by Chris O'Brien
In a tough economy with tightening margins, rising costs and discriminating consumers, private labeling can help retailers capture more revenue and increase customer loyalty. "Over the last 10 years, competition among food- and drug-store retailing has become absolutely fierce," says Brian Sharoff, Private Label Manufacturers Association president. "Price is no longer a competitive advantage, and what becomes the point of differentiation is the ability to offer consumers a branded product."
According to PLMA, over the past five years, sales of private-labeled products in supermarkets have increased 13.3 percent versus 7.1 percent for national brands. In drug stores for the same time period, private-label sales have soared almost 33 percent versus about 15 percent for national brands.
PLMA reports that today, 71 percent of consumers are purchasing private labels, 85 percent of which are national-brand-equivalent products, 9 percent premium private labels, 4 percent value and 2 percent organic.
According to Sharoff, one of the main advantages of private labeling is capturing and cultivating customer loyalty.
"So if you are Whole Foods and you are trying to get customers to come to your store versus other supermarkets, you create the 365 brand, and the only place customers can get 365 products is at Whole Foods," Sharoff says. "The only place you can get Kirkland is at Costco, and so forth."
"Especially now, in this economy, private label is a great sales avenue because consumers are looking for more value but still want the same quality," says Erin Silva, R.D., technical marketing manager at Irvine, Calif.-based Vitamer Labs. "If consumers get hooked on a brand's products, they have to return to that store to get the products, and hopefully, while they are there, they shop [for other items]."
"We see private labeling as an excellent way to remain competitive and maintain a customer base," says Peter Sokoloski, private-label manager at NOW Foods, based in Bloomingdale, Ill. "If you make a good product, you can lock the customer into your store."
With food, ideally, in addition to coming into the store to buy branded gelato and juice, consumers also fill their carts with staple produce, meats and other items on their shopping lists. Similarly, private-labeling vitamins and supplements can create brand and store loyalty, and result in additional sales.
Multiple strategies exist for turning private labeling into additional revenue. The most common supermarket strategy is competing directly with national brands. Position YourStore Ibuprofen against Advil. Put Safeway O Organics milk up against Horizon Organic. This strategy usually involves some price competition, and in the naturals marketplace, savvy and educated consumers will read labels carefully and gladly pay 30 cents less for a half gallon of milk if they're convinced they are getting the same quality as the national brand. For most consumers, because the O-brand milk is good enough, they will also pick up some frozen organic enchiladas, cheese popcorn and apple juice while in the store. With the right presentation, a good private-label brand can sweep out many national brands from the loyal consumer.
Another strategy is to not compete at all, but only offer your brand. Whole Foods 365 Italian sodas stand alone, take up their own shelf space and sell well to customers who also likely look for the 365 brand in other food categories.
Selling vitamins and supplements can work with a direct-competition strategy as well as a high-low spread strategy. Some stores, including Whole Foods Markets, offer two versions of supplements and vitamins: premium and value. The premium brand competes with the best products and counts on the demands of the sophisticated consumer to make a purchase based on quality. And because the product is positioned as the highest quality, the private label may even command a higher price than the national brand.
The private labeled value brand competes with the rest of the products, usually offers the consumer a small price advantage and counts on the consumer's confidence in the brand to choose the private label over the other products available in the price, quality and quantity range. Both value and premium private labels have inherent profit advantages.
"Most successful stores have a private label," says Paul Licata, president of Licata Enterprises, a Huntington Beach, Calif., manufacturer of private label supplements, "because the margin is generally higher. For example, our suggested retail is about 20 percent below the average national brand, and that still yields a 50 percent gross margin."
Private labels increase their potential margin by eliminating the huge advertising campaigns, distributors and middlemen found in national brands. And Licata says that with that kind of gross margin, stores can afford to adjust their pricing strategy to meet their customers' buying habits.
A boon to your brand
In addition to increased revenue, a private label can drive and energize in-store marketing.
"Private labeling gives your employees products to focus on that carry your name," Licata says. "That's advertising at no additional cost, so the first thing an employee could show consumers is the private-label line. For example, at Vitamin Cottage, while they carry a wide variety of national brands, they push their very successful private label as an integral part of their marketing strategy to develop brand loyalty and differentiate them from other stores."
"The private label has to be a focus of the staff," Sokoloski says. "The only drawback to private labeling is if the private-label line is poorly presented at the store, including being mispriced or put in the wrong shelf space."
The worst outcome would be the majority of a store's shoppers choosing other brands over a store's private label. This issue can easily be avoided by following the seasoned advice and training the most reputable manufacturers offer on how to price, market and display a private-label brand.
The selection of a private-label manufacturer, especially for products in the naturals channel, should also consider the expertise of the consumer. Quality ingredients in this market are critical, and organic and other properly sourced materials can allow higher sticker prices and better differentiation.
"A lot of the private label business is market-driven," Sokoloski says. "Good ingredients with a good presentation and a great label are important. Trademarked ingredients and GMP-certified ingredients tend to be favored by more sophisticated consumers who want more than just a cheaper, generic product."
Offering a private label is about building a store brand, and it gives retailers an opportunity to meet the points of quality and price their customers expect. Private labels can increase revenue through higher margins, secondary purchases and repeat business through increased loyalty while creating differentiation and brand identification in the mind of the consumer.
Chris O'Brien is a Boulder, Colo.-based freelance writer.
Natural Foods Merchandiser volume XXVIII/number 10/p.76