Out of the Box

Private Label: When Opportunity Knocks

By Menachem Lubinsky on September 17 2007

The business press of late has played up the dramatic explosion of private label goods that are sold by the nation’s retailers. Only a decade ago, private label was in many respects still in its infancy. The conventional wisdom was that Americans are enamored by brands and that private label goods, albeit of similar appearance and at a lower cost, are still no match for the coveted brands.

The evidence is overwhelming that the typical American consumer may have turned the corner on the issue of brand vs. private label. They are slowly coming to the realization that a brand name does not automatically connote superior quality. Americans understand that they may indeed be paying a premium not for the goods but for the label. In an age of soaring fuel costs and the strains of the family budget in general, shoppers are far more prudent and savvy.

Supermarkets and chain stores in general have come to the realization that they can potentially make more profit on the private label items. They can negotiate a cheaper production price, eliminate some middlemen, and offer the “generic” (no particular brand) at a lower price. The end result is that their margins can be much healthier and there is the potential of making even more money with increased volume.

The news of late is not only that there has been a major expansion of private label goods but that almost everyone is getting into the act. You can buy tools from Stanley, a brand name, or you can buy the “same” tools from Home Depot with the Home Dept label. You can make almost any change and find the same phenomenon.

Supermarkets are taking major advantage of the customer’s preoccupation with cost savings. Some supermarkets offer thousands of private label products. A retailer I spoke to told me that he remembers the day when stores would pull their goods off shelves if the store even entertained the fact of competing with them. Those days are gone, he pointed out, because customers are demanding the discounted goods.

It is interesting to note that some of the manufacturers of the brands have gotten into the private label business, realizing that they may be competing against themselves. But various business studies have shown that the brands were actually able to increase their business mani-fold. The brand loyal people by and large remained brand loyal and those who were not were buying them anyway, via the private label route.

Some manufacturers who service some of the giant chains find it challenging to deal with the corporate limitations that comes along with doing business with mega companies. One manufacturer told me how the manufacturers “squeeze every last penny” out of him. But unlike brands, the cost of producing the same goods is far less. There may be fewer salesmen, less marketing dollars spent, and a much more limited channel of distribution. There is also the opportunity to realize significant profits from the sheer volume that the chains command.

For small manufacturers, private label is a potential windfall. I have always counseled manufactures thinking of going the private label route to make sure that they have the production capabilities to fill a large order from a chain. It makes absolutely no sense to pursue a Wal-Mart, Costco, or Target, if you don’t have the capacity to produce enough goods to satisfy the needs of these chains.

The private label explosion is an enormous opportunity for manufacturers of all sizes. Many find their potential customers at trade shows, including the Private Label shows in Chicago for domestic goods and Amsterdam for export to Europe and beyond. Others use brokers that are adept at making successful matches.

One food manufacturer I know simply walked into a supermarket and noticed that the baked goods he manufactured were not available under the supermarket’s label. He made a successful pitch to the chain and is now selling in at least 15 stores throughout the Metropolitan area.

Producing private label does not automatically relieve the company of some of the responsibilities it has producing its own brand or brands in general. It still has to produce a quality product, satisfy the end user who buys the goods, and make sure that the “customer” (the retailer) is satisfied with the service. A promise to deliver goods to a pre-determined warehouse is sacred and excuses about the truck’s condition can spell the end of the relationship.

The food manufacturer told me how he had to hire additional crews, operate the machines round-the clock, and virtually run his business 24-hours a day. He admitted that private label had become an important piece of business for him.

Private label nowadays is a huge opportunity. Some manufacturers have even dropped their own brands in favor of expanding private label production. The business of private label today is huge and very much a public phenomenon.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.