In this episode of Pricing College – we cover the trend for many manufacturers of food products to produce very similar unlabelled or supermarket own brands.

 

We discuss how this can be a problem for your business in the longer term.

 

 

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TIME-STAMPED SHOW NOTES

[00:00] Introduction

[00:40] Where do the own brands’ concept start?

[02:48] Why do manufacturer produce their own brands? 

[05:15] Joanna discusses the positive and negative effects on the manufacturer who have their own brands.

[07:45] The short term and long term effects of having an own brand

[08:58] Supermarkets and suppliers being stocked in one category drives customers out of the supermarket

 

 

 

 

How can “own brands” damage the actual brand?

 

In today’s episode, we are going to look at “own brands”. And how own brand in the world of food fast-moving consumer goods, those sort of items. How can damage the actual brand? 

 

Thinking about how it all started with its own brands.

 

It came about through a sort of private label strategy to supermarkets. Favouring Private Labels in a way help with everyday low pricing. Consumers and shoppers wanted a bit more variation when they were buying.

 

They were saying the price was a major driver. Then, from there supermarkets came up with that pushing private label.

 

Often a part of that strategy was to ask every supplier providing the branded goods to make their own brand. A cheaper version of an own brand to compete or add depth to the category onto the product assortment.

 

In theory, there are positives.

 

It’s giving consumers sort of what they want or what they think they want. But in a way, it’s also damaged the supplier, supermarket retail relationships on a number of levels. Suppliers have lost a fair amount of margin over the years with their own brand private label strategy.

 

Yes, in the short term they did have sort of some kind of spike in revenue and volume, which I’m sure that they enjoyed from their brand. But at the same time, over time, a lot of the brands have worked too.

 

But bite them because now they’re being asked to put the well known branded goods on to a program called EDLP, everyday low pricing. And overall I think this is reducing sort of the value of the category year on year.

 

And consumers are not nonplussed about it either. So I do think there have been some negative effects.

 

 

Reasons why manufacturers produce their own brands.

 

I think you can understand from a manufacturer’s perspective why they will look at their brand or unbranded version.

 

So let’s say you produce any sort of product whether it’s washing powder or whatever it is. You’ve invested in the brand. You spend money on television adverts and it’s a very common item in people’s minds.

 

You have a target market out there that want to purchase that product. Buy it every week when they do the weekly shop and they want that item.

 

There’s pressure on you and from the supermarket or the retailer to lower prices.

 

Fundamentally, you don’t want to lower prices. You want to keep your star product where it is. And to keep it seen as a prestige product and keep those prices up to keep profitability and margin high.

 

Potentially, launching lower value, unbranded, unpackaged or whatever, it is the cheaper version of the same product. In many instances, they’ll come from the same factory. I think we’ve all heard of examples whether it’s a loaf of bread or you know whatever it is.

 

The item will be coming from the same place just go down a different shoot in the factory and different branding going on it.

 

You can even see examples of this in re-badging in the auto industry where the same product is sold. Fundamentally just with different badges at very different prices.

 

But certainly, in the supermarket food categories or household cleaners, etc., the item will be very similar.

 

There might be small differentials in the actual content. But in reality, the biggest difference will be in the packaging and what it looks like. It could be sold at a price differential of a third of the price of the original.

 

With that issue, that might be your margins in the meantime. But over time, as customers who always shop for seeing this item on the shelf next to it. They might start going to I’ll try the cheaper one I’m saving X number of dollars each time, why not give it a try?

 

If they do try it, fundamentally, are you producing a product that you don’t want people to buy?

 

That’s a strategy that over the long term there’s an issue there. So if you’re producing a product in theory you don’t want people to choose. But you can’t make it inferior and still has to be as internally as good from a health perspective from the food requirement perspective.

 

You are gonna be facing issues. Over time a certain percentage of people who are either price-aware or value shoppers or just, to be honest, don’t care about the packaging.

 

You will see a large number of people choosing the cheaper option. And you’ll cannibalise your sales, your margins and your profitability.

 

Can "own brands" - destroy your real brand

 

The  positive and negative effects of having an “own brands”

 

In the early days, you’re right.

 

It did provide some kind of price structure customer and segmentation structure by offering private label.

 

A few years ago, I’m thinking Kellogg’s for instance they were leading in the market. Everybody went to the Kellogg’s brand. But they needed to be more variety within that sort of category for people.

 

So offering that own brand was a good idea especially for price-sensitive consumers that wanted that Kellogg experience. But they just felt like they weren’t willing to pay. Couldn’t afford it for some reason.

 

In the basket of goods, total spending went up so they wanted to make allowances and wanted to then go to their own brand. That makes complete sense there’s logic. You’ve got a good better best strategy working quite well.

 

But what’s happened over time is just yet another own brand, another variation.

 

Let’s just use the Kellogg example here, what you end up having is just a huge amount of assortment of one product. Just think about the supermarket aisle when you go through the cereal aisle and the snacks aisle. It’s row upon row of the same sort of stuff.

 

This is the negative result almost of own brand.

 

Where you just keep on competing with that expanding that same product category. Just keep working and working until there’s no variety left in the supermarket.

 

This is a major issue for customers going to the supermarket now.

 

This is why a lot of consumers and shoppers are going elsewhere for their basic groceries. Because there’s a lack of variety in the supermarket based on private label EDLP strategy.

 

So they go to niche, smaller businesses that provide them what they want and they’re willing to do the homework for that, and surprisingly pay more.

 

It’s not a surprise because people do want diversity in their grocery goods, as well as in their price points. The business that provides that and the pricing team that sees that is going to win that market share. The niches that arise as a result of all these different strategies.

 

Can "own brands" - destroy your real brand?

 

I think a lot of this is short-termism versus long-termism.

 

In the short term, an own-brand strategy can seem sensible even if you’re producing branded goods you can justify yourself why you would go along with it.

 

But if you’re not differentiating the value. Understanding the drivers of why people purchase your product. Especially when something let’s say that you’re not showing the people that are not prestige items.

 

Let’s say a washing powder where theoretically there might be studies that show a branded washing powder performs 10X  better than an unbranded version. But if one costs three times the price of the other. I don’t believe for a minute that one performs three times as good as a similar one on a similar shelf.

 

And at least you’ve worked out for one or two tries. So you are going to undermine your brand offer.

 

If you don’t invest in the value that you provide. If you don’t protect that value through moats or some sort of mechanism. Where the unbranded version has to be discernibly inferior in performance, reliability or some other aspect. If it’s not discernibly different people over time have become aware of that, just choose the cheaper one.

 

I think my point here is as well that supermarkets and suppliers due to the same brand issue they’ve been stuck in that one category.

 

They’re not forgetting that they’re just working that product in that category to death. To the point that there’s no other choice for consumers and that’s driving them outside of the supermarket. Driving to other suppliers that provide a variety in the range and assortment.

 

So what I’m saying is sometimes own brand and that sort of competition to compete based on price not only do cannibalise your own brands by doing that. You’ve stopped thinking about the market and what customers want to buy.

 

Yes, you may provide them with all the cheapest possible product variations of the same product. But yet they still don’t buy.

 

Why? Because they want to buy something else.

 

This is where big leading brands are now finding that it’s the smaller entrant, providing that are the big competitors in the market for them now. Even their lean down cost-focused and streamlined manufacturing is not enough to compete with them.

 

Because the product innovation from leading companies is too slow. They’re not thinking about…

  1. How do people consume?
  2. What do they want to consume?

 

They’re just thinking about that sort of private label, a typical sort of strategy. Because their whole manufacturing operational capability is based on a very small range of brands that are almost yesteryear brands.

 

Unfortunately, consumers and the market are moving on. And it’s the agile smaller startups that provide exciting new tastes at price points that people can afford are the ones that are winning now.

 

The other aspect of it is if you’re investing in a brand that takes years and years to do it.

 

It takes years to gain customer awareness. There’s a large upfront expense of product development, distribution, advertising and marketing getting to where it needs a mass brand.

 

You don’t want to kill that golden goose before it pays off. If the entirety of the supermarket in the industry is dedicated to as soon as possible pumping out cheaper alternatives to your brand.

 

Why would you even invest in developing new products or services through that sales mechanism?

 

It’s almost doomed to failure.

 

I think when you’re going to the supermarket and you’re thinking, what would you have for dinner. You think there are limited options. To some extent, it seems sometimes everyone just eats chicken, and there are limited options to some extent.

 

You’re thinking there’s got to be more than this but if there are no financial incentives for people really to pursue it. I think to some extent, it is logical that over time it becomes more just similar similar stuff.

 

 I think a lot of suppliers, new entrants, new startups in the grocery game look at a potential relationship with a supermarket retailer.

 

And think you know what I don’t want to go down that same old groove like everyone else is doing. They buy my brand because it’s something new, it’s something that people like.

 

Then within no time at all, I’m told to reduce prices. I’m told to provide an alternative and own brand. A cheaper variation to provide some kind of distinction and attraction mechanism for price-sensitive customers. Then over time told to promote and fund that promotion.

 

A lot of people just like you know what…

  1. I can do my own distribution,
  2. I can do my own marketing,
  3. And, I can target the niche audiences that I want online.
  4.  I’m going to invest online to find my niche, find my customer base and give them what they want.

 

This is exactly what’s happening now.

 

What’s happening to the supermarket retailers and leading suppliers that serve that old fashioned market. They’re struggling and they don’t even have that sophisticated online strategy by segment, by price point to attract the right customers.

 

It’s a long story that all comes from that interesting private label issue and I suppose it all ties up together.

 

What is clear?

  1. Things have to change.
  2. Distribution is changing.
  3. There are new entrants.
  4. And having an IT capability is going to be enormous for everybody leading companies, smaller entrants.

 

They’ve already got a niche foothold in that market and are pulling that.

 

They’re not going down the private label own brands.

 

Because they know over time that’s just going to ruin their business. Not just their brand, their business. And it’s going to upset the customers.

 

There’s one thing that startups do only focus on and that is customers. Because they know if they don’t hit it with their customers and give them what they want when they want it. Then they’re not going to survive. I think there’s a lesson here for leading businesses too.

 

 

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