Can Private label and national brand co-exist?
We will remember last year as a very difficult year for the global economy and for retailers around the world. Many big retailers like Circuit City, Mervin, Linen n Things, Fortunoff etc filed for bankruptcy. Credit crunch and consumer distress has put off the plans of other retailers to grow.
Indeed, the times have been tough though we are seeing signs of recovery or having hit the bottom, there is a lesson for us. Economic stress is transforming retail business in many senses. Inefficiencies in the processes, systems and the organizations have been weeded out. On one side, the CPG companies and national brands are building capabilities for increase in market share. On the other side, the retailers are focusing on growing private label business at the cost of national labels. What is the future of this tussle and what factors will determine the survival of either one?
The current scenario calls for a state of harmonization, where the share of the private labels and the national brands is in a state of equilibrium. This will continue to evolve for some time to come. The critical factors in my mind, which will define this delicate equilibrium of private label vs. national brand share of customer wallet are:
a) Pricing: Economic recession has hit where it hurts the most. National brands have reduced the prices. Private labels in fashion and lifestyle business have reciprocated with the same effect, counting on market share and volumes, rather than profitability. Designer labels, national brands and private labels have all reduced their prices - in the form of price reductions, rollbacks or discounts and promotions. Reduction in price comes at the cost of profitability and in some cases, sustainability.
On the other hand, for grocery, retailer brands have slightly upped the prices, leaving them still lower than the leading national brands, to compensate margins against the low sales.
We are yet to witness how the overall pricing game evolves but I believe this alone could be a critical factor in defining the equilibrium. Lower prices may help generate traffic in the short term but may not be so for long term. Retailers may have to be cautious on pricing and provide add on benefits rather than playing only the pricing card.
b) Channel Planning: We are seeing many premium brands and designer-wear labels struggling with inventory. While they have come down on pricing, many still struggle for channels for liquidation of their last reason merchandise. This has given invitation only - designer discount web outlets like Gilt Groupe, Haute look etc, a chance to flourish.
Grocery retailers on the other hand, are leveraging the multichannel capabilities to reach out to the customers. Customer avoids going to the store and grocery retailers offer customers, convenience of shopping through the web. National brands will have to become more and more aggressive on customer connect.
c) Social Commerce: National brands have always felt less privileged when it comes to customer contact. Retailers have direct contact with the customers but now, the national brands can harness the power of web. Social networking sites today are playing a major role in shaping up interests and loyalties. Brands need to be more than active to be able to build and harness customer loyalty.
d) Costing: While there is a decrease in demand, apparel manufacturing hubs across the world - India, China, Rest of Asia, Eastern Europe - are facing acute problem of overcapacity. It is easier for national brands to negotiate, hedge their production and quality, and adjust to the demand, it becomes challenging for the retailers to manage private labels. Therefore collaborating with suppliers will become a key for costing and predictability.
These, in my mind are key tenets for the struggle of power between the national brands and private labels. Do you think the recession has redefined the equilibrium between the national brands and private labels?
