As the soon to be released book, Private Label Strategy: How to Meet the Store Brand Challenge (Harvard Business School Press, Feb. 2007), points out, national brands had their "golden age" in the U.S. around the middle of the twentieth century.
But as happens with all golden ages, the crowning period of the national brands came to an end. The vacuum created as brands began to wane came to be filled by a number of emerging retailers. Some chains such as Wal-Mart and Home Depot did not even exist at the zenith of national brand popularity. These and others were to become the true powerbrokers in the consumer marketplace and, in the process, lead what co-authors Nirmalya Kumar and Jan-Benedict E.M. Steenkamp have called the "private label revolution."
Messrs. Kumar and Steenkamp recently took part in an e-interview with RetailWire.
RW: Why this book?
Kumar: After 15 years of working as consultants and academics in the field of private labels, we had some unique insights into the phenomenon, especially since much of this work was in Europe which is more advanced than the US with respect to retailer brands.
RW: What is the premise of your work and what does it mean for brand marketers?
Kumar: The recommendation for brand manufacturers is four fold:
- Fight selectively where they can win against private labels and add value for consumers, retailers, and shareholders. This is typically where the brand is one or two in the category or occupying a premium niche position.
- Partner effectively by seeking win-win relationships with retailers through strategies that complement the retailer's private labels.
- Innovate brilliantly with new products to help beat private labels. Continuously launching incremental new products keeps the manufacturer brands looking fresh but this must be punctuated by periodically launching radical new products.
- Create winning value propositions by imbuing brands with symbolic imagery as well as functional quality that beats private labels. Too many manufacturer brands have let private label equal and sometimes better them on functional quality. In addition. to have a winning value proposition the pricing needs to be monitored closely to ensure that perceived benefits are equal to price premium.
RW: What about retailers?
Kumar: When a customer wants to replace a faucet, do they think of Home Depot first or American Standard? The recommendation for retailers is to have a portfolio strategy with respect to private labels - occupying several levels of price positions and perhaps also category brands like Wal-Mart or Tesco do. In addition, they should upgrade their private labels in terms of quality and support higher prices.
RW: Is there such a thing as brand loyalty?
Kumar: Yes there is brand loyalty though it may not always be to manufacturer brands. Many consumers are store loyal first.
RW: What do you hope retailers will take away from your work?
Steenkamp: Our work offers a lot of hope to retailers. Retailers have been remarkably successful in developing their private labels, as evidenced by the fact that private label sales (globally) exceed one trillion dollars annually. Consider the success of 100 percent private label chains as Aldi, H&M, Victoria's Secret, Ikea, and Zara; as well as the success of retailers like Wal-Mart, Target, and Tesco, all of which rely heavily on their private label investments for their success.
RW: Are there critical aspects of brands that retailers do not fully appreciate?
Steenkamp: There is a clear danger that retailers' continued success with private labels undermines the economics of private labels, the basis underlying their success. As 1) private label assortments widen and widen, 2) as retailers are developing budget, standard, and premium private labels, as well as private labels for niches (health, kids, organic, etc.), 3) retailers are starting to advertise for private labels, and 4) move beyond copy-catting to becoming innovation leaders, their cost advantage is eroded. Strong manufacturer brands have economies of scale and scope and with increased investments in private labels, retailers may lose the cost edge. That is probably the biggest danger.
RW: Have branded items been mishandled by retailers in some ways?
Steenkamp: Retailers regard (strong) manufacturer brands as a must-have; customers expect it. However, carrying Coke, Budweiser or Pampers is not going to differentiate one retailer from the other. As such, retailers have little incentive to engage in (extensive) marketing/merchandising of branded items. Branded items do not make a consumer loyal to their chain (unless the retailer offers them at much lower prices than other retailers), private labels do... However, one key instance of omission is that there is a very significant proportion of cases that branded items are actually more profitable to retailers than their own private labels. This is due to the higher dollar margin (lower percentage margin, but on a higher price) and shelf turnover of (leading) manufacturer brands.
Discussion Questions: What do you see as the most significant development and/or issue in the national and store brand story? Do you see the popularity of national brands or store brands as a cyclical phenomenon with one rising and the other falling at various stages over time?
Mr. Kumar is professor of marketing, co-director of Aditya Birla India Centre and faculty director for executive education at London Business School. Mr. Steenkamp is a C. Knox Massey distinguished professor of marketing and marketing area chair at the University of North Carolina at Chapel Hill's Kenan-Flagler Business School as well as executive director at global research center AiMark.
Private Label Strategy: How to Meet the Store Brand Challenge will go on sale in hardcover next month. Amazon.com and Barnes & Noble are accepting pre-orders now.