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The private label dilemma: To be or not to be?

By Kacey Culliney , 28-Jun-2012
Last updated on 28-Jun-2012 at 15:06 GMT2012-06-28T15:06:44Z

Heading down the private label route? Be careful, warns Rabobank
Heading down the private label route? Be careful, warns Rabobank

Suppliers that want to jump aboard the private label surge will face a fine balancing act of co-producing for the sector and branded goods, according to Rabobank.

Rabobank’s latest report ‘Producing both brands and private label: A delicate balancing act for food suppliers’ revealed the private label sector is set to double in market share to 50% by 2025.

Sebastiaan Schreijen, Rabobank analyst and author of the report, said that this shift towards private label, driven by retailers, has significant implications for food manufacturers and ingredients suppliers.

“If your major customer (the retailer) is moving that way, you need to follow,” Schreijen told FoodNavigator.com.

“As brand positions will be under pressure, going into private label seems a logical step,” he said.

Those food firms under particular pressure are those working with brands that lack consumer pull (B-brands), the report outlined.

Tapping into this surge seems the “simplest solution,” it said, however “co-producing B-brands and private label (referred to as dual tracker strategy) is a fairly risky strategy.”

This could be a lucrative shift in the short-term, Schreijen said, and “profitability for companies following a dual tracker strategy can be very high with excellent profit margins.”

However, for it to work food firms "will generally have to make sure both businesses are kept as separate entities. They need to be economically viable on their own merits,” he said.

Why is separation so important?

The supply of brands versus private label products is based on “completely different business models,” Rabobank outlined.

Selling brands is about product offering, image, differentiation and market share, it said, whereas for private label supply it is about contract wins, production flexibility and customer relationships.

For brand suppliers there is openness with retailers about price setting, marketing and new product development (NPD) plans and for private label suppliers cost structures are very transparent, it detailed.

However, the knowledge of all of this combined can enforce the negotiation power of the customer (food retailer) and weaken the supplier’s bargaining position, the report said.

This in turn could lead to food retailers demanding the same price and quality for branded and private label goods, Rabobank said, and pushing for faster NPD which would reduce valuable time spent on R&D.

“Some companies moving in this direction have learnt the hard way,” Schreijen said.

Why not just specialise?

The Rabobank analyst identified a stark trend towards private label specialisation, but for those manufacturers and suppliers already operating in the B-brand sector this would be an unlikely choice.

“To become private label specialists, the firm would have to make the emotional decision to let go of the brand,” he said, and “I think the dual tracker route would be the easier option for those firms.”

This addition of private label operations must be able to stand alone, he said, but it also needs to be “thoroughly embedded in the supplier’s overall corporate strategy and organisation.”

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