Those of you old enough to remember the movie “Repo Man” also remember the days when store private label products were the cheap, low-quality alternative to a branded product. Typically located in an unglamourous location in the store or relegated to a bottom shelf, they were a valuable tool to drive margin in certain product categories, but typically did nothing to elevate the retailer that carried them.
Over the years, retailers have become much smarter about private brand strategy, infusing it with both improved product quality and thoughtful marketing. As a result, sales of private label products have shot up and the customer’s perception of what private brands have come to mean has changed dramatically.
This took on an even more pronounced upswing over the last year. Going by conventional wisdom, private brands should not have succeeded during the pandemic, when such a large percentage of sales went online. After all, retailers have long relied on merchandising private brand products physically next to national brands as an alternative, and have customers pick up the alternative that offers the same look and feel for a much lower price.
But retailers that changed their mindset on private brands—spending human and financial resources on brand building, using consumer insights to develop and market products, and creatively presenting them online as a high-quality choice—were able to take advantage of the situation. They could successfully price their product lower than national brands but continue enhancing brand equity and building customer loyalty—even online. For example, Stitch Fix’s in-house brands, including Fairlane and 41 Hawthorn, are a direct output of analyzing customer feedback and other consumer data that revealed product gaps in the marketplace. Amazon is also known for leveraging data from sales on its platform to research and build several of its own brands, sometimes to the dismay of marketplace sellers.
Some of the growth can also be attributed to the unabating direct-to-consumer trend. As consumers get more comfortable buying directly from smaller brands online, big-box retailers and department stores are losing their position as the intermediary. This is prompting traditional retailers to find creative ways to bring customers back to their sites and stores with offerings that can only be found on their shelves – real or virtual. Launching a well-researched, high-quality line of private label products can be an elegant solution. Target and Costco are clear leaders of a successful private brand strategy. Four of Target’s in-house brands reached $2 billion or more in sales in 2020, while Costco’s Kirkland brand regularly accounts for nearly a fourth of the company’s total sales.
Private brands are a sensible option for retailers, if done right, as they offer higher margins and the opportunity to create a differentiated product that can engender consumer loyalty. The key, however, is in getting it right. Especially with the jump in ecommerce sales over the last year and the expectation that this growth will endure, retailers cannot rely on foot traffic in stores to expose potential customers to their private brand product. This raises the stakes dramatically for what it means to build, and market, a private brand.
How can a retailer decide if building a private brand is the right move in today’s environment? And if so, how can it create a long-term strategy for a strong in-house brand? Here are some suggestions:
Introduce consumer insights into all processes: Many retailers have strong loyalty programs and other direct connections with their customers, a relationship that many national brands would love to have. This must be leveraged into every aspect of the process of defining, designing, assorting, pricing, and marketing of a private brand. In an omnichannel world, brand takes on even greater importance in helping customers differentiate among products. Retailers can and should develop creative ways to trial private brands with existing customers.
Develop a true strategy plan and thoughtful targets: Identify the right competitive positioning and what opportunity or white space exists in the market. Map this against your existing sales data to determine what your customers want. Consider your overall assortment strategy. How will this category or brand fit in? Set goals around the penetration of any new private brand for a given category and in the overall assortment. Private brands can be a helpful mechanism to target diversified consumer types or serve different purposes for different consumer groups. If you find the right space to play in, consumer insights will also be helpful in assessing pricing strategies. Setting and sharing financial forecasts and product development targets prior to launch will be critical for successful execution.
Define the operating model and organizational requirements: Evaluate your organizational capabilities to determine if products should be developed in-house or in collaboration with a third-party vendor. Weigh whether to buy finished goods and build brand equity through the label you put on the product or if it makes sense to design and develop your own product that maximizes differentiation. Either model will come with its pros and cons. Determine what capabilities you need internally, including related to the supply chain, warehousing, and packaging. It may also be appropriate for your organization to go the hybrid route: leverage vendors to launch and gain some momentum before transitioning over time into developing truly differentiated products. How will other functions support your new strategy? Do you need new capabilities in finance, buying, or marketing?
Building brands is usually not something that’s embedded in most retailers’ DNA, so a cautious and thoughtful approach is crucial, along with the right amount of expertise. A key differentiator for a successful private label is a focus on the long term, much the way the best branded companies do. Retailers that truly want to develop a private brand must avoid simply chasing a low-cost, high-margin option that will not build customer loyalty. Instead, make deliberate choices around driving brand loyalty, building brand awareness, and understanding customer perceptions to ultimately drive profitability.
