What is the difference between a manufacturer brand, private brand and generic brand?

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You know the old joke: Just because you’re paranoid doesn’t mean they’re not out to get you. In a nutshell, that describes how manufacturers of brand-name products react to competition from private labels. On one hand, manufacturers are right to be concerned: There are more private labels—“store-brand” goods—on the market than ever before. Collectively, private labels in the United States command higher unit shares than the strongest national brand in 77 of 250 supermarket product categories. And they are collectively second or third in 100 of those categories. But on the other hand, many manufacturers have overreacted to the threat posed by private labels without fully recognizing two salient points.

First, private-label strength generally varies with economic conditions. That is, private-label market share generally goes up when the economy is suffering and down in stronger economic periods. Over the past 20 years, private-label market share has averaged 14% of U.S. dollar supermarket sales. In the depth of the 1981–1982 recession, it peaked at 17% of sales; in 1994, when private labels received great media attention, it was more than two percentage points lower at 14.8%. Second, manufacturers of brand-name products can temper the challenge posed by private-label goods. In fact, in large part, they can control it: More than 50% of U.S. manufacturers of branded consumer packaged goods make private-label goods as well.

It is difficult for managers to look at a competitive threat objectively and in a long-term context when day-to-day performance is suffering. Examples of big-name brand manufacturers under pressure from private labels and generics aren’t reassuring. What manager wouldn’t worry when faced with the success story of Classic Cola, a private label made by Cott Corporation for J. Sainsbury supermarkets in the United Kingdom? Classic Cola was launched in April 1994 at a price 28% lower than Coca-Cola’s. Today the private label accounts for 65% of total cola sales through Sainsbury’s and for 15% of the U.K. cola market.

Reactions to private-label success can have major repercussions. Consider what happened in the week following Philip Morris’s announcement in April 1993 that it was going to cut the price of Marlboro cigarettes. Wall Street analysts interpreted the price cut as the death knell of brands; Philip Morris’s stock lost $14 billion of its value; and the stocks of the top 25 consumer packaged-goods companies collectively lost $50 billion in value.

Meeting the private-label challenge requires the same consideration a company would give to any other competitor.

Although we agree that many national brands are under pressure—especially from the number three brand on down in each product category—we strongly believe that the private-label challenge must be kept in perspective. What’s needed is an objective approach and the same careful consideration a company would give to any brand-name competitor. To begin, managers must consider whether the threat posed by private labels will grow or fade. Then, they must reconsider the strengths of the brand name: Brands are far from dead. Finally, if their companies already produce private-label goods, they should weigh the costs of competing in the generic market against the benefits. And if the companies have not entered that market, they probably shouldn’t.

The Private-Label Threat

Several factors suggest that the private-label threat in the 1990s is serious and may stay that way regardless of economic conditions.

The Improved Quality of Private-Label Products.

Ten years ago, there was a distinct gap in the level of quality between private-label and brand-name products. Today that gap has narrowed; private-label quality levels are much higher than ever before, and they are more consistent, especially in categories historically characterized by little product innovation. The distributors that contract for private-label production have improved their procurement processes and are more careful about monitoring quality.

The Development of Premium Private-Label Brands.

Innovative retailers in North America have shown the rest of the trade how to develop a private-label line that delivers quality superior to that of national brands. Consider Loblaws’ President’s Choice line of 1,500 items, which includes the leading chocolate-chip cookie sold in Canada. As a result of careful, worldwide procurement, Loblaws can squeeze the national brands between its top-of-the-line President’s Choice label and the regular Loblaws private-label line. And President’s Choice has even expanded beyond Loblaws’ store boundaries: Fifteen U.S. supermarket chains now sell President’s Choice products as a premium private-label line.

European Supermarkets’ Success with Private Labels.

In European supermarkets, higher private-label sales result in higher average pretax profits. U.S. supermarkets average only 15% of sales from private labels; they average 2% pretax profits from all sales. By contrast, European grocery stores such as Sainsbury’s, with 54% of its sales coming from private labels, and Tesco, with 41%, average 7% pretax profits.

Of course, the reasons for the strength of private labels in Europe are partly structural. First, regulated television markets mean that cumulative advertising for name brands has never approached U.S. levels. Second, national chains dominate grocery retailing in most west European countries, so retailers’ power in relation to manufacturers’ is greater than it is in the United States. In the United States, the largest single operator commands only 6% of national supermarket sales, and the top five account for a total of 21%. In the United Kingdom, by contrast, the top five chains account for 62% of national supermarket sales.

But growing numbers of U.S. retailers such as the Kroger Company believe that strong private-label programs can successfully differentiate their stores and cement shoppers’ loyalty, thereby strengthening their positions with regard to brand-name manufacturers and increasing profitability. What’s more, cash-rich European retailers like Ahold [a Dutch supermarket chain] and Sainsbury’s have begun to acquire U.S. supermarket chains and may attempt to replicate their private-label programs in the United States.

The Emergence of New Channels.

Mass merchandisers, warehouse clubs, and other channels account for a growing percentage of sales of dry groceries, household cleaning products, and health and beauty aids. Wal-Mart Stores, in fact, is already one of the top ten food retailers in the United States. Private labels accounted for 8.8% of sales at mass merchandisers in 1994; in some categories, that percentage was much higher. For example, 39% of soft-drink volume sold in mass merchandisers is private label versus 21% in supermarkets. Some national-brand manufacturers have encouraged the growth of new channels, but they may regret it later. Unlike supermarkets, mass merchandisers and warehouse clubs are national chains; they have the incentive to develop their own national brands through private-label lines, and they have the procurement clout to ensure consistent quality at low cost.

The Creation of New Categories.

Private labels are continually expanding into new and diverse categories. Their growth follows some general trends. [See the table “What Drives Private-Label Shares?”] In supermarkets, for example, private labels have developed well beyond the traditional staples such as milk and canned peas to include health and beauty aids, paper products such as diapers, and soft drinks. Private-label sales have also increased in categories such as clothing and beer. With that expansion comes increased acceptance by consumers. The more quality private-label products on the market, the more readily will consumers choose a private label over a higher-priced name brand. Gone are the days when there was a stigma attached to buying private labels.

The percentage of units accounted for by private labels varies widely by category. To some degree, the variation is a function of time—private-label canned foods, for example, have been on the market longer and in broader distribution than private-label diapers. However, researchers have identified several factors, listed below, that favor private-label penetration.

Product category characteristics:

• The product is an inexpensive, easy, low-risk purchase for the consumer.

• It is easy to make from commodity ingredients.

• It is perishable, thereby favoring local suppliers.

• Product category sales are large and growing, so private labels can more easily garner sufficient volume to be profitable.

• The category is dominated by a few national-brand manufacturers, so retailers promote private labels to reduce dependency on them.

New-product activity:

• National brands are offered in few varieties, enabling a private label with a narrow line to represent a clear alternative to the consumer.

• National-brand new-product introductions are infrequent or easy to copy.

• Consumers can easily make side-by-side comparisons of national brands and private labels.

Private-label characteristics:

• Private-label goods have been available to consumers for many years.

• Distribution is well-developed.

• Variability in quality is low.

• Quality in comparison with national brands is high and improving.

• Consumers have confidence in their ability to make comparisons about quality.

Price and promotion factors:

• Retail gross margins in the product category are relatively high.

• Price gaps between national brands and private labels are wide.

• National-brand expenditures on price promotions as a percentage of sales are high, raising price sensitivity and encouraging consumers to switch brands.

• The credibility of national-brand prices is low because of frequent and deep price promotions.

• National-brand expenditures on advertising as a percentage of sales are low.

Retailer characteristics:

• The retailer is part of a stable oligopoly and therefore sells national brands at relatively high prices.

• The retailer has the size and resources to invest in high-quality private-label development.

Brand Strength

Taken together, these trends may seem daunting to manufacturers of brand-name products. But they tell only half the story. The increased strength of private labels does not mean that we should write an obituary for national brands. Indeed, the brand is alive and reasonably healthy. It requires only dedicated management to thrive. Consider the following points.

The purchase process favors brand-name products.

Brand names exist because consumers still require an assurance of quality when they do not have the time, opportunity, or ability to inspect alternatives at the point of sale. Brand names simplify the selection process in cluttered product categories; in the time-pressured dual income households of the 1990s, brands are needed more than ever. In fact, a 1994 DDB Needham survey indicates that 60% of consumers still agree that they prefer the comfort, security, and value of a national brand over a private label. Although this percentage is lower than the 75% figure common in the 1970s, it has remained fairly constant during the last ten years.

Brand-name goods have a solid foundation on which to build current advantage.

Put simply, brands have a running start. The strongest national brands have built their consumer equities over decades of advertising and through delivery of consistent quality. From year to year, there is little change in consumers’ rankings of the strongest national brands. Forty of the top 50 brands on Equitrend’s consumer survey were the same in 1993 as in 1991. In contrast, retailer brand names are not prominent. On the 1995 Equitrend list of the top 100 brands in the United States [based on ratings of 2,000 brands], only 5 store brands appear, the highest of which is Wal-Mart at number 52, down from 34 in 1994.

Brand strength parallels the strength of the economy.

As the United States has emerged from recession, manufacturers of national brands have increased advertising and won back some consumers who had turned to private labels. Sales of premium-quality, premium-priced brands are on the rise. A 1993 Roper Starch Worldwide survey found that 48% of packaged-goods buyers knew what brands they wanted before entering the store, up from 44% in 1991.

National brands have value for retailers.

Retailers cannot afford to cast off national brands that consumers expect to find widely distributed; when a store does not carry a popular brand, consumers are put off and may switch stores. Retailers must not only stock but also promote, often at a loss, those popular national brands—such as Miracle Whip, Heinz ketchup and Campbell’s soup—that consumers use to gauge overall store prices. Even if, in theory, retailers can make more profit per unit on private-label products, those products [with rare exceptions such as President’s Choice chocolate-chip cookies] just do not have the traffic-building power of brand-name goods.

Excessive emphasis on private labels dilutes their strength.

What could be more convenient, some retailers argue, than to have consumers remember a single store name? The problem is that stretching a store name—just like a manufacturer name—over too many product categories muddies the image. Many consumers rightly do not believe that a store can provide the same excellent quality for products across the board. Even Sears, Roebuck & Company, the premier private-label retailer in the United States, found it necessary to invest in category-specific subbrands such as Craftsman and Kenmore—which, in turn, have been outgunned by more focused manufacturer brands such as Black & Decker and Sony. By the late 1980s, Sears’ excessive emphasis on private labels led to consumers’ perceptions that the retailer’s assortment was incomplete as well as to reduced store traffic and poor profits. In 1990, the company launched the Sears Brand Central store-within-a-store concept and committed itself to stocking a full assortment of national brands alongside its private labels in electronics and appliances.

If You Don’t, Don’t Start

Faced with the pros and cons of private-label production, what should national-brand manufacturers do? Our recommendation to companies that do not yet make products for the private-label market is simple: Don’t start.

Some brand-name manufacturers make private-label goods only to use occasional excess production capacity. In those circumstances, private-label production may seem tempting. But beware. Although the system may work well for a company for a time, private-label production can become a narcotic. A manufacturer that begins making private-label products to take up excess capacity may soon find itself taking orders for private-label goods in categories where the market share of its own brand is weak.

For manufacturers seeking only to use excess capacity, private-label production can eventually become a narcotic.

That step, too, may seem reasonable enough. Indeed, production managers may argue that in addition to using up excess capacity, private-label production can increase cumulative production experience and lower unit manufacturing and distribution costs. Heinz, for example, is a major supplier of private-label baby food. However, it is easy to slide down the slippery slope. The next step in the process is to supply private-label goods in categories that are the lifeblood of the manufacturer’s branded sales. After all, the thinking goes, high-volume private-label orders placed well in advance of required delivery dates can help smooth production and take less time and effort per unit to sell than the company’s own branded goods.

From that point, however, the results of those tactics are predictable: The company’s strategy becomes confused; it starts to cannibalize its brand-name products; and it may even face financial disaster. Consider what happened to Borden. Once a strong manufacturer of well-known brands, Borden found itself floundering in the early 1990s largely because of a progressive, and eventually excessive, commitment to private-label manufacturing, which eroded its focus on sustaining its branded products. As a result of declining margins and cash flows, the company was finally sold to an investment firm in 1995.

Manufacturers still tempted by private-label production should understand, first, that managers invariably examine private-label production opportunities on an incremental marginal cost basis. The fixed overhead costs associated with the excess capacity used to make the private-label products would be incurred anyway. But if private-label manufacturing were evaluated on a fully costed rather than on an incremental basis, it would, in many cases, appear much less profitable. [See the chart “The Real Cost of Private-Label Manufacturing.”] The more private-label production grows as a percentage of total production, the more an analysis based on full costs becomes relevant.

Every company producing private-label goods should answer three questions: What is the true contribution from private-label products? What fixed costs are attributable to private-label production? And how much will the private-label goods cannibalize the company’s national brands?

At Consumer Corporation, the contribution from a popular food product was $0.40 per pound for the national brand and $0.23 per pound for the private label. Thus the company had to sell almost two pounds of the private-label product to equal the contribution generated by the sale of one pound of the national brand. If Consumer’s national brand incurred “fair share” cannibalization—that is, a loss of share equal to that garnered by the private label—then the company would earn a marginal profit. In many cases, the cannibalization rate will be higher than fair share. In this example, Consumer decided that the risk outweighed the reward; it invested more in the branded product.

Second, private-label production can result in additional manufacturing and distribution complexities that add costs rather than reduce them. For example, packages and labels have to be changed for each private-label customer, and inventory holding costs increase with each private-label contract.

Third, efficiencies of selling private-label contracts are also exaggerated. Whenever a private-label contract comes up for renewal, there is inevitably a long and arduous negotiation as competitors attempt to steal the business. And most retailers employ different buyers for national brands and private labels, so manufacturers must maintain two sales relationships with each retailer.

Fourth, it is easy to overstate the relative contribution of private-label goods and therefore to understate the cost of cannibalization. And even though selling private labels often requires a separate sales relationship, sales forces generally sell where they are most welcome; this means that invariably the private-label offerings end up in a manufacturer’s strongest accounts, not the weakest.

It is easy to overstate the contribution of private-label goods and to understate the cost of cannibalization.

Because private-label and national-brand manufacturing and marketing are based on such different cost structures, it’s hard for one organization to do both well. Some companies try to manage both together to approach the trade with a total category solution, but this practice often leads to strategic schizophrenia, pressure from demanding retailers to give priority to less profitable private-label shipments, and unproductive use of management time in reducing conflicts.

Other organizations try to manage their private-label business in separate divisions to compete better with the lean cost structures of private-label-only manufacturers. In such organizations, private-label manufacturing cannot be contained, and inevitably the private-label goods cannibalize national-brand sales.

Proponents of private-label manufacturing suggest that it is necessary for competitive reasons. If one manufacturer refuses private-label contracts, another will take them, perhaps using the profits from private-label manufacture to support the marketing of its national brands. Since private-label purchasers represent a legitimate and continuing consumer segment in most product categories, the goal of diversification argues for a manufacturer having a stake in both parts of the market. Proponents also argue that the dual manufacturer has more ability to influence the category, the shelf-space allocation between national brands and private labels, the price gap between them, and the timing of national-brand promotions; and further, that its clout with the trade is enhanced by supplying both national brands and private labels. Moreover, they contend, the learning about consumers and costs that comes from being in the private-label market can enhance the manufacturer’s ability to defend its national brands. And again, considered alone or in a short-term context, these views can seem compelling.

A few companies have used private-label production effectively as a temporary strategy to enhance competitive advantage. In Europe, PepsiCo Foods International succeeded in capturing private-label businesses from its key competitor, forcing it to close plants and, more importantly, weakening its national brands. In the United States, General Electric Company used a two-step process in the lightbulb business. It first captured private-label trade contracts from competitors and then proved through comparative in-store experiments that trade accounts could make more money just stocking GE lightbulbs than by stocking both GE and private-label bulbs.

There is no evidence, however, that making private-label products enhances a brand manufacturer’s trade relationships in the long run and results in preferential merchandising support for its national brands. Far from enhancing diversification, private-label contracts can increase a brand manufacturer’s dependence on a few large trade accounts, force the manufacturer to disclose its cost structure and share its latest product and process improvements, and result in margin pressure every time a contract is up for renewal. The president of a division of Consumer Corporation [not its real name]—a U.S. packaged-goods multinational competing in more than two dozen categories—was dismayed to find his plant shipping private-label product ahead of its own brands. When he asked why, he was told, “The stores are calling for their stock, not ours.”

Evaluating Private-Label Business

If your company does produce private-label goods, it is important to assess their effect on the business as a whole and to keep private-label operations under control. Taking the following steps should help.

First, conduct a private-label audit. Amazingly, top-level executives at many companies do not know how much private-label business their organizations do. This ignorance is most evident in multinationals with far-flung operations that have grown rapidly through acquisitions—especially of businesses in Europe and Canada, where private-label penetration is strong. Often those companies’ internal control systems do not accurately reflect private-label sales or the additional stockkeeping units devoted to them.

Second, calculate private-label profitability on both a full-cost and marginal-cost basis. Analyses at Consumer found that on a full-cost basis its private-label business was unprofitable in almost all categories in the United States. In Europe and Canada, however, where greater trade concentration results in higher retail prices for both national brands and private-label alternatives, the company found that its private-label business was mostly profitable. Armed with this information, Consumer implemented a new justification system for its private-label production. In effect, the burden of proof shifted from “why not” to “why.” As a result, the company’s private-label activity declined precipitously in the United States.

Third, examine the impact of private labels on the market shares of your national brands. Analysis of U.S. retail scanner data showed that private-label penetration had increased from 1991 to 1993 in 16 of Consumer’s 24 categories, but in only 4 of them had private labels gained share by cannibalizing sales of Consumer’s brands. In 14 categories, both Consumer and private-label producers had gained shares at the expense of weaker national brands; in most of these cases, Consumer’s national brand was the market-share leader. This analysis suggested to Consumer that there was no need to make private-label goods to maintain market share in most of the categories in which it competed.

Finally, close excess capacity. The option of shutting down unused capacity is almost never considered in the private-label debate. Yet in five categories, Consumer found that the profitability of manufacturing rationalization [including exit costs] was superior to filling excess capacity with low-return private-label business.

Winning Strategies

We recommend that national-brand manufacturers take the following nine actions—whether they currently make private-label products or not—to stem any further share gains by private labels.

Invest in brand equities.

This is not a new thought, but it is worthy of fresh consideration. For most consumer-goods companies, the brand names they own are their most important assets. James Burke, former CEO of Johnson & Johnson, has described a brand as “the capitalized value of the trust between a company and its customer.” Brand equity—the added value that a brand-name gives to the underlying product—must be carefully nurtured by each successive brand manager. Managers must continually monitor how consumers perceive the brand. Consistent, clear positioning—supported by periodic product improvements that keep the brand contemporary without distorting its fundamental promise—is essential. For example, Procter & Gamble Company has made 70 separate improvements to Tide laundry detergent since its launch in 1956, but the brand’s core promise that it will get clothes cleaner than any other product has never been compromised. Consistent investment in product improvements enhances a brand’s perceived superiority, provides the basis for informative and provocative advertising, increases the brand’s sustainable price premium over the competition, and raises the costs to private-label imitators who are constantly forced to play catch-up.

Innovate wisely.

Desperate to increase sales and presence on the shelves and to earn quick promotions, too many national-brand managers launch line extensions. Most are of marginal value to customers, dilute rather than enhance the core-brand franchise, add complexity and administrative costs, impair the accuracy of demand forecasts, and are unprofitable on a full-cost basis. In 1994, more than 20,000 new grocery products were introduced, half of them line extensions and 90% of them unlikely to survive through 1997. Too many line extensions confuse consumers, the trade, and the sales force, and reduce the manufacturer’s credibility with the trade as an expert on the category. In addition, if line extensions fragment the business, the average retail sales per item will decline. That, in turn, opens the door for a private-label program that focuses just on a brand’s best-sellers and therefore can deliver attractive average sales and profits per item.

In 1994, national-brand managers introduced 20,000 new grocery products. Most won’t survive through 1997.

Product-line extensions do make sense when a category has a large premium component and the level of rivalry is high. But in most instances, especially in commodity categories that are driven by price, product-line proliferation and innovation are a waste of money.

Use fighting brands sparingly.

For similar reasons, managers should be wary of launching fighting brands, which are price positioned between private labels and the national brands they aim to defend. The purpose of a fighting brand is to avoid the huge contribution loss that would occur if a leading national brand tried to stem share losses to private labels by dropping its price; the fighting brand gives the price-sensitive consumer a low-cost branded alternative. Philip Morris has effectively used fighting brands L&M, Basic, and Chesterfield around the world to flank Marlboro. Likewise, Heinz has used fighting brands well in pet foods. However, the fighting brand can end up competing with the national brand for consumers who would not have switched to private-label products anyway. For this reason, Procter & Gamble recently phased out White Cloud toilet tissue and Oxydol laundry detergent. Rarely do fighting brands make money. At Consumer, fighting brands had close to $1 billion in revenues but were unprofitable after the allocation of fixed costs. The management time that these products absorb is often better invested in building the equity of the national brand.

Build trade relationships.

The best consumer goods companies should know more about their consumers and their categories than any private-label manufacturer. Indeed, they should also know more than their trade customers, who, though closer to the end consumer and inundated with scanner purchase data, have to plan assortments of products and allocate shelf space for 250 to 300 categories with only the resources that 1% after-tax profit margins will permit. Manufacturers must leverage their knowledge to create a win-win proposition for their trade accounts: Retailers and national-brand producers can maximize their profits jointly without excessive emphasis on private labels. They can do so if manufacturers take these steps:

• Loan retailers an accountant to educate them about private-label profitability. A Brandweek survey reported that 88% of retailers believe private labels can increase category profits whereas only 31% of manufacturers believe this. Many retailers emphasize private-label products because they often deliver a higher percentage of profit margins than national brands. However, the rate of private-label turnover and the absolute dollar margin per unit may be lower. In addition, retailers often mistakenly compare apples and oranges. They don’t always take account of promotion costs for the store name that builds private-label demand. They also may omit their warehousing and distribution costs for private-label products when comparing private-label retail margins with those of national brands that manufacturers deliver direct to stores and stock on the shelves.

• Offer to examine retailers’ purchase scanner data. Invariably, the shopper who buys a national brand rather than the private label in the same category spends more per supermarket visit and delivers a higher absolute and percentage margin to the retailer. The private-label shopper is not the most profitable for the retailer.

• Subsidize in-store experiments. Retailers’ views of how many consumers are attracted to their stores by private labels is often exaggerated. National-brand manufacturers can suggest and pay for tests that compare the sales and profitability of a control store’s current shelf-space allocation plan with the sales and profitability of a shelf-space plan offering fewer or no private-label goods.

• Ration support. By responding to customers and managing categories more efficiently, leading manufacturers have found new ways of favoring trade accounts that support their national brands over private labels and of not being quite so helpful to those that don’t. For example, companies are becoming increasingly sophisticated about how they spend their trade dollars. Instead of giving straight discounts, manufacturers are asking for “pay for performance,” in which retailers are paid more if their sales activities are successful.

Manage the price spread.

During the 1980s, consumer goods manufacturers increased prices ahead of inflation [the easiest way to add bottom-line profit in the short term] and then offered periodic reductions off their artificially inflated list prices to distributors and consumers who demanded them. As long as some still paid full price, this price discrimination was thought to be profitable. Over time, however, such a high proportion of the typical brand’s volume was being sold at a deep discount that the list prices no longer had credibility. Further, the added manufacturing and logistics costs of the promotions and the increased price sensitivity they stimulated played into the hands of private labels. When Marlboro cut its list prices, it correspondingly reduced the level and frequency of its promotions; the list price was restored to a more credible level while the hidden costs from the brand’s use of promotions were reduced.

National-brand manufacturers must monitor the price gap both to the distributor and to the end consumer between each national brand and the other brands, including private labels, in every market. They must also understand how elastic the price is for each national brand—that is, how much effect changes in price have on consumers. For example, a 5% increase over the private-label price in the price premium of a sample national brand may result in a 2% loss of share. But an increase of 10% may result in an additional 3% loss. With an increase between 10% and 15%, only 2% more might be lost because the remaining national-brand customers are now the less-price-sensitive loyals. [See Stephen J. Hoch and Shumeet Bannerji, “When Do Private Labels Succeed?” Sloan Management Review, Summer 1993, pp. 57–67.]

Knowing the shape of your brand’s price elasticity curve is essential to smart pricing and to maximizing the brand’s profitability. A price reduction on a popular national brand may result in a lower profit contribution, but studies show that private-label sales are twice as sensitive as national brands to changes in the price gap. In other words, a decrease in the price gap would swing twice as many sales from private labels to national brands as a corresponding increase would swing sales to private labels from national brands. [See the graph “Price Elasticity of National Brands.”]

Price Elasticity of National Brands

Exploit sales-promotion tactics.

National-brand manufacturers cannot prevent retailers from displaying copycat private-label products alongside their brands with “compare and save” signs heralding the price gaps. However, they can use sales promotion tactics to enhance the merchandising of their brands. Strong brands with full product lines such as Neutrogena can sometimes secure retail space for their own custom-built displays. Manufacturers can emphasize performance-based merchandising allowances that require special in-store displays or advertisements over cash discounts applied to invoices. They can reward retailers for increasing sales volume [as verified by scanner records] with rebates. And they can distribute coupons to households in areas where retailers are aggressively providing private-label products.

Manage each category.

What works for detergents won’t necessarily work for soft drinks. Categories differ widely in private-label penetration, the price-quality gap between private labels and national brands, and the relative profitability and potential cannibalization cost of any private label or value brand.

• In categories with low private-label penetration such as candy and baby food, managers must understand and sustain the barriers to entry—such as frequent technological improvements within a category, a manufacturer’s low-cost producer status, or intense competition among national brands. In one case, an easy-to-prepare dinner entree had seen modest private-label sales for years, but sales exploded once private-label manufacturers acquired the technology for an increasingly popular form of the product.

• In categories with emerging private-label penetration, it is useful to consider value-added packaging changes—and, in some circumstances, line extensions—that make the product stand out on the shelf, keep consumers’ attention focused on the national brands, and raise the costs for private-label imitators. In part, we have private-label pressure to thank for easy-open and resealable packages. Promotions targeted at trade accounts showing interest in private labels may also be useful, along with advertising [such as the 1994 “Nothing Else is a Pepsi” campaign] that focuses consumers on the advantages of the national brand and then warns them against imitations.

• In categories with well-established private-label penetration, the goal is containment. The emphasis must be on lowering the costs in the supply chain—through minimum orders, truckload and direct shipment discounts, more efficient trade deals, and the elimination of slow-moving stockkeeping units—to save money for reinvestment in the brand.

Use category profit pools as a performance measure.

Most consumer-goods companies use market share and volume as the primary measurement tools for category performance. These tools can lead to poor decision making because they inherently value all share points equally. Consumer Corporation, as part of its effort to manage the profitability of its marketing, tracked and analyzed the profit pool for all its categories. That is, it calculated the total profit for all participants in a category by segment and then attributed percentages of the total to the companies competing within that category. Not surprisingly, low-volume, low-profit private labels appear to be far less important when using this measurement. When a manufacturer’s objectives are to maximize both the overall category profit pool and its share of that pool, the decision making is generally very different from traditional share and volume measures.

Take private labels seriously.

Too many national brands treat private-label competition as an afterthought in their annual marketing plans. They regard only the other national brands as their true competitors. The emergence of premium private labels and national store brands such as Sam’s makes this oversight more and more dangerous. Stealing market share from weaker national brands often merely opens the door for more serious private-label competition. Every national-brand marketing plan should include a section on how to limit the encroachment of private labels. The marketing plan might include specific actions to be taken in categories, trade accounts, or regional markets where reports indicate private labels are gaining ground. In addition, national-brand manufacturers should bring more legal actions against copycat private labelers who use the same packaging shapes and colors as the national brands, and they should tighten arrangements with contract suppliers to prevent them from using new proprietary technologies in the manufacture of private-label products.

National-brand manufacturers can use some or all of the strategies outlined above to win the battle against private-label producers. Consider the results of the Coca-Cola Company’s response to Cott in Canada, where the market for private-label soft drink sales was strong. After Coca-Cola retaliated aggressively against Cott in 1994, the latter’s profits as a percentage of sales plummeted along with its stock price; the company then moderated its ambitions to extend its private-label success formula to other product categories. Cott executives stated that the company’s growth would thereafter come as a result of overall market expansion and at the expense of competitors smaller than Coca-Cola. By taking firm, considered action, brand-name manufacturers can successfully fight the private-label challenge.

A version of this article appeared in the January–February 1996 issue of Harvard Business Review.

What is the difference between a manufacturer brand and a private brand?

What are a few differences between manufacturer brands and generic brands?

What is a manufacturing brand?

What is the difference between a manufacturer brand and a private brand quizlet?