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Sleeping With Your Enemy : Private Labels and National Brands, Who Innovates?

Traditionally, national brands have considered innovation an exclusive competitive advantage over private labels

Published: Feb 5, 2010 12:00:50 AM IST
Updated: Feb 15, 2010 01:47:41 PM IST

In the last few years, private labels have steadily eroded the market share traditionally held by national brands. In fact, in 2008, private labels had taken over 25% and 50% in most European markets and 20% in the US. Private labels are defined as consumer products produced by or on behalf of, distributors and sold under the distributor’s own name or trademark through the distributors own outlets.

There are a few reasons driving private label growth: an increased concentration among retailers, an improved quality perception among consumers, and a rising social acceptance of private labels consumption. In addition, the current economic downturn has further boosted the appeal of private labels because of their price utility.

Carmen Abril, PhD, IE Professor and “Marketingthinking” Partner
Carmen Abril, PhD, IE Professor and “Marketingthinking” Partner
To combat the threat posed by private labels, consumer packaged goods companies frequently adopt new innovation strategies focused on delivering new value to consumers. Furthermore, research shows that national brand manufacturers have mainly focused on increasing their distance from private labels through innovation and advertising in order to provide a superior value to the consumers compared to private labels brands. In this sense, product innovations help to sustain a national brand’s competitive advantage and provide a basis for a sustainable price premium over store brands. Research also shows that the introduction of new products by national brands has a positive impact on their brand equity which makes them less vulnerable to the entry of private labels.

These findings were all true in an early market development of private labels as they were not innovating in turn but under current high level of store brands new product development activity , is something different happening now?

Private Labels strategy
Private labels play an important role in retailers’ strategies beyond adding value through convenient pricing for consumers. Many retailers consider private labels as key in their effort to create consumer loyalty and to differentiate themselves from the competition. This may explain retailers’ intensifying involvement in new product developments, which has further fueled the market share growth of private labels. According to a recent U.S. study by Mintel (2009), private labels made up 25% of all food product launches in 2008, whereas they only represented 13% of all product introductions in 2005.

This increased incorporation of private labels into retailer’s strategic vision is evident in the shift among many retailers from a “me too” to an “added value” approach. For example “Fair trade” lines and “Healthy Kid Snacks” introduced by Tesco; “Active Lifestyle” and “PS Organics” from Kroger; “Eco” from Carrefour or “Deliplus” from Mercadona – all are clear examples of innovative product lines which now lead the product innovation in their respective categories.

There are several reasons for that increase of activity. The first is the current volume scale of private label brands. For instance, Carrefour private label revenues are beyond 20bn $, which affords access to R&D and innovation resources, some even provided by their exclusive mega-suppliers.

Secondly, an increased penetration of private label products, consumer familiarity with them, and an improved quality of product, has significantly reduced the past perceived risk when buying private labels. And thirdly, “smart shopping” – a new phenomena in which finding value is a symbol of intelligence – gives consumers permission to reconsider the private labels choice in a broad array of categories.

Factors influencing innovation success
Traditionally, national brands have considered innovation an exclusive competitive advantage over private labels, because consumers tended to associate more risk with buying a private label product than a manufacturer brand alternative. However, the previously described market situation deems it worthwhile to reconsider this assumption.

Do private labels have enough brand equity to launch and sustain successful innovation?
The answering is yes, accordingly to a recent study performed by IE Business School that analyzed all new product launches in last two years in several consumer packaged good categories.
The reasons behind this result are related to the increased consumer familiarity and experience with private labels, along with a positive consumer perception of the price utility now provided by private labels even in new products.

The difference of “product news” vs “product innovation”
The findings have led to some interesting interpretations and implications.

The innovation strategy to fight store brands seems to be inefficient at least in the categories where store brands are already dominant, ie have high degree of consumer familiarity and trust. In fact despite increasing innovation in the market place few national brands are gaining share. This has led us to think that the current strategy of innovation and launching of new products in consumer packaged good markets needs to be reconsidered by manufacturers.

First, it is important to mention the distinction between product news and product innovation. The relevance and degree of innovation of the majority of new products launched by national brands are quite low, and because of it easy to copy by private labels. This “me too strategy” (copying the new products of national brands) has actually legitimated private labels’ ability to launch new products.
National brands need news to reenergize point of sale and consumer excitement but too much “news” without true innovation can result in consumer saturation and eventual skepticism.

Just how much news/innovation a national brand can and should deliver is not easy to sort out, since new products that come from a high degree of innovation pose some risks to the consumer decision process and negatively influence consumer acceptance. However, it seems clear that national brands need to revaluate their value proposal to consumers and build barriers to avoid easy-copy products in order to lead market innovation.

Interestingly, strong brands with high market share seem positively influence consumers’ acceptance of new products. This fact endorses the strategic shift of leading companies like Unilever and Procter & Gamble which bet on their mega brands to efficiently compete in the market place.

This is all important for countries outside of Europe and the United States where private labels are not yet so developed thanks to market fragmentation. In fact it would be interesting to continue this study in countries like India and South America where the market share of private labels is still below 10%.
For them, there is still hope.


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[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain]

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  • ing. Maurice van Vliet

    The power of Private Label is so strong that it will soon shift to less developed countries in the world. Private Label is already well established in US and Europe but will start to grow now in China, Japan, South America and India. 60% of Private Label in combination with 40% branded goods will be the perfect efficient working combi. Maurice van Vliet

    on Feb 7, 2010