Are retailers risking their profit potential by ignoring the new reality?

• Necessity – closure of brick and mortar restricting choices.
• Scarcity – panic buying of national brands forcing private label substitution.
• Accessibility – avoiding exposure to large groups of people is steering them to new channels.

The pandemic has increased demand for private label products across many sectors, outpacing sales of national brands, creating an opportune moment for retailers to define (or re-define) their private label strategy.

Success will elevate profits, whilst failure could wipe them out totally.

In 2020, private labels in UK grocery retail grew to 46% of the £205b sector sales*, up over 4%pts. in the latest 12 months, and 40% of those who switched brands are likely to continue purchasing a new brand post lockdown.** leaving traditional brands in fmcg, consumer electronics, and apparel exposed to threats from distinct private label retailers, poised to drive sales and margins.

Private label retailing is a skill which many don’t fully appreciate, mastering it will:

–      motivate customers to switch to you.

–      boost gross margin contributions.

–      enhance your value credentials.

–      cultivate brand loyalty.

–      increase brand advocacy.

The common mistake retailers make is they don’t define their brand purpose, culminating in an inconsistent proposition across product development, merchandising and marketing. They fail to build customer trust.

Their price positioning is too frequently focussed on entry level, failing to promote overall brand quality. All of which leads to poor cash profit performance and reputational risk.

Critical steps to a winning Private label Strategy;

1.     Brand Strategy

Define your brand purpose – Don’t develop a private label until you have established a distinctive customer need and worked out how your private label will meet it. The resulting ‘customer value proposition’(CVP), must capture;

–       who is the target audience? Understand their motivations.

–       Why they should buy your label?

–       How will you make the proposition ‘distinct’ from others (e.g. price, value, quality, sustainability, premiumisation, innovation etc).

–       What, when and where will you serve them?

Once tested with customers, the CVP must be used as the operating framework inside the business to manage, review and control.

2.     Assortment Planning

You are searching for missed customer opportunities to fulfil. Resist assortment ‘flooding’ and price ‘bottoming’. Instead, start with an assortment plan of your existing products and employ tags (or attributes) that you will use to identify gaps in price, quality and innovation. Flag poorly performing secondary and tertiary brands to replace with a private label, then re-define the assortment architecture.

Your private label product must not simply rely on price to sell, it is an opportunity to differentiate through design features and benefits. The ‘3D’ product purpose framework (Defend, Delight, Disrupt) will help to guide merchandise teams to curate balanced assortments.

3.      Product Development and Sourcing

Whilst guided by opportunities identified in the assortment plan, product development will differ with category dynamics, customer and market maturity. Category management means skilfully interpreting the brand strategy and developing products and sources from cradle to grave. Options for product development should include:

–      Developing a ‘me too’ brand copy to improve gross margin or enable a disruptive price that generates greater demand.

–      An innovator that offers features and benefits that are unique to your label that ‘delights’ the customer by filling missed needs and aspirations.

Replacing your reliance on national brands for profit with private label expands the sourcing funnel and creates opportunities to differentiate on price, value and innovation.

4.     Organisation and Operating model

The operating model calls for new competencies in; brand management, sourcing, product and packaging design, quality assurance, supply chain fulfilment and customer insight.

Deciding whether to centralise development will depend upon the skills maturity of the existing team. If you are starting-up then centralisation will bring control and consistency over brand identity. As you develop maturity a decentralised structure will enable faster expansion across categories.

5.     Customer Communication

Traditionally Private labels have relied upon price alone to sell. With maturity the retailer should also use private label to develop differentiated products that win by competing in different ways.

The retailer needs to become the ‘storyteller’ for an authentic brand story- it could be about innovation, creativity, quality, value, or sustainability, but it must ‘bring own brand to life’ and the story must be told consistently across your;

–      Packaging: developing a brand language which articulates the CVP.

–      Social proofing: influencer endorsements, awards, reviews.

–      PR: identifying the customer’s destination for researching product purchase and meeting them there.

–      Positioning: Web or in-store, you must control how your product ‘stands out’. Page or gondola prominence.

Conclusion

A surge in private label sales is good news for retailers. It’s an opportunity to differentiate the customer value proposition from all other competitors.

Delivered poorly it will risk your reputation and incur financial losses; done correctly it will build customer loyalty, brand advocacy and improve your profits too.

Sources

(*Statista, Jan 2021).

** McKinsey- Global private label report. Oct 2020.