We’ve done a number of virtual reality tests of private label pricing, both in the US and abroad, and continually find that the gaps are too large. However, we have not found much consistency between categories to say that there is an ideal gap–it may be a category by category definition.

Category dollars is only one metric to look at in the PL equation. What about all that extra margin the retailer made by selling more store brand versus national? In my recent observations, categories such as frozen prepared entrees, frozen deserts, condiments and fresh prepared showed increases over last year in net profitability. This was aided by the increase in skus of private label in all those categories. If you look deeper, I suspect you will see greater margin intake in other categories that have PL exposure. Vendors call them price gaps. Customers call it value.

Of course. And they have been doing so–in the U.S.–since the advent of store brands. Retailers habitually place too much emphasis on their PL price versus competitive PL prices on like items, rather than branded price gaps in their own store. By the time these comparisons are being made, the shopper is already in your store–they are highly unlikely to leave because they remember that your competitor’s PL milk is a nickel cheaper a gallon. And they are no less likely to buy your milk versus the national brand at a 20% price gap than at a 30% price gap. After a point (usually much closer to price parity than any typical PL price gap today) cheaper is cheaper.

Unless you are building your primary shopper image on “lowest prices everyday,” you are leaving money on the table. And unless you are Walmart–you need to stop that.

The last time I checked, store traffic and sales–in terms of the total basket–were priorities for most retailers. While category performance is not an inconsequential consideration, decisions cannot be made independently for each category with no regard for the overall impression a shopper has with respect to store pricing.

If every category was examined independently, I suspect manufacturers in each category could build a case for higher pricing for all store brand products.

Finally, there is more to building a customer-retailer relationship than pricing, however, I get somewhat uncomfortable when decisions are driven by an objective to improve emotive equity as opposed to basket size.

Most (all?) of the research on private brands leaves out one important fact: Shoppers don’t always know a private label when they see one. That can be easy for us industry folks to forget as we closely watch every PL launch and line extension; however, the distinction between private labels and national brands gets blurrier by the day for the very reasons mentioned in the article. As private labels participate at the OPP, mid tier and premium level and as retailers aggressively market them online, in circulars and on the shelf (through brand blocking and side-by-side comparisons), the distinctions, particularly between premium private label and national brands, will be even less clear to shoppers going forward.

Private label’s promise is no longer limited to price; however, the more marketing that retailers throw at their brands, the more they earn the right to increase prices for them. Perception and context are everything.

Some retailers are leaving money on the table by pricing private label so much lower than national brands. However, do take into consideration that private label is now so prominent that consumers are starting to show signs of comparing prices of private label between one retail chain to another.

This is why it’s so important that retailers recognize the significance of implementing points of differentiation for product, packaging, design, marketing, and even how they implement fanfare for the private brand program.

A few years ago I pointed out that the gap between Private Label and National Brands was only resulting in lost sales and profits. Supermarket News questioned my findings and performed their own survey which confirmed my position.

The maximum a gap there should ever be is 30% and that is during the launch of a new Private Label item. The gap should reduce as the item increases its market share. This approach only applies to equivalent items as to quality and formulation.

This is a very useful area of consideration for retailers. There appear to be some noticeable inconsistencies in some categories. Very large gaps are confusing to shoppers and create barriers for brand marketers to deliver sales results, among other issues.

Retailer performance is still measured with category analytics, while retailers think in terms of department, product sections, and areas. Optimization for profitability and efficiency that supports the value proposition that keeps the core shoppers coming back is still a long-term goal. All parties understand the need to be consumer centric and ensure that all steps in the retail chain add value, but a long way until collaboration reaches this level.

An important fact to recognize here is that there are, broadly speaking, two kinds of store brands. The first kind is value based store brands, which closely match national brands in quality and characteristics but are sold at a cheaper price. The second kind is unique, premium-quality store brands that differentiate a retailer from the national brand offerings and from other retailers. In today’s retail landscape, most retailers offer the former category only, while some offer both. The first category is targeted at low willingness to pay (WTP) shoppers, and therefore should be priced low. This separates these low WTP consumer segment from the high WTP consumer segment. The high WTP segment purchases the national brands and the premium-quality store brands. This offers the retailer the power to price these higher, since the low WTP consumer segment is not interfering with the high WTP segment any more. Empirical studies have indeed shown that prices of national brands increase after the introduction of store brands. And since these prices increase due to the cheap prices of… Read more »

I know I have mentioned it before, but my classic mispriced private label example was pointed out by a VP of merchandising as we did a store walk. In this case, it was the retailer’s private label answer to Woolite. The retailer had their product priced 70 percent below the price of Woolite. I am sure they were still making money, but the VP’s point was that people only hand wash their expensive or cherished clothing. They don’t want to risk destruction by putting these clothes into an inferior product. The low price not only gave away margin, it degraded the image of the product. I think that right now, price is important. While the Woolite example is probably still an anomaly, I think consumers are more willing to experiment in order to save money. This makes price an important factor. Could there be higher margins, possibly, but maybe a way to look at it is that the retailer is buying sales. If a customer “falls in love” with a private label product, they can’t… Read more »

The answer depends on a number of factors. My observations are that some retailers are not great brand managers. They repeatedly discount PL unnecessarily deep as in 10 for 10 and BOGO, which erodes much of the margin. Remember, there are rarely promotional monies built into Private Label. It is a net net business. My analysis of average price comparisons indicate that not only does Private Label erode category average price, driving down dollars, it can cannibalize branded dollars (along with marketing support dollars). Further, over development of Private Label space will attract a disproportionate mix of unprofitable customers to the category at the expense of Branded selection. As mentioned before in this column, 10% of a retailer’s customers generate 40% of their business. The “premium” customers typically are not PL shoppers. They are brand shoppers. As differentiation erodes, alienation of “premium” customers increases. Thus begins the insidious slip into category hell. Not only is price gap the problem, but sizing is also contributing negatively to the profit erosion. Why market an 8 oz size… Read more »

Some very good technical information has been presented here today. But the one point that is being missed is on the emotional side. Companies may need to do a better job in managing the selling point of Private Label to maximize profitability but they maybe using the Private Label as a marketing, branding, and positioning tool which has not been figured into selling price by most of the panelists.

Retailers also have to be careful if they want to raise the prices of PL. It’s not a matter of a single product being lower, it’s the overall basket and total savings that really drives consumers. Decrease their savings per trip and they may go elsewhere or reduce the number of items they purchase.

I’ve been expecting for a long time a shopper push-back against supermarkets shouldering national brands off the shelf in favor of their PL. The push-back hasn’t happened, and maybe this is one reason. Retailers instinctively lowering PL prices to avoid criticism.

[Lesser minds] argue about category dollars (which mean little) and successful retailers concentrate on dollar profit (this you can spend). A good businessman concentrates his efforts on activities that build profit. Pushing National Brands may not be the best route to doing this. Pushing quality and value almost always is a supportable solution. Provided PL has the quality the consumer wants and can deliver more pennies profit per transaction than the national brand then the retailer risks little pushing PL. However, many PL products do not consistently measure up to National Brands in terms of quality. To protect your customers, it is wise to promote the National Brand and price your PL so it produces more pennies of profit per unit sold. If you want to lead with PL please do your self a favor and do continuous cuttings against the National Brands to make sure your PL quality is where it should be. Use caution when pushing PL; never ever inconvenience the consumer by loading so much PL on your shelves that your National… Read more »