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.
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:
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.
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.
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.
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.
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.
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.
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
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.
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.
- 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.
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