2018 was not a great year for the retail industry. Increasing costs and diminishing footfall resulted in shrinking profits. However, there are numerous ways that retailers can look to improve their profitability in 2019 to reduce mounting pressure. Creating innovative private label ranges is one sustainable way to reduce costs whilst getting more customers into shops.
From past experiences working with retailers, it is evident that brand loyalty is diminishing. Millennials and Generation Z are not as brand and fascia loyal as Baby Boomers, yet they equate for a larger share of the market. Instead, these consumers are driven by price, quality, sustainability and wanting to try newer more attractive brands recommended by friends or influencers.
A recent survey suggested that consumers would buy private label products in most major categories, including medicine, tinned food, household cleaners, pet and baby products. This is evident by the fact that 90% of the leading household goods brands are losing market share on consistently low-growth categories.
So, what are the benefits for retailers to introduce more private label into their stores?
- Lower costs. Retailers can improve profitability when making elements of branded ranges private label. By being in control of the product life cycle from product development, sourcing through to pricing, retailers can drive higher profit margins compared to like for like branded alternatives. It is well known that retailers and consumers quite often have to pay a “brand tax” for buying a branded product when they could buy an own label product of equal quality for less money.However, retailers need to truly understand the market in the categories that they are developing products in. Badly thought through cost-cutting measures on poor quality ranges will deter customers from stores with the possibility they will shop elsewhere. Some categories need different degrees of brand presence to give customers the confidence to continue to visit that particular shop. Losing top brands could also result in a reduction in rebate packages and investment.
- Differentiation from competitors. Discounters like Aldi and Lidl have taken market share from the established retailers in the last 6-8 years by differentiating themselves with their private label ranges. They operate on a fairly small range of pre-dominantly private label products which offer better value versus other retailers branded equivalents. Better margins from private label products mean that the discounters have been able to generate margins to invest in further expansion whilst increasing their market share as a result of more and more customers switching to them as a result of their lower prices.
- Customer Loyalty. Perhaps the biggest benefit of private label is that they drive and determine customer loyalty. At a time when disposable incomes are relatively static, with purchases becoming more planned and less impulsive, getting customers into your particular shop and not elsewhere is vital – great own brands provide this “hook”.
Variety and innovation are key to drive customer loyalty. In many grocers, there are at least 5 private label ranges centred around organics, naturals (free from), premium, mid-tier and value lines. New opportunities exist for retailers who cater to new customer trends such as ‘sustainable and eco-friendly’. M&S’ new vegan range has been successful in that it has created a range based on new consumer trends at affordable prices. Just look at the PR benefits that Greggs achieved from launching its vegan sausage roll – Piers Morgan’s derogatory comments only served to improve sales!
Retailers should work closely with a select number of private label suppliers on cost improvements and innovations – having a pipeline of NPD is crucial! Suppliers often understand the market for that specific category better than the retailer themselves, and so working together ensures the optimal range is created. Investing in supplier capabilities has a high ROI and results in better quality, availability, efficiency and lower total cost.
4C Associates has extensive experience in helping retailers improve profitability through sustainable strategies. We are experts on sourcing private label manufacturers. Through our category experts and analytics tools, we also provide insights and detailed analysis and recommendations on which categories are most receptive to an own brand presence. We want you to evolve alongside the rest of the retail industry!