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:

  • Premium-lite store brands. The premium-lite store brand starts with leading manufacturer brands as the standard and then attempts to make a superior product at a lower price. If retailers can pull this off from a product development perspective and convince customers of the performance from a marketing perspective, then life can become unbearable for manufacturer brands. This is the holy grail of retailer private label strategy—the ambition of retailers around the world, regardless of retail type or size.

    A leading example of the premium-lite strategy is Canadian retailer Loblaw's President Choice store brand. Rather than focus on price in its marketing, President's Choice emphasizes the quality of the ingredients and the care with which the products are prepared.

    It competes directly against the major manufacturer brands on quality. Since Kellogg had two scoops of raisins in its cereal, President's Choice cereal had to have twice the amount of raisins while still being cheaper. The Decadent chocolate chip cookie under the President's Choice label has 39% chocolate chips compared with 19% chocolate chips, by weight, in Chips Ahoy! In addition, real butter replaced hydrogenated coconut oil and quality chocolate substituted for artificial chips. The resulting Decadent product became Canada's market leader in chocolate chip cookies despite being sold only in the 20% of the market held by Loblaw.

    President's Choice brand includes grocery products, financial services, and even mobile phone services, helping Loblaw to generate impressive levels of customer loyalty.

  • Premium-price store brands. Though most premium store brands are still somewhat cheaper than leading manufacturer brands, some premium private labels now are more expensive than leading manufacturers' brands.

    Premium-price store brands were pioneered in the United Kingdom by retailers like Marks and Spencer, Sainsbury, and Tesco. But the premium-price store brands can also be found elsewhere. South Africa's Woolworths has a strong private label focus, selling nearly all its foods and general merchandise products at premium prices under the Woolworths name. In the U.S., Victoria's Secret in lingerie has been able to develop several premium-price private label brands.

    A compelling case study of the premium-price strategy is provided by Britain's Tesco, one of the world's largest retailers.

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Retailer private labels have come a long way. Banish the old image of cheap, low-quality toilet paper or canned beans packaged in black and white. Today's sophisticated retailers are successfully experimenting with premium store brands.

Rather than perceiving them as a poor cousin to manufacturer brands, many consumers can be persuaded to pay more for top quality private labels.

Adapted from Private Label Strategy: How to Meet the Store Brand Challenge, Harvard Business School Press, February 2007.

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Nirmalya Kumar is a professor of marketing at the former at London Business School (where he is also Faculty Director for Executive Education, Director of Centre for Marketing, and co director of Aditya V. Birla India Centre).
Jan-Benedict E.M. Steenkamp is a professor at University of North Carolina at Chapel Hill (where he is the C. Knox Massey Distinguished Professor of Marketing and Marketing Area Chair at Kenan-Flagler Business School).