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Role of Private Labels

Why do intermediaries sponsor their own brands? First, these brands can be more profitable. Intermediaries may be able to use manufacturers with excess capacity that will produce private-label goods at low cost. Other costs, such as research and development, advertising, sales promotion, and physical distribution, are also much lower, so private labels can generate a higher profit margin.16 Retailers also develop exclusive store brands to differentiate themselves from competitors.

Generics are unbranded, plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and canned peaches. They offer standard or lower quality at a price that may be as much as 20 percent to 40 percent lower than nationally advertised brands and 10 percent to 20 percent lower than the retailer’s private-label brands.

Private-Label Success Factors

In the battle between manufacturers’ and private labels, retailers have increasing market power. Because shelf space is scarce, many supermarkets charge a slotting fee for accepting a new brand; retailers also charge for special display space and in-store advertising space. They typically give more prominent display to their own brands and make sure they are well stocked.

Although retailers get credit for the success of private labels, the growing power of store brands has also benefited from the weakening of national brands. Many consumers have become more price sensitive, a trend reinforced by the continuous barrage of coupons and price specials that has trained a generation to buy on price. Competing manufacturers and national retailers copy and duplicate the quality and features of the best brands in a category, reducing physical product differentiation. A steady stream of brand extensions and line extensions has blurred brand identity at times and led to a confusing amount of product proliferation.

Bucking these trends, many manufacturers are fighting back by investing in R&D to bring out new brands, line extensions, features, and quality improvements. They are also investing in strong “pull” advertising programs to maintain high brand recognition and consumer preference and to overcome the in-store marketing advantage private labels can enjoy. Experts suggest that manufacturers compete against or collaborate with private labels by fighting selectively, partnering effectively, innovating, and creating winning value propositions.17

 
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