Private labeling involves one company selling the products of another company using its own branding and packaging. In most instances, a retailer purchases products from a manufacturer that are then sold to consumers with the manufacturer’s brand and packaging visible. In private labeling instead, the retailer might have a third-party manufacturer produce goods and sell them under the retailer’s brand. Therefore the manufacturer acts as a private label, not showing its brand toward consumers.
Aspect | Explanation |
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Definition | Private Labeling, also known as Private Branding or Store Branding, is a business practice in which a retailer or distributor sells products under its own brand name instead of the brand name of the manufacturer. These products are often produced by third-party manufacturers and are marketed and sold by the retailer as if they were its own. |
Key Concepts | – Retailer’s Brand: Private label products bear the retailer’s brand or logo. – Exclusivity: These products are exclusive to the retailer and cannot be found under other brand names. – Cost Control: Retailers can often offer private label products at lower prices due to reduced marketing and branding costs. – Quality Control: Retailers have control over product quality and specifications. – Brand Loyalty: Private labels can foster customer loyalty to the retailer. |
Objectives | – Differentiation: Distinguish the retailer from competitors with unique products. – Profit Margins: Increase profit margins by offering lower-cost alternatives. – Customer Loyalty: Build customer loyalty by offering reliable, affordable products. – Market Expansion: Enter new markets or product categories with private label offerings. – Control: Maintain control over product quality and branding. |
Private Labeling Models | – Generic/Private Label: Basic products with minimal branding, often sold at the lowest prices. – Copycat/Private Label: Private label versions that closely mimic popular national brands. – Premium/Private Label: Higher-quality products positioned as premium alternatives. – Exclusive/Private Label: Products developed in partnership with manufacturers for exclusivity. – Value/Private Label: Value-oriented products offering affordability without compromising quality. |
Advantages | – Profitability: Higher profit margins due to reduced branding and marketing costs. – Control: Retailers have control over product quality and specifications. – Exclusivity: Products are unique to the retailer, reducing price competition. – Customer Loyalty: Private labels can build customer loyalty to the retailer. – Market Entry: Allows retailers to enter new markets or product categories. |
Challenges | – Perception: Private labels may be perceived as lower quality than national brands. – Investment: Requires investment in quality control, product development, and marketing. – Competition: Facing competition from both national brands and other private labels. – Brand Trust: Building trust in the retailer’s brand can take time. – Range: Managing a wide range of private label products can be complex. |
Examples | – Amazon Basics: Amazon offers a wide range of private label products, from electronics to household goods. – Kirkland Signature: Costco’s private label brand is known for quality and affordability. – Great Value: Walmart’s private label brand for a variety of products. – Trader Joe’s: The grocery chain offers a range of unique private label food products. – Boots No7: A skincare and cosmetics line sold exclusively by Boots in the UK. |
Consumer Trends | Private label products have gained popularity as consumers seek value and quality. The economic challenges of recent years have further driven the appeal of private labels. |
Conclusion | Private Labeling is a business strategy in which retailers or distributors sell products under their own brand name. It offers advantages such as increased profit margins and control over product quality but also comes with challenges related to consumer perception and competition. As consumers continue to seek value and quality, private label products are likely to remain a significant part of the retail landscape. |
Understanding private labeling
Sometimes, however, the retailer may sell private label products that are manufactured by a contract or third-party manufacturer and sold under its own brand name. The retailer acts as a de facto product manufacturer by controlling what goes in the product, how it is presented, and what the label looks like.
Private labeling is present in most consumer product categories, including personal care, beverages, pet food, cosmetics, condiments, dairy items, frozen foods, clothing, and household cleaners. In Australia and the United States, private label brands account for 18.1% and 17.7% of all retail sales revenue respectively. In Europe, these brands are more popular, comprising 41% of sales in the United Kingdom and 42% in Spain for example.
Examples of private labeling
Following is a look at some of the companies making a success of private labeling:
Amazon
The eCommerce giant owns over 100 private label brands that appear across various categories including food and beverage, electronics, and automotive. Many of Amazon’s private-label brands are created to mimic the success of brands that sell well on its platform. Examples include Amazon Essentials, Revly, Nod, and Happy Belly.
Trader Joe’s
American grocery chain Trader Joe’s sources most of its products from third-party manufacturers including PepsiCo and Snyder’s-Lance, the second largest salty snack maker in the United States.
Costco
The retailer’s Kirkland Signature private label range sells everything from batteries to wine to rotisserie chicken. The company reported in 2020 that it made $39 billion in revenue from the Kirkland brand alone in the previous twelve months.
Walmart
Which has recently made a foray into private label apparel for men, women, and children. The supermarket chain also operates private label brands in wine, toys, tools, and consumer technology.
Advantages of private labeling
Private labeling has several benefits for the business that extends beyond the simplification of the product development process.
These include:
Control over costs
Despite not manufacturing the product, retailers still control the product pricing strategy and can optimize production costs to increase profit margins. Retailers also have the final say over specifics such as product quality, pricing, ingredients, and volume.
Product rotation
Retailers also use private label products to accelerate product rotation. Companies such as Nordstrom sell private label products to increase their responsiveness to seasonal trends and compete with fast-fashion retailers such as H&M.
Market stability
In countries where private label products are prevalent, consumers choose them for their quality, consistency, and affordability. Thanks to lower price points, private label products can boast steady sales even amid a recession. Since there is more stability and less price inelasticity, retailers may even increase their order quantities during economic downturns.
Nevertheless, there are some disadvantages too.
Disadvantages of private labeling
Production dependence
While retailers have control over many aspects of private labeling, they do not have control over the product manufacturer. Inefficient processes could cause inventory or quality issues and, in a worst-case scenario, the manufacturer may declare bankruptcy and severely disrupt operations.
Brand dilution and loyalty
Some consumers perceive private label products to be of poor quality, which can cause brand dilution for a retailer’s more premium brands. Furthermore, building any sort of brand loyalty to a bulk, low-cost product is difficult.
Cost
Some manufacturers will ask for an initial payment if it is the first time they are working with a retailer. There may also be a stipulated minimum order quantity to ensure both parties profit from the arrangement. These factors make private label products a challenge for retailers with smaller budgets.
Case Studies
- Amazon: Amazon has over 100 private label brands that cover various product categories, including Amazon Basics (electronics and household essentials), Happy Belly (groceries), Solimo (health and personal care), and more.
- Trader Joe’s: Trader Joe’s, a popular American grocery chain, sells private label products under its brand name. These products include snacks, frozen foods, beverages, and unique food items.
- Costco: Costco’s Kirkland Signature is a well-known private label brand that offers a wide range of products, from batteries to wine to clothing. In 2020, Kirkland Signature alone generated $39 billion in revenue.
- Walmart: Walmart, one of the world’s largest retailers, has entered the private label space with various brands. They offer private label products in apparel, consumer technology, wine, toys, and more.
- Kroger: Kroger, a major supermarket chain in the United States, has its private label brands, including Simple Truth (organic and natural products) and Private Selection (premium food items).
- Target: Target offers private label products under brands like Up & Up (household essentials), Market Pantry (groceries), and Cat & Jack (children’s clothing).
- Aldi: Aldi, a global discount supermarket chain, primarily sells private label products under various brand names. Their private labels cover a wide range of categories, including food, household items, and beauty products.
- Sephora: Sephora, a beauty and cosmetics retailer, has its private label brand called Sephora Collection, offering a diverse range of makeup, skincare, and beauty tools.
- Whole Foods Market: Whole Foods Market, known for its natural and organic products, has private label brands like 365 Everyday Value (groceries) and Whole Paws (pet food).
- CVS Health: CVS Pharmacy offers private label healthcare and wellness products under the CVS Health brand, including vitamins, over-the-counter medications, and personal care items.
Key takeaways:
- Private labeling involves one company selling the products of another company using its own branding and packaging.
- Private labeling is used successfully by companies such as Amazon, Trader Joe’s, Costco, and Walmart.
- Private labeling gives retailers more control over costs and product development and also allows them to maintain sales in economic downturns. However, the approach is only as robust as the product manufacturer and some companies may find it difficult to build brand loyalty in a low-cost product from scratch.
Key Highlights
- Definition: Private labeling involves one company selling the products of another company using its own branding and packaging.
- Variety of Products: Private labeling is present in various consumer product categories, including personal care, beverages, pet food, cosmetics, and more.
- Examples of Success: Companies like Amazon, Trader Joe’s, Costco, and Walmart have successfully implemented private labeling strategies across different product ranges.
- Control and Customization: Private labeling allows retailers to have more control over product development, pricing, quality, ingredients, and volume. They can customize products to meet specific customer preferences.
- Product Rotation: Retailers use private label products to quickly adapt to seasonal trends and compete with fast-fashion retailers. This flexibility in product rotation is a significant advantage.
- Market Stability: In regions where private label products are popular, consumers often choose them for their quality, consistency, and affordability. This can lead to more stable sales, even during economic downturns.
- Disadvantages: Private labeling also comes with challenges, including production dependence on manufacturers, potential brand dilution for premium brands, and initial costs for smaller retailers.
- Brand Loyalty: Building brand loyalty for low-cost private label products can be challenging, as some consumers may perceive them as lower quality.
- Cost Considerations: Manufacturers may require an initial payment, and there might be minimum order quantity requirements, making private labeling less accessible for smaller businesses with limited budgets.
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