The strong growth of private label is tempting A-brand manufacturers to also produce private brands. On the other hand, private label manufacturers see opportunities in developing a national brand. What opportunities and risks does “dual tracking” bring?
Private label has been on the rise for some time, but last year total private label sales grew by as much as 25 billion euros to 302 billion euros, according to figures from the association of private label manufacturers PLMA. That is a record: family budgets remain under pressure and high inflation is causing an increasing price gap between private labels and A-brands. No wonder brand manufacturers are looking at this growing market with great interest. Could it be interesting for them to develop private brands alongside their national brands? It is a question many manufacturers are grappling with.
On the other hand, more and more private label manufacturers are translating their expertise into consumer brand development. There is no shortage of examples, such as salad manufacturer Signature Foods (that developed the strong A-brand Delio) or sauce manufacturer Pauwels (strong in the foodservice channel and as a manufacturer of private labels for supermarkets, that also successfully entered food retail with its own brand). Astra Sweets acquired the Frisia brand, which is particularly strong in the Netherlands, through an acquisition.
Private labels have undergone strong development in recent decades, Karel Demeester of marketing consultancy Callebaut Collective explains. “Private labels were initially strongly price-driven, but evolved into true ‘powerhouse brands’ that increasingly have the characteristics of a national brand. Look at what Marks & Spencer is doing in the UK. Value for money remains important, but producers are also doing portfolio management and taking steps towards ‘brand storytelling’. They are gathering more knowledge of the consumer and shopper.”
This has happened in four waves: in a first phase, private labels were purely price-focused, then they started covering more customer needs and expanding the portfolio (for instance with organic products). In a third phase, they invested more in marketing and packaging, to compete with the A-brands. And the latest evolution is innovation from consumer insights: “Private brands are not just competing on the shelf, but also at the dinner table at home.”
Private label has overtaken A-brands in several areas, Demeester observes: “They can switch faster, are more innovative. A-brands have less of that agility and are more risk-averse. Private brands also often come across as more authentic, sustainable and local to shoppers, compared to the international brands of the big multinationals. As a result, you see that not only lower income groups, but also the middle and upper classes are buying more private labels: they recognise that the quality of private labels has greatly improved.”
However, it is true that private brands still mainly tag along on the big trends, instead of building on in-depth consumer insights. “Retailers, for example, want to go all the way in terms of health, while brands know that for consumers taste takes precedence. Attempts by private brands to gain a foothold with soft drinks sweetened with stevia were unsuccessful: the products just did not taste good.”
What advantages does combining brands and private labels – also known as “dual tracking” – offer to manufacturers? Spreading risk and making better use of production capacity play a role, in addition to tactical considerations: for example, you can start copying a competitor’s features in a private label you develop yourself. You can also test innovations faster because you have higher flexibility with private labels than with A-brands.
As a brand manufacturer getting into private brands, you can also deepen the relationship with retailers and build category expertise together. “You will get access to more data, better understand what drives the retailer, you will get a broader picture of the category. Studies suggest that brand manufacturers stand a better chance if they also produce private label: Aldi, for example, is more likely to choose brands that also offer private labels. Conversely, private label manufacturers that want to become even more of a partner with retailers will need to gather consumer knowledge and category expertise. By marketing a brand yourself, you help build that knowledge.”
Yet there are also risks associated with dual tracking. The business model of both paths is fundamentally different: “For private labels, cost leadership is essential, while brand manufacturers focus less on that. Dealing with other KPIs is challenging. Private label focuses more on short-term benefits, brands are in a long-term perspective.”
As a private label manufacturer, you therefore need to think carefully about your ambitions with a brand: what role are you going to play? Building a ‘love brand’ is very challenging, but B-brands are eventually phased out. Internal focus is a concern. Studies show that it is better to split the sales organisation, and see private label as a brand in its own right alongside the others. This requires clear decisions: “Which functional features do you reserve for your brand and which for the private label? Which brand gets priority in case of capacity issues? Retailers will insist on giving priority to the private label brand.” Private label can be complementary to your brand, but it can also cannibalise, and margins are lower.
Conclusion? “Dual tracking can be interesting for manufacturers, but think carefully about your ambitions”, Demeester advises. “As a private label manufacturer, do you want to become a better private label partner with the development of an A-brand in the first place, or do you really want to build a love brand? As a brand manufacturer, do you want to become a fully-fledged private label specialist, or still primarily protect the position of your A-brands?” In both cases, the move requires major investments and firm adaptability within the organisation.
This interview with Karel Demeester appeared on the retail platform of RetailDetail on the 24th of March 2023.