The Private-Brand Conundrum
When a customer becomes a competitor
As private brands gain more space on retail shelves, executives at consumer packaged goods companies are struggling with a landscape in which their retail customers are also their competitors. CPG firms can stay ahead of the curve by finding the right balance between competing and collaborating.
Private brands have become one of the biggest powerhouses on store shelves today. As in-house support, outsourced development and manufacturing capabilities grow, these retailer-branded products are gaining prominence—and consumers are eagerly snapping them up. Executives at consumer packaged goods companies cannot afford to ignore these trends. They must find a way to balance competitor and customer when dealing with retailers. Those that align their product lines with private brands will be the ultimate winners.
Private labels are fast becoming the biggest competitors for consumer packaged goods (CPG) companies. For example, U.K. grocer Tesco’s house brands now have more than 50 percent penetration in its stores, while Walmart’s Great Value label is America’s largest food brand. In some grocery categories such as pain relievers, milk and paper towels, private brands combine for the category lead. As retailers acquire more manufacturing capacity, capture consumer insights and improve their brand management skills, they are making a mark in more complex categories such as beauty products.
Consumers, seeking quality but still price-sensitive in the wake of the recession, are embracing these private labels. According to a 2009 study by research firm GfK Group, 90 percent of consumers believe that private-brand quality is as good as or better than major CPG brands, and that it typically saves them significant amounts of money. Once considered merely “affordable” alternatives, private labels are now often identified by consumers with attributes such as consistency, reliability and trust. It is not unusual at stores today to see only three brands in a category: the national leader, a private label, and a local or niche brand. As these trends pick up, billions in brand value will move from CPG brands to private labels in the next decade. In light of these developments—and a general move by retailers to reduce stock-keeping units (SKUs)— CPG firms cannot stand still. As market share shrinks and shelf space becomes more precious, they must fight to stay ahead of the pack.