Marcos Fava Neves

The world of retailers brands

By Marcos Fava Neves (chinadaily.com.cn)
Updated: 2010-04-20 09:05

Private label (brands developed and managed by distributors: retailers and wholesalers) is one of the most discussed issues on strategy and of major impact on retailers' activities nowadays. It has been an important tool for the distributor in a very competitive sector and has played different roles for the food industry, coming from threats to opportunities. The objective of this article is to elect some important aspects to be considered in a relationship to supply food products to a distributor's (retailer or wholesaler) private label.

In some countries the share of private labels at retail has reached over 50 percent of total food sales. Some retailers even only sell their brands on stores. The percentage of private label sales within product categories is higher in food and beverage than other product's categories. But what are the possible advantages for a food producer when they decide to sell products to private labels?

I think there are several possible advantages: since communication is done by the retailer, lower cost for the company is a first one. There is also a possibility to increase sales and obtain scale gains, since the company will have higher occupation of the factory capacity and volume of inputs bought, enhancing negotiation power with suppliers. The producer can occupy a larger space in the retailer shelves (this happens when there are two brands from the same factory--the original and the private label.

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For a food producer, it also could be easier to obtain credit and funding by Banks, since future sales are guaranteed by the supply contract. In product line decisions, gives the possibilities of alternative product lines with different prices and positioning. It is important to notice that normally these are products without technological innovation. Hardly new products are launched as private labels. There is improvement in the relationship with the retailer. An advantage for the food company is reputation, since consumers recognize that to be a supplier of a retailer works as a quality certification. It may also add a possible lower physical distribution cost and food producers don't need promoters at the point of sale.

Another point is that should be considered is that the company may face a possible lower market share for the main company's brand at the store, but a higher market share for the factory (since now it has two brands coming from the factory at the shelves). The company gests experience, and further can supply other retailers, even other industries and, as the retailing sector becomes more global, there is the opportunity to be the global supplier for the category. A final and practical reason to study this proposal is that if one company does not occupy this space, a competitor will occupy.

And for the retailer: what are advantages of having products with their brands? First we need to understand that there are several possible formats: brand with the name of the retail chain; retail brand, but with other name and retailer stamp on the product. There is an advantage of vertical chain coordination, having production without production assets and to have possible stocks reductions since these products will be managed by the company. The retailer also gets higher bargaining power to negotiate with other suppliers given by the flexibility of private label's price positioning. This strategy adds the possibility to develop store loyalty (identification in the mind of the consumer, once he will be always seeing the brand at home or at other place). Private labels normally offer higher margins and increase in pressure for shelf-space disputes once one part of this limited space is filled with its own products reducing space for other companies to share.

As other possible advantages, the store's product line gets wider. But the retailer has to have a very good coordination, since it has to have careful quality monitoring because the brand image (the name of the retailer) can be damaged in case of problems.

Since retailers are recognized and in some cases very admired by consumers, why not to extend their brands to the products sold in the stores? Private labels today are a major concern in marketing. How can the food industry fight against these giants? Private labels increased competition in the food market and enhanced retail's bargaining power. Market leaders are threatened by the increasing private label sales even within premium segments, and the second or third brands in the market are threatened at the other side by cheaper private label. What rests to the food industry? Next article!

The author is a professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker.