Private labels – what are they?

The topic of private labels in the wine industry was introduced in the previous article. This series of articles is being released as part of a Wine2030 (University of Adelaide) initiative to invite discussion around this current and emotive development in Australia. To access the other articles in this series, click on ‘Private labels’ under ‘Categories’ on the right hand side of this blog.

This article looks first at private labels in general and later I shall return to consider their application specifically in the wine industry. The research I present in this series of articles will inform the discussion around the following questions:

  • Are private labels a cheap and cheerful copy of branded products?
  • Are private labels as good?
  • Do they increase or decrease choice?
  • Are they a fad or a growing and/or permanent phenomenon?

In order to have an informed discussion about private labels it is necessary to put some definitions in place and to understand exactly what we are talking about. In my research I have studied key texts, consulted with industry experts, and also kept an eye on what is being said online and in various media sources. An excellent and comprehensive reference in this research has been the book by Kumar and Steenkamp entitled ‘Private Label Strategy: How to Meet the Store Brand Challenge’ – an easy-reading and highly insightful text. I have also consulted Lincoln and Thomassen’s ‘Private label: turning the retail brand threat into your biggest opportunity’.

I will look at some of the most successful private labels companies in the third article in this series, after first providing an overview in this article of the classification of private labels. I then pull together my findings in terms of the approaches of these companies and turn my attention back to wine and Australia.

Private labels – a definition
Private labels may also be referred to as home brands, own brands, own labels, store brands, retailer brands and probably more. Kumar and Steenkamp define a private label “to be any brand that is owned by the retailer or the distributor and is sold only in its own outlets” (p.20).  Therefore brands such as IKEA, Gap and H&M, Woolworths Select and Coles SmartBuy are private labels because they are sold only in their own stores and their products are not sold through any other outlets.

Retailers tend to concentrate on any or all of four key groupings of private label lines. These are: generics, copycats, premium store brands and value innovators. There are strategies associated with each of these groupings, each of which could be the subject of its own article. For each of these label types, I shall provide a simple description of the approach, the driving forces behind them and examples.

1.       Generics

Generic private labels of Australian retailers Coles, Woolworths and IGA
Generic private labels of Australian retailers Coles, Woolworths and IGA

Private labels first came onto the scene several decades ago in the US and Europe, and more recently in Australia, as cheap, inferior products. They were presented as ‘generics’, often not bearing the name of the retailer, but simply the name of the product, such as ‘milk’ or ‘butter’, in plain script on a white plain background. Mostly basic food products, canned goods and paper goods, they were offered at low prices, competitive with the lowest priced product in that category. The product range appealed to the budget-sensitive shopper. They were seen as low quality but cheap. Retailers rarely run price promotions because the product is cheap already and there is usually only one product to choose from. When I was a student living on very limited funds I loved them.

Generics are common in Australia, and do bear the name of the retailer – Woolworths has its Home Brand; Coles has its SmartBuy; and IGA has Black & Gold. In the UK, Tesco has a Value line, and Sainsbury has its Low Price range. South Africa’s Pick n Pay supermarket chain has the No Name line.

2.       Copycats
Copycat store brands carry the name of the retailer and tend to have packaging and price points very close to the products that they compete with. The retailers tend to target branded products that are already successful then produce a copycat that has similar ingredients, packaging and pricing. Copycat retailers can thereby cash in on the success of the branded product without having to incur the costs associated with developing the product and researching the market. Marketing costs are also kept down since the product is instantly recognisable as being associated with the product it is copying. With copycat brands there is no cost of failure to absorb since only successful products are targeted. The retailer tends to produce a similar product and offer it at a lower price than the branded product – so the message to the consumer is that it is as good but cheaper.

Examples of copycat products by Coles compared to the branded products

Examples of copycat products by Coles compared to the branded products

The advantages of having copycat brands is not only to make profit on the sale of the product itself, but it creates competition for the existing manufacturer branded products as well as increasing the retailer’s bargaining power with the manufacturers, since the retailer has the option to promote its own brand in competition with the original brands.

There are many examples of copycat products in Australian supermarkets. Walking around you will see private label copies of established manufactured brands in a wide range of products – just looking in the confectionary and chocolate biscuits aisle there are many examples. The image of some examples from Coles shows similar product and colour schemes and same size packaging for flavoured tinned tuna, tinned spaghetti and tea bags going head to head with products from John West, Heinz and Lipton, respectively. Even the Aussie icon brand of Tim Tams has been openly copied by the major retailers, selling a similar product in similar packaging, with the Coles or Woolworths name on the pack. This is also one of the strategies followed by UK supermarkets such as Tesco and Sainsbury.

The Spanish clothing chain Zara is a very successful copycat company that sells private labels only, producing fashion clothing at very low prices that imitates famous designers and well-known brands. They employ talented and unknown young designers to pick up on key trends and translate them into clothing for the Zara chain. Its strategy allows it to operate with extremely low costs of advertising, staffing, market research, and so on, that the manufacturer brands continue to incur. This chain has been so successful it is a multinational company and is due to open its first Australian store in 2011 in Sydney.

3.       Premium store brands
As retailer strategies have developed, the approaches have evolved to incorporate premium store brands. Retailers have seen the opportunity to differentiate their products and thereby target a whole new section of the market. The latest trend is to establish high quality products with distinctive packaging, presented as a whole new product line by the retailer, targeted at competing with the top brands in the range.

Kumar and Steenkamp define two types of premium brands: the premium private label which is exclusive, higher in price, and superior in quality to competing brands; and the premium-lite store brand which is promoted as being equal or better in quality to the competing brands, while being cheaper.

In the UK, Sainsbury’s premium line is called Taste the Difference, Tesco has Tesco Finest, and Asda has Extra Special. These labels tell the consumer that this is the best product, and the packaging is also targeted to this effect. The Marks & Spencer chain in the UK can charge premium prices for many of its own label food products as it has successfully marketed its food lines as gourmet, high-quality food. In Australia, Woolworths Select is a premium-lite store brand – it offers a price advantage while also offering similar quality to manufactured brands. Coles has introduced a Coles Finest range.

With premium pricing, the store brands compete against the premium branded products in a particular product range, but also offer distinctive elements while benefiting from consumer loyalty.  Once consumers are loyal to the brand, they are more likely to trust other products in the range. For example, Sainsbury has over 800 products in its Taste the Difference range.

As part of the premium private label approach many retailers have adopted the strategy of co-branding. This is when the retailer join forces with a prominent brand manufacturer. This has been seen in the UK with the Waitrose supermarket range of labels called ‘in Partnership with’, for example, Waitrose “in Partnership with” St Hallett Wines 2008 Barossa Shiraz Reserve from Australia which sells for £8.99 – not the cheaper end of the wine range. In the US, Costco has co-branded products in its premium Kirkland Signature range with Starbucks on some coffee products, and with Hershey and Nestlé with some chocolate and confectionary products.

4.       Value innovators
Value innovator own labels are the fourth main category of private labels. The retailers following this approach have focused on cutting down costs and processes to simplify the production and marketing of product ranges, so that a good quality product can be offered at very low prices. The Swedish company IKEA has done this with furniture, cutting costs through the whole process, as well as passing on the collection and construction of items to the consumer. By far the most successful retailer across Europe has been Aldi, a company now making headway in Australia, with over 200 stores.

The value innovator approach differs greatly to the generic, copycat and premium label approaches.   There are a number of key principles that must be adhered to for this approach to be successful.

  • Limited number of products
  • Low costs of production and marketing
  • Good quality products at low prices

Taking Aldi as the example here, Aldi offers around 700 products, which is very limited compared to supermarkets which typically have several thousand. Aldi has over 90 percent private labels in its stores, giving its own names to products, such as Bueler Cola and Royal Avenue toilet tissue. The turnover per product is higher than any other retailer’s (Kumar and Steenkamp, p.64) which assists in negotiating power with suppliers. Aldi keeps its system costs down – “the total costs added to its procurement price from suppliers is about 13 to 14 percent (2 percent each for logistics, rental, overhead and marketing, plus about 5 percent for staff)” in contrast to 28 to 30 percent for traditional supermarkets such as Walmart. As well as keeping the number of products down, Aldi achieves this by locating its stores in cheaper areas, employing minimal staff, displaying products on pallets, and so on.

Aldi is also known in Europe as a ‘hard discounter’ – a retailer that cuts prices to levels below those of traditional doscounters.  Aldi offers an efficient, no-frills shopping experience with prices that are extremely competitive with other retailers and brands, while quality is high.

So what next…
Four questions were set out at the start of this article. I have started to answer them and will delve further in the next few articles. In short, the story is clearly more complicated than just being a cheap and cheerful copy of branded products – yes and no is the answer here, depending on the strategy adopted. Are private labels as good? The consumer votes with their wallet and private labels sales are the key area of growth for these multinational companies. Do they increase or decrease choice? Again, not a simple yes or no answer and in some cases it remains to be seen. Are they a fad or a growing phenomenon? Clearly the answer is the latter.

The next article will look at the largest and most successful retailers who have followed a range of private label strategies and what we can learn from them and what to expect in Australia.

References:

Keith Lincoln and Lars Thomassen, ‘Private label: turning the retail brand threat into your biggest opportunity’, Kogan Page, 2008.

Nirmalya Kumar and Jan-Benedict E.M. Steenkamp, ‘Private Label Strategy’, Harvard Business School Press, 2007.

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About tigchandler

English-born, lived several years in Wellington, NZ, then in Adelaide, South Australia, and recently moved back to New Zealand. With an economics background, I have worked in researching wine consumption patterns, marketing, economics and social media at the University of Adelaide. I also worked a vintage and in wineries in McLaren Vale so have seen both the research/analytical side of the industry and the practical/hands-on side. I have retail experience and many ongoing industry links all around Australia and overseas. This blog reflects my ongoing passion for everything related to the wine industry.
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7 Responses to Private labels – what are they?

  1. Pingback: Tweets that mention Private labels – what are they? | Tigchandler's Blog -- Topsy.com

  2. Cullen Habel says:

    Do private labels grow the category or simply shift around market share? That’s a question that consumer goods marketers have considered for many years. I looked at it using a model called the NBD-Dirichlet and the answer – as always is – it depends.
    Category expansion would be measured by an increase in the k or shape parameter of the category NBD.
    In short, being such a mature category where there already exists a heap of demand and established behaviours, retailer introducing private labels are simply likely to be shifting market share across rather than expanding the category. I know I’m not saying anything that any sensible market watcher wouldn’t know, but it’s very easily measured.
    If anybody has transaction (ie loyalty club) data – skus by customer – we could quite easily demonstrate this. A nice little bit of modeling.

    @cullenofadelaid and http://www.cullenofadelaid.blogspot.com

    @cullenofadelaid and http://www.cullenofadelaid.blogspot.com

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