Costco’s Cynthia Glaser, Vice President and General Merchandise Manager, Private Label Non-Foods, says Costco will not develop a Kirkland Signature product unless it can make it better and cheaper: “It has to be an item that merits the time and effort that goes into it.”

Similarly Hol at Ahold places quality and price at the heart of an Ahold private label product. “We don’t want to position our private label as a discount label. It is a balancing act between the price, quality and the uniqueness of certain items. We prefer to position ourselves not only on price but in the unique recipe of a product and also the quality.”

To ensure that quality, private labelers began to analyze the contents of a leading brand and then, based on those findings, recreate that item step by step. Now most leading private labelers take an active role in the manufacturing specs of the product and no longer slap their logo on whatever comes off the assembly line. The result is that often the only thing separating one product from the other is the name on the label.

Attention to quality has helped grow the consumer base across economic classes. Private label’s typical consumer was traditionally well-educated high earners. Ironically, those who could benefit most from the lower price alternatives did not do so because, according to Dell, “They were putting their hard earned money out and they wanted a guarantee of the quality and the product’s performance.” As the private label’s quality improves the lower earning consumer can be more certain of the value for money ratio. Just like a branded product, once the relationship has been established, the consumer will continue to buy as long as it continues to perform well.

How far can a private label stretch before the consumer loses confidence in it? According to Hade at Ukrops it’s a fine line “You’ve got to be careful. I question when people get into these intensive multi-tiered strategies. Are they doing that as a benefit to the consumer? What are they accomplishing?”

He explains that although Ukrops wants to grow its private label line, decisions are largely based on what Ukrops thinks the consumer wants. “We measure our success by when we introduce a product. Did it get the appropriate amount of share that we anticipated in the subcategory? If not, the consumer is clearly telling us that we missed the mark and that it needs to be removed from the shelf.”

Hol on the other hands says that with regard to stretch, Ahold “hasn’t seen the border yet.” He goes on to cite examples of success with stretch. “In Europe we sell financial services under our Albert Heijn brand. We have a credit card company in Brazil under the store brand Bompreço. If the store brand is reliable with a good track record, and people have built confidence in it, there are a lot of new innovations and services that you can bring and market under this brand.”

But are private labels “real brands”? Hol insists that they can be. “We do have certain private labels that have emerged into the power and authority of a brand.”

Dell agrees. “But they didn’t start out [as brands]. They started out as a second-tier price alternative. And it’s very clear that the consumer is not really interested in that. And just like a branded product, if I buy a private label product and I don’t like it, I’m unlikely to buy any other private label product.” What’s more, he says, the private label should be managed like a brand as part of the marketing mix of the chain.

In fact, Dell suggests, the private label industry suffers by not taking itself seriously enough as a branded category. “The industry has tried to implement category management, which is a take off of the brand category management from the national brand manufacturers. A lot of them have titles called category managers, but I call them super buyers. They don’t have MBAs in marketing; they don’t spend time studying the industry. These people are in charge of a category, so one of the things that I find as a weakness is that they don’t have what I would call ‘brand managers.’ I think that is going to limit the success and effectiveness of private labels by not having that.”

Still as the private label industry grows, the threat to branded product rises. After all brands are now competing for shelf space with the store’s own product and sometimes, like in the case of Ahold, that product may have one, two or three different levels of varying degrees which procures even more shelf space. What’s more the branded product has an added burden of a large advertising-marketing budget, which can substantially impact the bottom line, particularly on low-margin goods.

The retailers we spoke with agreed that a growing private label industry represents a threat to the branded product, but none were too eager to share advice on how to compete against them.

Hade at Ukrops says brand owners competing with private labels need to offer a combination of quality and price that is a value proposition. “If a private label can meet those requirements and is significantly lower in price [than the branded product], than I would question how well [the brand owner] is running that company. Have they got their resources allocated right? Too much marketing costs?” Not surprisingly, he ultimately concluded that competing with private labels is “their problem.” What will keep private labels from taking over entirely? Is it possible that the cost to market will become too high for branded goods, squeezing brand product owners out of the business? The market seems to saturate at 50% and besides, without someone to copy, the private labels’ R&D costs will lower their own margins. Perhaps the fact that the branded product needs the retailer to carry the product and the private label needs something to copy makes for an unlikely but symbiotic relationship.

Jonathan Schneider, founder of Square One Research, contributed to this article.    

[6-May-2002]