Marketing Profs

A recent survey conducted by Ipsos MORI for the Private Label Manufacturers Association found that 41% of shoppers now identify themselves as "frequent" buyers of store brands or private labels. Almost seven out of ten of those surveyed agreed that the private-label products they buy are as good as, if not better than, their national brand counterparts.

Private labels started as cheap, inferior products and more recently became copycats. Today, best-practice retailers are using "premium store brands" to help position the retailer as a "brand." The emergence of the new premium private labels is the hottest trend in retailing.

Store brands have come a long way. Historically, they did not even carry the name of the store. Usually, the package with black letters on a white background simply identified the product, like paper towels or dog food. Most consumers saw these generics for what they were—undifferentiated, except in their poor quality, but at a very low price.

Store brands then morphed into copycat brands. Copycats imitate the leading manufacturer brands in the category. Their touted value proposition is that same quality as a leading manufacturer brand but at a considerably lower price (typically 30-40% less). For example, Walgreens whitening toothpaste, sold at $1.99, is positioned directly against P&G's Crest whitening toothpaste with a "You Save $1.00" shelf sign.

In contrast, the new positioning of "premium store brands" is revolutionizing the retail landscape. Examples of premium private labels include Wal-Mart's Sam's Choice (U.S.), Loblaw's President's Choice (Canada), Tesco Finest (U.K.), Marks & Spencer's St. Michael (U.K.), Woolworth Select (Australia), Pick and Pay's Choice (South Africa), and Albert Heijn's AH Select (Netherlands).

The important distinction between premium store brands and traditional copycat brands is the clear vision of the retailer to differentiate on quality vis-a-vis the manufacturer brands, combined with the absence of any attempt to copy the packaging of the leading manufacturer brands.

Why do retailers develop premium store brands? Our research has identified two reasons:

1. Companies want to differentiate themselves from other retailers. Though the classic copycat branding strategy does help as a tool against manufacturer brands, it does not help differentiate the store against other retailers.
   
   For example, Wal-Mart's Equate brand of dental rinse compares itself on the front of the package to its branded competitor, Plax. The drug store chains CVS and Walgreens also have similar copycat store-branded mouthwashes.
   
   In fact, in the consumers' mind, often the only thing separating one retailer store brand from the other is the name on the label. To escape this commoditization, retailers are investing in premium store brands.
   
   
2. Retailers want to generate higher profits. Copycat private labels have to sell at a considerable discount versus leading manufacturing brands. Although the profit margin percentage that the retailer earns is higher on its copycat store brand than on leading manufacturer brands, profit dollars may actually be lower.
   
   This is because copycat private labels sell at a considerable discount: A 30% profit margin on the sale of a store brand priced at $1 generates less profit than a 20% profit margin on the sale of a manufacturer brand at $1.75.

Two types of premium store brands are priced at par or above leading manufacturer brands: "Premium-Price Store Brands" sell at or above the price of manufacturer brands; and those that sell only at a small discount, typically 10%, called "Premium-Lite Store Brands."

Thus, versus manufacturer brands, higher profit margin percentage translates into higher dollar profits for premium private labels: