Branding Choices Not So Simple

Sam Walton, the progenitor of what the world knows as Wal-Mart, loved brands. He reasoned that his low price format depended crucially on consumers perceiving that Wal-Mart really was low price.

Private Label was one approach, but Sam figured consumers could always assume, correctly or incorrectly, that the low prices on Private Label goods were due to some “cheapness” in quality or ingredients in the Private Label, whereas branded goods were directly comparable. This easy comparison would only encourage consumers to buy that particular product at Wal-Mart, but the clear comparison would help Wal-Mart establish a reputation for always offering the best prices. And so it did.

Now, however, Wal-Mart is reducing the number of national and regional brands it carries in each category and replacing some of the displaced brands with its own Private Label. In doing so, Wal-Mart is in sync with a trend in American retailing. The trend is understandable enough. At a time when consumers are looking to save money, retailers find they can buy a product under their own brand and that they can, by eliminating the margin manufacturers have for marketing and R&D, both increase the retailer’s own margin and decrease the consumer’s cost for the goods.

Although consumers in North America were brought up to think of Private Label as a cheaper alternative to national brands, that has really been only part of the story for some time now. It was way back in 1984, at Loblaws Companies Ltd., in Canada, that President’s Choice was unveiled as a high-quality Private Label line with products on par with national brands.

In the short term, consumers certainly value lower prices, and, of course, retailers value higher margins and hope that the exclusive nature of Private Labels will keep consumers loyal. Long term, there are some questions. Although a few retailers, such as Trader Joe’s, have become famous for unique formulations of dressings and sauces — most Private Label goods, even if high quality, are not original. Their success depends crucially on the market established by a national brand.

Yet this raises an issue. If stores weaken national brands, who will do the great national advertising that encouraged the growth of these products and categories to begin with? Where will the margins come from to fund R&D efforts to develop new products?

These are important issues, and it is not clear how it will all shake out, but one thing is certain: Companies outside of North America have an opportunity to capitalize on the current focus of North American retailers with private label.

The Private Label business depends crucially on volume, and this is true whether the retailer owns its own production facilities or is contracting for product. Higher volumes mean more efficient production runs, which means lower costs.

A retailer’s ability to increase volume dramatically is limited by its own stores, so most retailers are happy to sell their Private Label line into other regions. They may make an exclusive deal with a supermarket in another country or they may simply sell their product to an importer.

In effect, buyers around the world can instantly get their own Private Label line by simply buying one of the lines an American retailer has developed. Since many of these lines exceed 3,000 items, it is like getting a Private Label program in a box.

Of course, part of the attraction to American products for consumers around the world is that these products have been so prominently represented in American movies and music, they are part of the cultural lingua franca that means American — and these products are almost exclusively branded.

Perhaps the answer is that it is not necessary — or desirable — to choose between a national brand and Private Label. There are a few stores, such as Marks & Spencer in the UK and Trader Joe’s in the United States, for which Private Label is a raison d’être, but for most, the sales of Private Label goods are only enhanced by the presence of national and international brands to compare them to. Long term, a solid partnership between manufacturers and retailers is necessary for the continued growth of the various categories. Retailers will do much more if they don’t have to do it alone.