Private Labels Challenge for CPG Industry – Compete or Collaborate (Part II)
By Rrituraj Sharma and Mahesh Bukkapatna
Private Labels and the CPG industry. The predicament continues. Or does it? Well, come to think of it, its no longer a predicament actually.
In our last post 2 weeks back*, we had discussed about the Prevalence and growth of Private Labels and the strategy options ideally to be adopted by Retailers in the long run. Lets continue the discussion on what are the strategic options that the CPG companies have. *(http://www.infosysblogs.com/retail-cpg/2009/10/private_labels_challenge_for_c.html#more)
Strategy Options for CPG companies
Retailers have certain strong holds which CPG companies cannot ignore. CPG companies have to find right strategies to face challenge posed by private labels. They have to align their internal thinking and formulate actionable initiatives and strategies to be successful. If a CPG company decides to take the private labels head on, it should focus on following areas that may help in achieving results.
Consumer insights – Going back to basics of marketing like understanding consumer behavior would certainly be the first step. It is important to identify reasons for consumer shift to private labels and the needs that are met by private labels. That should result in right product strategies like coming out with new products, cost engineering, product re-positioning etc. For e.g. rising commodity prices is one of the reasons for shifting to private labels. So efficient sourcing and product cost engineering should help CPG companies to offer their products at competitive prices.
Category Strategies – CPG companies should identify categories that have lower potential for private labels and focus on them to achieve business objectives. If they have any categories that are prone to private label onslaught, reduce emphasis on such categories. A detailed analysis of private label trends should give a good insight into the direction in which private labels are moving.
Focus on emotional relationship – Brands loyalty is the most effective means to face competition. Same is true while competing with private labels. Categories such as personal products are relatively less affected by private labels. So brand positioning and communication strategy should focus more on how to build the emotional bonding with consumers to increase loyalty. CPG companies may look at new trends to engage consumers through social marketing, online communities etc.
Continuous innovation – A very pertinent activity for a CPG company would be to innovate and come up with newer & better products which have the potential to be winners in the consumer market. For E.g. Gillette comes up with innovative razors and hence the growth of private labels in this area is less. Innovative products will create brands and retailers will be happy to stock such products in their stores because of sheer consumer demand.
Identifying new potential markets and developing new products to meet that markets demand could be another strategy. For e.g. focusing on convenience stores with portion packs could be good strategy to reduce dependency on traditional retail channel.
Better Distribution - Having a distribution network with good depth and width is essential to win in the market. This ensures product availability which is crucial during seasons, promotions and new product launches. Agile distribution systems and processes would help CPG manufacturers to achieve desired results.
Compete or Collaborate
A different approach to face private label challenge is leveraging the situation to manufacturer’s advantage. Instead of competing with the retailer, CPG companies can collaborate with retailers in private label business to synergize each other’s strengths. With the increase of private label business, retailers will look out for strategic suppliers. Apart from their own robust supply chain, CPG companies can also partner with the retailers to manufacture and supply their private labeled products. Leading CPG companies like Nestle, Heinz, and Kimberly Clark manufacture many private labels. It is true that margins on private labels’ manufacturing is lesser but it ensures a steady flow of revenue as well as maximizing and optimizing use of fixed assets. To some extent it offsets decrease in own brand sales. Collaboration can also be extended to leasing of under-utilized warehouse capacities to the retailers for their various back end operations. Similarly retailers can give a commitment of stocking the CPG company’s products in volumes, allow promotions and provide a productive channel for the manufacturer to liquidate their products.
There is no single right strategy to successfully offset impact of private labels for CPG companies. It depends on company’s product categories, strength of brands, financial position, fixed cost structure and other factors. A thorough analysis of both strategies - compete or collaborate - along with risks and benefits should show the right way to pursue.
Best Practices that CPG companies can adopt to face Private Label Challenge
Technology can play a big role in providing the required edge to CPG companies in the areas mentioned below:
Retailer Collaboration – CPG companies can improve their service levels through collaborative planning, forecasting and replenishment.
Advanced Analytics – generate superior insights leveraging multiple data sources including both structured and unstructured ones
Shopper insights – for better understanding of consumer behaviour at the last mile of supply chain and first moment of truth.
Social Marketing & Web Communities – to create a loyal group of consumers
Accelerated New Product Development & PLM – to reduce time to market and to differentiate them in the crowded market.
Well, we guess this is one topic where one can go on and on and we hope this post made interesting reading for you. Next time when you are out shopping make sure you go for the right pick between private label and/or branded products. But do know that not only the CPG company but now, the retailer is also keenly observing your shopping habit based on which many a key decision will be taken.
