Private Label vs National Brands: a Comparative Study Essay Example

of private labels in the organized retail sector.

INTRODUCTION: PRIVATE LABELS

Private Labels Private labels i. e, retailers’ own brands are nurtured by the retailers. A private label is a retailer’s strategic tool while negotiating with manufacturers of a national brand. Differentiation and innovation strategies applied to private labels hold the key to success. A private label is characterized by being a product produced, improved, processed, packed or distributed exclusively by the organization that has the brand control. It can carry the company’s name or use other brands not associated by the company’s name.

Still due to these characteristics and their appeals, the market for the private label has grown in the last few years (A C Nielsen 2004). 4 Facts There is currently a $65 Billion market for private label products. Private Label sales grew 4. 1% while brand names grew at only 1. 6% (vs. prior years). 75% of consumers define store brands as "brands" and 83% said they purchase these brands on a regular basis. Private label brands account for one out of every five items sold everyday in supermarkets, drug chains, and mass merchandisers. Advantages of Private Labels The packaging and labels can be custom tailored to meet specifications, including product name, description, company's logo and contact information. •Private labeling allows for greater control over many factors - including sales, marketing, and distribution. Retailers can have complete control over product distribution with private label products. With private labeling, retailers can acquire products that are already developed, or that can be changed and re-branded in an individual fashion. Basically, retailers can control many business aspects, and create their own unique product. Private brand goods are

also acquired from small, quality manufacturers that specialize in particular product lines. Often, these companies concentrate on producing private label brands almost exclusively.

Retailers with strong private label brands create exceptional sales opportunities for themselves. They can build value and recognition from the customers. Private brand products allow retailers to differentiate their products from competitors' products, and provide shoppers with an alternative to other brands. 4 Disadvantages of Private Labels Developing and nurturing private labels requires significant investment, and the retailer has to be financially sound to take this forward. Therefore, small retailer’s keep away from launching private labels. Private brands require continuous efforts to properly manage them in terms of quality, cost, and image. Often, retailers fail to manage the demand for private label merchandise and are forced to discontinue them. National Brands are quite conscious about the threats from private labels, and therefore invest significant sum towards research and development to introduce new features or to reduce the cost of manufacturers. 2 ?

BACKGROUND: EVOLUTION AND EMERGENCE

The Six Ages of Private Labels The first age of private label was as a simple, budget purchase for hard-up consumers. In 1919 a young demobbed soldier called Jack Cohen used his serviceman's gratuity to set up a market stall in London. It flourished, but Cohen was ambitious and wanted to sell his own products. In 1924 he signed a deal with tea producer TE Stockwell to sell its tea under his firm's brand. Taking the first three letters of the tea company's name and the first two of his surname, he gave the Tesco name to Britain's first private-label product.

The second age of private label was a move

upmarket. Marks & Spencer began to sell its own products under the St Michael brand in 1928. Named after the founder of the company Michael Marks, the brand came to stand for quality and value to three generations of British shoppers and demonstrated the potential of private labels to provide more than simply a budget offering. The third age began in 1992 with the launch of Sainsbury's Novon washing detergent. Rather than representing a cheap, budget equivalent closely aligned to the store master brand, Novon was a standalone product.

Thanks to in-store promotions, Novon quickly doubled Sainsbury's share of the detergent category and proved that private labels could stand on their own merits. The fourth age marked a period when private labels became brazen in their attempts to replicate and replace manufacturer brands. The fifth age of private label was a move beyond parity and replication toward superiority. Following the successful example of Canadian supermarket Loblaws, Tesco launched a line of super-premium private-label products under the finest sub-brand. They often retailed for more than the manufacturer's equivalents and were of higher quality.

The sixth age has seen a shift away from basic store brands toward a brand architecture of private labels. The big supermarkets have moved from a simple house structure to use private-label sub-brands to offer distinct organic, budget, healthy and premium lines - a multifaceted offering that surrounds manufacturer brands on all sides. In 2007 we saw early evidence of the next step for private labels: category leadership. The real golden era of private labels is only just beginning and manufacturers are glimpsing the true challenge that awaits them.

Brand managers will have to compete against

private labels that are cheaper, more premiums, more profitable, better merchandised, more trusted, and easier to market - and face the prospect of trying to enter categories created, and now led, by private labels. 20 Private Label Brands: Reasons for Growth 1. Substantial Increase in the Price of the National Brands: This was more out of result of the supplier power accumulated with them and has quite clearly created some market voids having value differences among what is available and what is sought after. Private Labels can capitalize on these gaps. 2.

Perceived Decrease in the quality variance between national brands and private labels 3. The increased power of organized retailers: Organized retailers have been able to attract a steady clientele who are loyal to them. Most retailers have put in private labelling efforts to meet the needs of this clientele. 4. Increased education of Consumers: When price differences become very large, highly educated will be first to notice the discrepancy in the value. 5. As a retail strategy to differentiate your store: A large number of retail operators are using Private Labels as a mojoe tool to differentiate their stores. 1?

REVIEW OF LITERATURE

Private label positioning: Quality versus feature differentiation from the national brand Among other retailer benefits, private labels add diversity to the product line in a retail category (Raju et al. 1995; Soberman and Parker in press). This product differentiation can reflect quality differences or just differences in features. 1 Improvement in both packaging/features as well as quality have been partially responsible for private label sales growth. Quality differentiation usually exhibits itself through the perception that private labels are of lower quality than the

corresponding national brands.

Quality differentiation is based on the notion that the characteristic on which differentiation occurs is one for which all consumers value the highest possible level. A superior quality national brand may lose its quality differentiation from the private label if private-label retailers are eventually able to match the national brand's technology and perception. In contrast, feature differentiation refers to the degree to which products have different forms, sizes, or packaging. Different brands in a category may exhibit little feature differentiation or more significant feature differentiation. ).

Unlike a “quality” characteristic, a “feature” characteristic of a product is one for which “more” is not always “better,” and can include characteristics where variety is valued by the consumer. Many private label retailers have purposely sought to minimize feature differentiation from national brands, by making their packaging, sizes, typeface, and labeling extremely similar to their respective target brands. 5 ? Impact of private-label positioning on national brand profits Maximum differentiation in both quality and feature dimensions is the optimal positioning strategy for a rival brand such as a private label.

However, the push to make private label products “better,” which decreases differentiation, is not surprising, given our analysis. Even when a successful private label attacks the national brand by creating an offering of virtually equal quality, a retailer's profitability can increase if this product improvement is not too costly and/or is accompanied by persistent feature differentiation. optimal differentiation strategies by the private label depend on several underlying factors.

When the national brands are substantially differentiated in features, the private label, if its quality is relatively high, is generally better off imitating the stronger national brand or one of two

parity-quality national brands. 4 Consumer perceptions of private label quality: the role of product category characteristics and consumer use of heuristics Private label brands have made tremendous in-roads over the past two decades. Although the success of private labels has been limited to certain product categories and segments of consumers, retailers continue to expand the domain of private label offerings. Although many additional factors will ultimately determine the success of a private label offering, consumer perceptions of quality based on category characteristics are important to consider as they will serve as an indicator of the relative ease with which a private label may gain market share. In assessing the role of product category characteristics, it appears that the primary determinant of perceptions of private label quality relates to the ability of private label manufacturers to compete with national brands in terms of functional quality.

The consumer characteristics yield interesting results. Somewhat surprisingly, that consumers who use brand names as a heuristic to judge the functional quality of products will perceive private labels to be of lesser quality received only weak support. There is increased consumer belief that private label products are competitive with national brands from a functional standpoint. 6 Private Labels- Retailer’s Value Proposition Private labels aims at offering better value for the customers with lower mark ups.

It seeks an opportunity to deliver a value plus product, thereby satisfying the ego needs of the customer. According to A C Nielsen report on private label it was found that in India 56% of the respondents believe that private label is a good alternative to the national brands. 7 Objectives of Introducing Private Labels To get better

bargaining power while negotiating with national brand manufacturers. To provide better value to customers in terms of product offerings with lower mark ups. To increase the profitability on a gradual basis. To create powerful own labels in order to get more market share. To enhance store image. To create store loyalty through unique private label offereings. The marketing cost of store brands is less because of the elimination of middlemen Since store brands are mostly sold at retailer’s own stores, they help in creating a sustainable competitive advantage for the retailer, which in turn helps in generating and maintaining customer loyalty. 8 Types of Private Labels According to David Gilbert (2009) there are generally four types of private labels-

1. . Generic Brand: It is the one which has no branding except that it s recognized by the retailer’s name. It has simply low cost packaging, is unadvertised and is popular in poor localities and in times of recession.
2. Price Led Retailer Brand: It provides better value than manufacturer’s brands at a lower price and have distinct brand names. The retailer’s name too is carried on the product and the package is designed to communicate value and low price.
3. Quality Led Own Brands: they are quality oriented in terms of both product features and packaging, and they compete head on with the manufacturer’s brand.
4. Exclusive Own Brand: they are manufactured by the retailer and are sold exclusively through the retailer’s own outlets as premium products.

They form part of a niche strategy meant to bring in high margins and profits. 8 Determinants of the Success of Private Labels9 Hoch and Banerji Table 1 Consumer Driven FactorsProduct QualityHighPrivate

Label Market Share Quality ConsistencyHigh Retailer Driven FactorsCategory Retail SalesHigh Category Gross MarginHigh National Manufacturer DrivenNumber of National ManufacturersLow National Advertising Per ManufacturerLow Figure 1 ?

RESEARCH METHODOLOGY

The research is of exploratory nature, based on the primary data but secondary data has also been collected from various sources as per the requirement. The quantitative study would be carried out through a survey in order to identify the consumer perception of the private labels and the factors affecting the purchase decision-making of the private labels and national brands. To obtain information, a self-administered structured questionnaire would be formulated. A qualitative study would be carried through secondary data in order to understand the strategies of the etailers for private labels, how does it pose threat to the national brands, and the strategies adopted by national brands to counter the threat. Objectives of the Research The objectives of this research are threefold:

• To understand the consumer perception of the private labels and how does it differ from that of Brands.
• To identify the various factors that affect the purchase decision of consumers in choosing private labels and/or private labels.
• o study the branding strategies of retailers for private labels and how does it affect the strategies national brands. Research Problem

The retailers today are coming up with their own in-house brand. The primary objective of introducing private labels is to backward integration in order to make supply chain efficient and achieve economies of scale. The big retailers like future bazaar, shoppers Stop leverage upon their brand image by introducing private labels. The initial strategy of the retailers in order to promote private labels was low pricing. However, in order to

compete with the brands, which differentiate their products through advertisement, quality became an equally important determinant of the success of the private labels.

The purpose of the study would be to study the perception of the consumers towards private labels and how does it differ from that of national brands. The study would also determine the various factors that affect the purchase decision of the consumers for private labels and/or national brands The research would also highlight the branding and promotion strategies of the retailer for private labels which are considered to be push products. Also the strategies of the national brands to counter the threat posed by private labels. Research Questions Does the consumer perception of private labels differ from that of national brands? Does the brand image of retailer effects the consumer perception of private labels? •Are the consumers aware of the various private label offered by the retailers? Does the pricing of the in house brands compare to national brands effects the purchase decision making of the consumers? Does the product quality of the private labels compared to national brands effect the purchase decision making of the consumers? Is the in store promotion of private labels more effective than the advertisement of national brands in various media? Does the packaging and labelling of private labels compared to national brands effect the purchase decision making of the consumers? Research Hypothesis H1: The consumers’ perception of private labels differs from that of national brands. H2: The pricing of the private labels affects the purchase decision-making of the consumers. H3: Product Quality affects the purchase decision of the consumers for private labels and national brands. H4:

Promotion of the private labels and national brands affects the purchase decision making. Data Collection Primary: Questionnaire Secondary: Journals, Internet, books, magazines on retail industry Sampling Technique A non Probability convenience sampling technique was used to administer a consumer survey. The sample would belong to the middle class and upper middle class who frequent organized retailing. Sample Size A sample size of 100 would be used for the survey Tool of data collection Questionnaire Tool of Data Analysis SPSS and excel Limitations of the Study The samples size is one of the limitations of the study. Also the demographics of the sample are suitable to the findings of the research. The study is limited to the overall perception of the private labels in the minds of the consumers and the branding strategy of the retailers. The future studies could be made in the various categories like food, grocery, apparels etc ?

 DATA ANALYSIS

Demographics Age Group Figure 2 Profession Figure 3 Annual Household Income Figure 4 Level of Education Figure 5 The demographic data of the respondents iterates the following characteristics about the sample: A majority of the sample represents a younger demographic of the population who are curious, less risk averse and seek to try new things. The sample is highly educated as all the respondents are either graduate or post graduate. The annual household income of 92. 1% respondents was above Rs. 200,000 among which the major chunk of the respondents fall under the bracket of 5-10 lakhs which shows that we are dealing with the upper income group. The stores frequented by the Shoppers Figure 6 80% of the respondents have visited big bazaar

for shopping, 70% of them have visited reliance both of which has a considerable amount to an assortment of private labels like food bazaar, reliance select, reliance value etc.

This indicated that the shoppers knowingly or unknowingly do purchase private labels, especially in food and grocery very frequently. However, 57% of them also visit Kirana stores where only national brands are available. Hence in a way kirana stores still provide a challenge to the organized retailers, hence to the private labels The Private Label Brands Purchased by the Shoppers Figure 7 Clearly shoppers are very much aware of the food bazaar, which shows that private labels have considerable amount of awareness and recall in the food and grocery section.

Definition of Private Labels Identified by the Shoppers Figure 8 Almost all the respondents were able to identify the right definition of private labels which is brands owned or marketed by the retailers and differentiate from the national brands which are owned by manufacturers Factors Influencing the purchase decision of the Consumers Figure 9? The Mean Score and Standard Deviation of Factors influencing Purchase Decision of Shoppers: Descriptive Statistics 1 Table 2 NMinimumMaximumMeanStd. Deviation Price of the Product116141. 71. 834 Quality of the product116141. 28. 613 Availability116142. 57. 675 Change in income Level116153. 281. 052 Promotion/Discounts116152. 53. 955 Advertising116152. 86. 733 Display in the Store116152. 26. 759 Brand Name116142. 02. 802 Store Image116152. 09. 992 Figure 10 Above are the ratings of the factors according to the importance of factors influencing the purchase decision of the shoppers. Rating of 1 signifies the factor as most important, whereas the rating of 5 signifies it as least important.

The mean ratings

tell the average ratings by all the respondents to the above-mentioned factors. The most important factors influencing purchase decision of the shoppers in the retail store are price and quality whereas the least important are income level of the shoppers followed by advertising and promotion. Availability and display inside the store which adds up to convenience are also important influencing factors. Brand name and store image which fulfils the status needs of the shoppers also contribute as the influencers of the decision making.

Consumer Attitude towards Private Label Brands in Comparison to National Brands Quality Vs Price Perception Figure 11 A Cumulative percentage of 89. 6 agree to the fact that private labels are more reasonably priced than the national brands hence are cheaper than the latter. Also 82. 8% of the respondents say that private labels offer more discounts and promotional offers than the national brands. However, the perception of the low price of the private labels take a beat when it comes to it being perceived as quality leaders as the 71. % of the shoppers disagree to the statement “the quality of the private labels are better than that of national brands. Hence shoppers always face a trade off between price and quality when it comes to choosing private labels as price and quality are the most important factors based on which shoppers make the purchase decision Convenience Figure 12 With regards to private labels providing more variety than the national brands, shoppers have a mixed opinion as 44% of them agree, while the rest of them either are neutral or disagree. On the other hand, 82. % of the shoppers believe that

private labels are always available in the store. So overall private labels score good on the convenience of the shoppers. Perception and Behaviour of Shoppers Figure 13 The above figure primarily deals with the consumer attitude towards imagery of the store compared to that of the brands and the resultant behaviour of the shoppers. Only a small percentage of 24. 1 believe that store image is more important than the brand image and also 25. 8% of the shoppers say that they do not consider brand names while buying products from the retail store.