Private Label Brands: Too Powerful?

The typical format for managerial learning at a business school usually involves students working on case studies during their classes.

This approach often guarantees a much richer learning experience that the lecture format.

The classic criticism of the case study method, however, is that it encourages managers to believe that any problem can be solved. In fact, many strategic problems are intractable. Sometimes the biggest managerial skill of all is to learn which battles to avoid fighting in the first place, rather than to contemplate how every battle may be won.

I was reminded of this issue last week. I was wrapping up my brand management course with a session on private labels. Private labels, own-brands or store brands, have always been with us. From their origins as 'recession brands' in the 50s, through to their evolution into premium-priced luxury alternatives, consumers have always had a private label option.

Private label now counts for half the transactions in most leading supermarkets in the UK. In many categories its relative share of the market continues to grow.

The intriguing question from the manufacturer's point of view is what to do about this growth. There are a number of options, but none of them appear to be able to stem the tide. The classic approach, adopted by Coca-Cola, was to fight the threat of store colas by focusing even more heavily on brand. The 'Always Coca-Cola' campaign was a direct response to the threat of own brand.

The problem with this approach is that many brands have already eroded their brand equity through sales promotions. Promotions are a double whammy to any strong brand because they simultaneously encourage the customer to experiment with other brands while making it a commodity.

While a brand such as Coke may be able to defend its corner against private labels by taking the high road, many other brands simply do not have the perceived value in the customer's mind to justify their price premium over the private label.

A more complex strategy is creating a 'fighter' brand. In the US, Anheuser-Busch, makers of Budwesier, developed a brand called Busch. It was invented to allow the brewer to continue to enjoy the high-margin sales of its premium brands such as Bud, while also giving it the chance to compete with lower-price, private label brews. The problem with Busch, and indeed most fighter brands, was that it cannibalised the premium beer sales far more than it influenced the sales of private label beer.

Faced with decreasing market share and issues of minimum efficient scale for their manufacturing plants, many manufacturers are opting to make private-label products for retailers. Heinz, for example, has led the way in working with, rather than against, the own-brand threat.

And this is the option that proved hard to swallow for many of my MBA students last week. Surely, they thought, there must be a way to defeat the private label menace? The answer, in this instance, is apparently not. This is one case that will not be cracked.

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