What’s it: Private label products refer to products owned by a company but are not made in-house. Companies procure their products from other manufacturers or manufacturers with contracts under their labels. You can find them in a wide variety of industries, from retail to food to cosmetics. We also call it a store brand if the owner is a retailer.
The simple way private label works
Take retailers as brand owners, for example. They define everything about the product, from specifications, features, to packaging. Then they contract and pay a manufacturing partner to produce it. Finally, they then label it with their own brand and then market it.
Take Carrefour products as private label products. Carrefour sells food or beverage products under the Carrefour brand and packaging. The company does not make it internally but outsources it to other companies. Another great example is Nike. They buy in bulk from credible partners and place their brand labels and sell them.
Why private label matters
Private label products can generate a profitable income stream for the company. They can maximize sales during peak demand. If done right, they add additional product lines to sell and increase its credibility and trust in customers’ eyes.
In terms of market share, private label contributions vary between countries. In the United States, private labels account for about 15% of total supermarket sales. In Indonesia, it contributes less than 20% of total sales in modern retail. Meanwhile, a Nielsen study in 2014 showed that the global average market share was around 16.5%.
Private label advantages
This branding strategy is a low-cost alternative to regional, national, or international brands. Companies can rely on their strong reputation by launching private label products without having to produce them directly. Consumers may see the product as the same as the company’s other original products.
Taking advantage of such perceptions, companies can add various other private label products. Apart from getting to market quickly, they can also generate more income. Of course, they have to make sure partners have the capability to do so and meet their expectations.
Other advantages of private label are:
Lower price. Indeed, some products may be perceived as premium products, according to the owner’s image. However, they are generally cheaper.
Owners try to increase supply to meet consumer demand. Lower prices allow them to sell more products. Price-conscious or disloyal consumers see an attractive product and are likely to buy it. Such consumers usually consider the price and who the seller is rather than the quality of the product.
Strengthen brand equity. Products have a specific and unique brand according to the name of the retailer or owner. An identical brand will lead consumers to always remember the name of the store or manufacturer. If they like the product, it leads to stronger brand equity.
Maximizing peak demand. Companies can launch them during peak seasons or specific events to maximize sales from high market demand.
More price control. The owner has more flexibility in determining the selling price. Also, they can determine product costs and specifications and then find suitable manufacturers. They can use market knowledge to determine product specifications.
Marketing independence. For manufacturers, they don’t have to spend money on marketing costs. Also, they secure future income through cooperation contracts. Their task is simply to make sure the product meets the specifications requested by the owner.
Optimizing capacity utilization. Less well-known manufacturers can improve their utilization rates by working with private label owners.
Private label disadvantages
Private label strategies also carry some risks, such as:
Production dependence. Private label owners depend on manufacturers and have no control over them (not as a shareholder). Thus, a manufacturer’s business failure could disrupt operations. Thus, owners should choose an established partner with a proven track record.
Low operation control. Not being involved in the production, owners may find that the product’s quality does not meet expectations. Or, some products meet the requirements, but more products do not. When they pull a product from the market, it can generate negative perceptions among consumers.
Additionally, manufacturers may not be reliable in delivering products. It can interfere with the owner’s inventory management. Or, they are not flexible enough to increase production or modify products easily to meet demand trends.
Low-quality perception. Companies usually sell private label products at a lower price. And consumers may perceive such products of inferior quality. Instead of attracting demand, it worsens the company’s image and affects other companies’ products.