Private Label Pricing
22 March 2010
“Let’s just take the store brand,” I heard a wife tell her husband as they perused an aisle at a local supermarket. “It’s about a dollar cheaper” she continued, “and it’s just as good as the one we used to buy.” It should come as no surprise that a middle class family was willing to choose the private label (PL) product to save a dollar on one of the many items in their overflowing grocery cart. Families for whom groceries constitute a larger share of household expenditures are likely to be more price sensitive on average. What is intriguing, however, is that the store brand, which at one time was perceived as low quality, low price, is now being compared favorably with the name brand by consumers. Does this mean that the pricing landscape has changed for PL products? If so, what are some of the challenges that they face as they continue to grow and thrive in today’s economy? And how should name brand producers respond to such pressures? I spoke with Kim Frazier & Chris Goodin, from Deloitte Consulting LLP to get some insights on what has been a dramatic change in the PL industry and what pricing strategies are employed once launched at a retailer.
PL manufactured products have been in the market for many years. However, the demand for PL products has increased substantially in recent times. Ms Frazier explains that the increase has been driven not only by the current economic climate in the U.S. but also because retailers are leveraging PL brands to create store loyalty through lower prices while simultaneously increasing profits. The proliferation of PL goods is not limited to supermarkets either. Department stores like Sears, as well as retail giants Walmart and Target have all invested in their own store brands. (See this article about Best Buy’s PL goods.) According to Deborayh Weinswig, a retail analyst at Citigroup Investment Research (see this video from the PL Manufacturers Association), a significant portion of the growth of PL products can be attributed to increased investments in PL brands to improve the packaging and quality of the product, all while continuing to maintain lower prices compared to the benchmark nationally branded product.
Ms Frazier notes that retailers often use PL product pricing to, “drive price perception with the customer and offer a lower opening price point.” The challenge for retailers is often to price low enough to attract price sensitive customers, induce trial, or to support an overall store image of good value, while still maintaining the perception of adequate quality relative to the nationally branded product. If a PL product were priced too far below the price of the branded product, consumers might avoid the PL product because of the negative quality signal of an extremely low price.
Just being considered “as good as” the name brand alternative, however, isn’t good enough for some PLs. Mr Goodin points out that in the grocery space there are now premium PL products with prices to match that are higher than the name brands. Trader Joes, for example, has many premium store branded items, “and the customer views its private label products as high quality and good value.” Rochester-based supermarket chain Wegmans has several lines of store branded products, from its bargain-priced pastas, to its super-premium basting oils. The fact that consumers are sometimes willing to pay more for a PL product than the name branded product is evidence of a major shift in consumer perception of PL products.
The rise of PL products has in some instances created tension between retailers and name brand manufacturers. A retailer’s decision to introduce or expand its PL product offerings has the potential to encroach on both the shelf space and the market share of the incumbent brand names. Mr Goodin notes that retailers generally do not have to spend much on advertising for their own PL products, particularly since they, “don’t have to pay to create awareness about the goods they carry.”
So with all this pressure from PL products, what are nationally branded products to do? Marketing development funds and promotions by name brand producers, “are still very big,” for retailers, and represent one lever that national brands can use to combat the encroachment of PL products. Mr Goodin also sees national branded products continuing to use their advertising and promotion spending to stimulate demand for their products. Ms Frazier has seen the name brands responding to the competitive threat of PL products and macroeconomic environment by issuing more coupons for their products. Additional coupons might allow the name brands to maintain their price and margins on high willingness-to-pay customers, while simultaneously competing more aggressively with PL products for price sensitive customers who are willing to clip coupons.
The relationship between PL-product-producing retailers and name brand suppliers doesn’t always have to be hostile, however. One strategy that has been employed by supermarkets is the bundling of a name brand product with a PL complement. For example, Ms Frazier has observed a, “grilled cheese meal deal assortment,” that pairs Kraft cheese singles with PL bread.
Name brand producers might be encouraged by Mr Goodin’s observation that up until this point for PL products, “the overall penetration is low.” Until economic conditions improve substantially, however, it is highly likely that we’ll see even more families making the switch from the branded products to PL products. As more customers try and are satisfied with the quality of PL products, their prevalence is likely to increase. As long as name brand producers recognize how to use their larger marketing budgets to their advantage and avoid knee-jerk, widespread price reductions, however, the damage to their profits from the rise of PL products should be able to be contained.
- Sean Senhouse, M.B.A. Candidate, Class of 2010
Agreed that in these times, families will choose to look at there bottom line as opposed to namebrand. In most cases I’ve seen people checking nutrition facts and “Made in” locations as another way to compare the two types of products. But that gives no indication of the quality of materials used in processing, which the consumer soon finds out when the product is not up to par with namebrand and then they return to buying those. Indeed PL pricing is the proven means of building store loyalty. I usually only buy PL brands because of price, and quality is not so far behind to make me want to spend more. The beauty is in the choices that consumers have and the freedom they have to make this choice. Great job Sean. That’s my 2 cents! and probably worth just as much. Good luck
I’ve commented prior to this good series by Simon. This most recent post by Mr. Senhouse intrigues me, for again, I have experience in this realm of pricing (as well as a decent understanding of PL).
Within the context of Mr. Senhouse’s column I did not seem to find a discussion about the manufacturing process relative to Private Label goods. I did appreciate his comments, research and observations of the pricing techniques, evolution and market share of PL’s, and the market impact on branded products. However, at least from my personal experience, in many instances the two products tend to be very tightly connected for reasons below.
Prior experience with PL goods was an excellent way to improve profit margins and steal market share from competitors (who were selling branded only goods). The ability to improve margins was based upon the fact we obtained the PL at a substantial cost savings versus the brand product. In my experience, the trick was the brand name manufacturer was also the manufacturer of the PL (or their product was manufactured at a contracted packager who had license authority to private label the branded product with margin rebate to the brand); hence a novel way for them to improve market share (discretely) while improving manufacturing efficiencies. By my selling their (my) PL, I helped them keep their competitors (yes their competitors) at bay (less shelf space), while simultaneously improving my profit margin through the lower cost per unit. It was a win-win of sorts.
All that said the PL manufactured goods were never “full quality” of the branded product. They were nearly as efficacious, but still not 100% compatible. Hence this minor quality differential allowed the manufacturer to price lower while still maintaining their brand integrity. The end user was satisfied with the quality based upon the price savings.
Thank you again to this month’s author and the Simon School for the Pricing Connection. Like I have said in a prior post, pricing is part science, part art. In this case, it’s also part “don’t judge a book by it cover as it could be the same book”.
I agree with the first point that in these trying times most families are making sacrifices when it comes to buying brand names products and instead opting for PL brands. Some may say that the PL brands are not as a good a quality as the brand name products but as was stated in the article some PL brands are in fact produced by the Brand name manufacturer.
The article was very insightful and just emphases the point that I always knew brand/ more expensive products do not always mean better quality.
Great Article.
I have to disagree with Gregory’s comment about PL brands not being the same level of quality as brand-name items. While there are definitely many cases where PL brands aren’t of the same quality, I would cite Costco’s Kirkland Signature brand as an example that has seemingly more stringent quality requirements than the brand-names.
Moreover, many PL branded items carry a 100%+ satisfaction guarantee, not only allowing for a refund, but also providing the name-brand item as a direct replacement. True, most would not take advantage of this, but I digress…
Great post and great comments. A couple very quick points:
1) Yes, some major private label purchasers (retailers) retain independent testing labs to test prospective PL products. They meet or exceed the brand in all respects including packaging or they don’t make it to the shelf.
2) One factor I rarely here discussed is also that some of the value of a private label product is imputed from the retailer who is selling it. If a retailer scores low in key attributes its PL products inherit a lower value and cannot command the same price as an identical product in a better scoring retailer.
3) Price gap between brand and PL is important but not critical. There is a range of acceptability. I was involved in major study which verified this. Sponsored by branded manufacturer. As results demonstrated brand vulnerability not widely known.
For decades, Great A&P maintained in their Quaker Maid manufacturing plants, test labs to monitor the quality of everything from Ann Page preserves and jellies to Sultana pork and bean, Cap’n John fish dinners and Bright Sail laundry detergents and bleaches.
Private label today is all about quality and value. Families are cash strapped and can really use the savings that great private label products such as Via Roma, GreenWay, Hartford Reserve, Food Basics, Home Basics, Preferred Pet, Live Better, Market Spa, and America’s Choice provides.
I can clip coupons, ;use clipless coupons and bonus savings cards, buy private label, and reap a guaranteed savings of 40 percent and more on my weekly grocery bill.