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Private Label Goods - A High Wire Dance for Retailers

"Trading down" is when consumers change their purchasing behavior from Brand names to Private Labels also known as generic labels.  Private labels are goods manufactured either by the retailer or by another company for the retailer.  Private labels can carry the name of the retailer or not. Usually, the change in purchasing behavior is due to price sensitivity so trading down is less proactive and more reactive.  In the past, this has meant that trading down is generally a temporary move until brand name goods are more affordable because price has an inherent duality, one of which is as an indicator of quality.  Private label goods were perceived to be of lesser value whereas brand name goods were aspirational.

That was then, this is now.  The value line between private label and brand name goods is blurring.  Economists using economic indicators declared the recession over, however consumers disagree.  The over, but not over recession is exposing consumers to private labels for a longer amount of time.  Time that is allowing consumers to build brand loyalty to private labels.  These are not the private labels of yesteryear, these are private labels that are evocative of brand names - in packaging and messaging.  In general, private labels realize a 10 - 40% price advantage compared to brand name goods. (Agnese, 7/21/11)  So private labels can compete on price if retailers so choose or it can tuck that margin away as profits.

Private labels are now a competitive threat to brand name goods and for retailers that is a high wire dance because brand name goods are necessary for revenue generation.  Retailers do not have enough private labels goods to fill a store or enough brand awareness.  Moreover, private labels like Target's Archer Farms are only sold in Target stores unlike brand name goods such as Dawn dish soap, which is sold in most, if not all retailers.  The advantage of exclusivity is its resistance to price comparisons as the price is controlled throughout the distribution channel.  A more serious issue for retailers is managing cannibalization when floor or shelf space serves two masters.

The question is - to what degree will retailers become protectionistic towards brand name goods when private labels are clearly a lucrative venture and in the best interests of the retailer.  Retailers need brand name goods and brand name goods need retailers so until that is discretionary instead of necessary, retailers must be comfortable with heights.

Joseph Agnese, Standard & Poor's Industry Surveys: Supermarkets & Drugstores, July 21, 2011.

This post first appeared on The Phoenix Phactor, please read the originial post: here

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Private Label Goods - A High Wire Dance for Retailers


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