1. Is Private Label Pricing the Way to Go?
By: W. Frank Dell II, CMC
Private Label sales are growing every year. There are a couple of reasons for this growth.
First, Private Label products have a higher gross margin and retailers believe this means they’re
making more money. The more important reason for this growth has been the significant
improvement in product quality and packaging.
Additionally, retailers are starting to understand that Private Label products are unique in that
consumers can not buy these products in their competition’s store. This supports retaining
customers, which is every retailer’s objective.
Historically, Private Label products were imitations of leading national brands. Product quality
claims were that they were equal to the national brand, but this was rarely so. Packaging for Private Label was poor and
left much to be desired. Private Label products are priced anywhere from 20 to 70 percent lower than the national
brand. Even with larger discounts, Private Label products achieve a higher gross margin percent than the branded
competition.
The retail food industry is infatuated with low prices. This is illustrated by the following chart from one of our
studies. This chart is proof positive that Private Label’s low prices do not equate to or increase sales. Neither does it
increase market share. In all of these examples the Private Label product has been discounted by more than 50 percent
versus the national brand. Yet, these products have not achieved significant market share. This confirms price is not the
sole factor consumer use in selecting products.
The world of Private Label has changed greatly in recent years and so should the pricing for these products.
Today, the standard Private Label product must be truly equal to or better than the national brand in quality. Quality is
judged by the consumer’s perception of the product’s performance. If the consumer determines the product performs in
their household in an equivalent or acceptable fashion the quality is the perceived as equal. The second factor is
packaging for Private Label. Products must be competitive and current in design.
In addition to the standard Private Label products, there have been a number of new developments. Gourmet or
unique products have entered the marketplace. These are products for which there is no national brand equivalent. A
good example of a retailer offering gourmet or unique Private Label products is Trader Joe’s. In recent years we’ve also
seen growth in the super premium segment. These are Private Label products with quality that exceeds the national
brands. An illustration of this point is the difference between Ben and Jerry’s ice cream and the leading national brand.
Another group of Private Label products achieving growth are organics.
These are products grown without the use of pesticides. In many cases these products are equivalent in quality to
the national brand but, the national brand is not organic. Our last group of Private Label products is the second tier. In
many cases these would be the Private Label products of years before and true commodity products. Examples here
include flour, sugar and canned vegetables. In summary there are standard, gourmet, super premium, organic and
commodity Private Label product groups.