Many retailers offer a variety of products under their own brand, such as Target’s Market Pantry or AmazonBasics. These “store brands” are available only at these respective retailers and are significantly less expensive than name brand products. But the store brand product is often identical to the name brand product–same ingredients, same manufacturer, same everything.
How can that be possible–that a store brand product can be sold at a significantly reduced price if it is the exact same thing as the name brand product?
The answer rests in private labeling.
What is Private Labeling?
A retailer can choose to purchase merchandise or goods from a manufacturer and label those items with the retailer’s own unique name, rather than the manufacturer’s or producer’s label.
Retailers can choose from manufacturers that only sell goods to the private label market, or they can purchase products from companies that manufacture items for a recognizable brand name but sell excess product to the private label market. In this case, the products sold to the private label market are identical to those sold to the brand name company but are labeled under different names. However, the private label name does not carry the cost of marketing that the well-recognized brand name carries; brand name companies have to spend a lot of money on establishing their brand with consumers. Private label products are not marketed in the same manner. That means the private label product can often be sold at a much lower price.
We often see private labeling in grocery stores and pharmacies; generic drugs and every day grocery items see the most action. Grocery stores, for example, capitalize on the private label option, often offering coupons with higher discounts and creating loyalty programs with greater perks for purchases of private label items.
But private labeling isn’t limited to grocery stores and pharmacies; it can be found in all sorts of venues, including clothing retailers and the cosmetics industry.
When is Private Labeling a Good Idea?
Private labeling can be a great option for many retailers, both online venues and traditional bricks-and-mortar stores. Some of the primary benefits for choosing to enter the private label market include:
Increased Profit Margins. As discussed above, brand name companies spend a great deal of money on marketing their brand and products. For private label products, retailers do not spend all that money on brand awareness, which means they do not have to attach an additional cost to the products. Instead, they can price the private label goods just below the name-brand goods but take home the additional margin as a profit. For example, if a name-brand product costs $3 to make, $0.50 to market, and sells for $10, the company takes home $6.50. If a private label costs the same $3 to make, has no marketing costs, and sells at $9.75, the retailer takes home $6.75. Customers are attracted to the lower price of the private label product, and the retailer takes home $0.25 more per product sold.
Building a Private Brand. Private label products give a retailer the opportunity to build its own brand and identity. The retailer can customize the look of the label and the packaging of each product–tailoring the products’ name and description, as well as displaying the store’s logo and information. A customized private label reflects the retailer’s image; in essence, it creates a brand for the store. Customers recognize this brand as belonging to the store, often driving customer loyalty.
Customer Interactions. If a private label product is a hit with customers, those customers will seek more products under that same label. Private labels are only available at that specific retailer, encouraging customers to return to that store. A good line of private label products can achieve levels of customer loyalty that exceed that of name-brand products.
What Risks Can Private Labeling Carry?
Private labeling may not be best choice for every retailer, as there are some associated risks:
Issues with Branding. Customers may perceive a brand-name product as better quality than its private label product counterpart. The retailer offering a private label needs to establish the quality of the product and change the perception of consumers. This is a hurdle that some private labels never get over, and those companies end up with “dead inventory”–private label products that gather dust on the shelf until it expires or is outdated. This is especially true for private label clothing; many consumers are loyal to name-brand fashion companies.
Liability for Products. When a customer purchases a brand name product, and that product subsequently makes the customer ill, typically the brand-name company is responsible, rather than the retailer. However, if the product was a private label offered by the retailer, then the retailer assumes the responsibility. Before offering a private label product, the retailer needs to determine how it will test product safety and other risks the products may carry.
Legal Risks. Before entering the private label market, a retailer needs to research safety risks like the one discussed above. The retailer should also think about regulatory and intellectual property risk. Of course different types of products carry different legal risks, so retailers should consider speaking with an attorney and/or product consultant.
For almost 20 years Kim Lowe has lawyered from the trenches. Kim lawyers from experience, using her knowledge of the law and understanding of how both for-profit and nonprofit business enterprises operate.
Emilee Walters is a second year law student at the St. Thomas School of Law. Emilee is an Avisen Fellow exploring a legal career in business law.