Private labelling refers to products of one business being sold to another who afterwards markets, retails, packages and sells it under different branding (i.e. a third party). For this reason, consumers generally would not know who the private label producers are. This is common almost in any industry, be it food, cosmetics, electronics, cleaning supplies, pet items and more. Companies that have a private label are said to find it profitable as they do not need to keep manufacturing new products. It is most commonly used in e-commerce spaces such as Amazon today, whereby the company that first sells the products to a third party gains a profit, after which the third party profits by selling it to consumers. The topic of private labelled products has, for a time now, received increased attention, specifically during COVID-19 and due to the impending global economic recession. This article will detail everything you need to know about private labelled products.
How It Works
Two parties are involved in private labelling: the manufacturer, who makes the product, and the sellers, who sell the goods manufactured to retail customers. The manufacturer is responsible for ensuring the goods meet product quality and reduce costs. On the other hand, the seller only concerns themselves with the pricing and branding of the product. Since the good is branded to the retailer’s name, however, the retailer gains more advantages, moving beyond finances. Due to the heightened focus on the retailer’s brand, this form of label is sometimes referred to as a store brand.
To thrive in the private labelling business, however, retailers should first study their sales and consumer trends and understand what consumers within the store’s location expect. This is communicated to the manufacturer, who creates a product that meets the retailer. It is this that is then sold to the retailer, who in turn sells it to their customers. For a practical example, Amazon often uses the data it accumulates through its website to understand and find out which private-label brand to produce, requesting a manufacturer to make it. In this respect, a retailer can have more than one private label, with Amazon having more than 20.
It should be noted that sometimes, private labelling can also include items where the retailer only purchases an ingredient or component from the manufacturer and uses it to manufacture, providing it as part or in support of the retailer’s products.
It is Not White Labelling
There is a tendency for many to regard private labelling and white labelling to be the same. The significant difference can be assessed through the role of the manufacturer. For instance, in a private label product, the manufacturer would customise the good according to the third-party requirements. Hence, private label products are exclusively sold to one retailer and the good remains unique to them. Thus, it is not for sale in any other location besides the brand store. In contrast, a white-label manufacturer sells generic goods. These items, unlike the former, are usually sold to multiple retailers instead of only selling to one retailer. Each third party is free to price the item individually and sell it under their branding. This means that the same good is sold under different names in a white-labelled product.
Benefits of Private Labelling
The manufacturer feels the benefits of private labelling, retailers and even the consumers themselves. For consumers, particularly, better value is one key motivator to switch from purchasing a good that is a national label to a product label. This is not limited to financial value but also offers more selections. According to an article by Clarkston Consulting, one-fifth of consumers relied more on private-label products before the pandemic, with it increasing to 52 per cent after. In this sense, it is a well known fact that the success of private labels depends on economic conditions. Here are three benefits retails experience from opting for private labelling:
It is More Profitable for Retailers and Cheaper for Consumers
As previously stated, the current economic condition makes private labelling ideal for all parties. The market share for private label products generally increases when an economy suffers but decreases when it strengthens. With inflation on the rise, however, it is reasonable to assume that the significance of private labelling will only continue to increase. Consequently, even consumers are seen to shift towards market brands with private labels as they are relatively cheaper. In fact, according to Forbes, private labelled products are 20 to 30 per cent less expensive in comparison to national brands. This has allowed retailers to drive sales growth and gain market share by selling items with a private label of trending goods.
Gain Customer Loyalty
Private labels are often associated with cultivating customer loyalty. Due to the affordability of products coupled with their quality, consumers would start being more loyal to the retailer’s products. This was widely experienced during COVID-19 when a large shift in consumer buying behaviour occurred. Such changes are not simply attributed to the low cost but also because certain national or other big brands did not have certain goods available as they were out of stock for weeks, and manufacturers could not meet sudden spikes in demand with quarantine protocols. Since then, it has been a known fact that the better the quality of the private label, the higher the probability of the retailer gaining a devoted following and the private label being a key driver for customer loyalty.
It provides More Power to the Retailer
While the retailer does not manufacture the goods in question, private labelling gives the retailer all the power. They can demarcate how it should look and in what quantities it should be made and can set a their own price. Hence, whenever consumers are changing trends, the retailer can easily adapt to customising newer products since the resources and effort put into manufacturing are outsourced. This is especially beneficial to smaller retail companies, who gain the flexibility to promptly meet unexpected changes in the industry, whereas large retailers may find it hard to do so without risking financial damages. It also becomes a great tool for branding, allowing retailers to introduce privately labelled products at different price points based on quality.
More Variety for Consumers
The great thing about private labels is that it offers more variety and, therefore, more competition. Imagine walking to super marketing and seeing multiple types of milk powders. This would have the products of the industry’s major players and the store brand’s products. What this means is that retailers can accommodate various types of people. Whether they are looking to purchase a recognised global brand or want to try something from the retailer’s brand, the number of customers entering through the store doors will not be hindered. Hence, regardless of whether the private labels will be the most profitable, the retailer can gain a reputation with products of the same range for different prices, allowing any type of consumer to take their pick on what they decide to prioritise.
Private Labelling Does Have Its Challenges
From the consumer’s point of view, privately labelled products may not incentivise the public to always purchase them. This is because it is primarily known to be lower in cost and not necessarily high in quality. This is not the best way for a brand to be identified as the brand would always be perceived as not being equally good as the national brand, therefore, not the best alternative. Hence, attempting to convince the public that it is cost-effective and durable in the long term may sometimes be seen as a challenge. It could be a waste for certain retailers since private label requires a minimum order quantity to be made. In the unfortunate event that a retailer cannot compensate for the minimum order quantity, they would not be able to purchase the good in a profitable manner.
Is Private Labelling the Way to Go?
There is no straightforward answer to this question. While statistics indicate that private labelling will remain centre stage, it comes down to a question of considering a retailer’s branding strategy. Just because a company purchases goods from a third party does not mean it will automatically thrive. Comprehensively understanding your target audience and delivering goods based on price and quality are vital components to consider when deciding whether private labelling is a more profitable option for your company.
