Private Labeling and You

Private labeling is on the increase for most retailers. In the United States, where approximately 25 percent of all products sold are private labeled, major hardware stores have increased the number of products they cany under their own label by more than 12 percent in the past year alone. In Europe,

there has been a huge growth in private labeling as major U.S. retailers open stores and stock them heavily with their own brands. Some studies show as many as 45 percent of all the goods sold by major European retailers are under private label. In some cases, the private label brand is exactly the same product and made by the same manufacturer of a competing brand - just 10 to as much as 25 percent less expensive.

In other cases, the private label brand is less expensive, but the product's quality simply does not measure up to similar products sold by leading manufacturers. And in a few situations, price is not the issue at all. The retailers decide to produce their own brand, under their own label, because they want "added value" and are dissatisfied with similar products made by the major manufacturers.

Advantages and disadvantages

For consumers, private labeling can have many advantages. If the quality of the product is perceived to be the same, consumers appreciate the savings and the price differentiation. Along with this, if they are happy with one retailer's private label product, they are more likely to buy other private label brands by that retailer. This benefits the merchant and minimizes the amount of comparison shopping required by the consumer.

But, there can be disadvantages. Some consumers believe that a private label brand does not always measure up in quality when compared to a major manufacturers brand. Additionally, if the consumer purchases a private label brand and is dissatisfied with the product, it may deter them from buying other private label brands or ever shopping in that store again.

For the Jan/San distributor, a private label product can have definite advantages including: greater customer dependence on the specific distributor; reduces one manufacturer's domination in the marketplace; often results in a greater profit margin; builds customer loyalty; allows the distributor more flexibility on pricing; and enhances the distributors overall company profile and perception to the customer.

But, again, there can also be disadvantages. Some customers do equate "low price" on a private label brand to mean poor quality, as mentioned earlier. This can turn away sales, especially if distributors heavily promote their own private label. And, if the distributors just market their own private label, they are likely to lose customers who are looking for a specific manufacturers brand or product.

Our private label history

When City Group, Inc. began operations in 1988, we were exclusively a private label house. Like many distributors at that time, our company name was on every product we sold. At that time, few manufacturers, especially chemical manufacturers, had managed to distinguish themselves from their competitors or develop brand name loyalty among consumers. Because of this, we would always demonstrate one of our own private label products for our customers.

However, contrary to what is happening in some other industries and with the general public, in the Jan/San industry it appears that brand loyalty is increasing. Many customers put a lot of stock in certain brands made by particular manufacturers, and that is all they want. To accommodate customers, some distributors are stocking more of these major brands - even if their profit margins are less - along with their own private labels.

What may also be influencing todays market and steering customers away from private label products in just the past couple of years is the greater emphasis on specialty offerings, such as Green products. Most customers are aware that a product should be certified Green by either Green Seal or by the Environmental Choice Program^sup M^. Because manufacturers must pay to have their products tested and certified, consumers are confident in the products and are encouraged to look for manufacturers who have this certification.

Not only does this limit private labeling, it makes it harder for a manufacturer to establish a new brand. In order for a company to gain recognition for a new brand, it must develop an aggressive marketing campaign - for both distributors and consumers - and be able to promote the product heavily in advertising and different forms of expensive marketing.

Just as with so many other changes that have evolved in our industry, it appears that private labeling will not be as common in the future as it was 15 or more years ago. Although this can reduce the profit margins some distributors have enjoyed over the years by promoting their own private labels, it also opens up new opportunities. Major manufacturers are working harder to develop customer acceptance of their brands and this can make it easier for a distributor's sales force to market them.

SIDEBAR

Contrary to what is happening in some other industries, it appears that brand loyalty is increasing.

IMAGE PHOTOGRAPH 1AUTHOR_AFFILIATION

Rick Silber is president of City Group, Inc., Jessup, Maryland.