‘How should we respond to the growth of private label brands?’

Q: We hope you won’t mind if we don’t identify ourselves. We believe you’ll easily understand the reason after you’ve read our request for your Marketing Rx.

We’re one of the many national brands who are also suppliers to the country’s top and largest private label brand. Our concern is very real.  At the start, we agreed to be a source and supplier but after several years, we’re having serious second thoughts. The volume of orders from the private label brand has increased so much to the point that a given order often gets in conflict with our production priority for our own national brand. Also, because of, or maybe along with this extraordinary rise in its purchase order, this private label has been eating our national brand’s share of business in the retail stores, which own this private label brand.

In our ongoing critical review of this side of our business, we’ve been gathering expert opinions and suggestions. We have high regard for your column and wish to request for your advice as a marketing and brand management expert.

How should we respond to this growth of private label brand without alienating our good relationship with its owner and at the same time assuring our continuing availability in its stores?

A: We should start with some basic clarifications. First is to have a common understanding of what a private label brand is. Learning what other names it’s known by is a convenient and common way toward that understanding. A private label brand is also known as “a store brand,” “a retailer’s own brand” or “an in-house brand.”

In the Philippines, what is the largest and also the first private label brand? In the retail trade community, this is known to be SM Bonus. First of all, at an SM supermarket, there are about 40,000 to 60,000 products, or SKUs [shelf keeping units] on its shelves depending on the supermarket’s size. We were told that some 1,000 or more of these items carry their store brand name, SM Bonus. The range of products under this store brand has gotten to be very extensive and includes:

(1) personal care products;

(2) canned goods;

(3) packaged snacks;

(4) laundry aids;

(5) pet-care products;

(6) fresh meat; and

(7) poultry.

What’s the driver for its increasing purchases by shoppers? The key purchase motivator among shopping consumers is low price. An SM Bonus brand retails at 15 percent to 30 percent cheaper than leading national brands.

How come SM has succeeded in enlarging this shopper segment and in dominating it? SM has scale. It’s probably no exaggeration to say that it has scale of Titanic proportion.

As a food retail group, SM consisted of (as of 2009) a total of 83 establishments made up of 26 SM supermarkets, 19 SM hypermarts, 26 Savemore stores and 12 Makros.

SM reported that in 2009, these 83 establishments accounted for 58 percent of total retail sales, and 77 percent of total net income. “Earnings” reached P3.1 billion in 2009, up from P2.2 billion in 2008.

Research has shown that the growing sales productivity of private labels comes from a growing market segment of mostly price-conscious shoppers across all socio-economic classes. These shoppers want high-quality products at lower prices. You cannot expect to satisfy this shopper priority value in all products. This is realistic to satisfy in those products encompassed by the SM Bonus product range.

Consider, for example, personal care products, packaged snacks and laundry aids. Do you remember how local lower-priced brands like Eskinol found it relatively easy to participate in the personal care products?  Price-conscious shoppers found Eskinol as serving just as well what they wanted from even well-known imported brands. Or recall what happened in the packaged snack category. Its barriers to imitation were so low that the cheap but tasty “Boy Bawang” was able to gain entry and own a good market share. Or recollect how two local lower-priced detergent brands, “Champion” and “Pride,” took on the No. 1 and the No. 2 competitive positions at the height of our recession in 2009 and 2010. The economy and sub-economy price segmenting strategy has been also the pivotal market entry and market staying strategy of the private label, house brands.

What about the future? Let’s see how private label brands have succeeded in its market penetration in the developed countries.

According to a 1994 A.C. Nielsen data, it is in Switzerland, where the top three retailers’ house brands have the highest market shares in total retail sales of 41 percent unit share and 80 percent in value share. It is in the US and Canada where the top three retailers’ house brands have the lowest market shares: 18 percent unit share and 17 percent value share in the US; and 21 percent unit share and 25 percent value share in Canada.

One of the undeniable market implications here is that private labels had effectively entered the retail market and will continue to enlarge its market participation. This has the potential to grow to as much as 80 percent of the total market value just by its top three house brands! The AC Nielsen report also showed that private labels give larger margins to retailers. That means that house brands are here to stay.

So as a national or mass-market brand, what should you do? How should you respond? Our Marketing Rx is this. Stay with your competitive advantage in the premium price segment where you belong. Continue harping on your quality advantage but making sure that you also continue kaizening that quality. At the price that your private label principal is paying, give your principal the commensurate quality for their house brand. This way, your principal will find it revenue-rewarding as well as profitable to stay with you as its house brand supplier. That’s the win-win solution to your situation.

Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!