Own label ‘no longer’ a threat

A recent Euromonitor survey has confirmed that own label is continuing to grow across Europe, and that it will play an increasingly important part in retailer strategies in the future.

The survey found that own label is growing at a rate of about 5.9 per cent annually and that own-label sales reached $278bn (167bn) across Europe last year, compared with $217bn (130bn) in 1993. There appears to be no prospect of a slow-down.

Such news comes as little surprise. So inexorable has the growth of own label become that it rarely generates more than a few column inches in the marketing press. Yet it still remains a fundamental concern for brand manufacturers struggling to cope with the growing power of retailers.

However, work by two leading marketing professors in the US presents a contrary view to those brand manufacturers which see only their own demise foretold in the success of own-label products. David Dunne of the Rotman School of Management in Ontario and Chakravarthi Narasimhan from Washington University’s Olin School of Business in St Louis Missouri seek to make the case for brand manufacturers to overcome their fears of own label.

Writing in the Harvard Business Review, they argue that by rejecting an adversarial mind-set, brand manufacturers can generate revenue as own-label suppliers without undermining the position of their brands.

Dunne and Narasimhan maintain that as private label has moved from commodity to premium status, it has become more reliant upon manufacturers with proven expertise. Manufacturers which are able to offer more sophisticated production processes are increasingly offered supply agreements at higher margins than would have been attainable in the past.

Equally, they see the incursion of own label into the territory held by manufacturer secondary brands, or “fighter brands”, as another opportunity for brand manufacturers. Historically, manufacturers used secondary brands to protect their main brand. If they raised the price of their premium product they would expect cost-conscious consumers to defect to the cheaper secondary brand rather than to the main competition.

Certainly, own label has killed off most of these secondary brands. But Dunne and Narasimhan state that: “The logic of the fighter brands remains sound, and manufacturers can often use private labels as a substitute for fighter brands. Premium private labels are especially useful in this way because they are close substitutes to the major brand.”

The emotion with which this topic is charged is such that many brand manufacturers, supported by their agencies, instinctively recoil at the very idea of supplying own label.

But as own label matures, it seems to be offering opportunities, rather than threats, to brand manufacturers.

It is also clear that brand owners believe it can generate significant additional revenue, protect major brands from competitors and form the basis for building valuable long-term relationships with retailers.

John Shannon is president of Grey International

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