Deloitte Debates

Brand Loyalty and the

Impact of Private Label
Products
Sit tight or fight back aggressively?

The struggling economy has given private label products a big boost on the store shelf and on consumers’ shopping lists.
Between 2006 and 2009, the market share for private label products in the U.S. increased in nearly three out of four
product categories within personal care, household goods and food and beverage according to Information Resources,
Inc. In total, private label in the U.S. now accounts for more than 20 percent of grocery store sales and 18 percent of
superstore sales.

What should national brands do about this growing trend? Should they sit tight and hope for a reversal as the economy
improves? Or should they fight back aggressively?

Here’s the debate.

Point Counterpoint

Sit tight
“Stick with proven brand
strategies and rely on the
economy to put private
labels back in their place.”
Private labels always do better when
times are tough. Once consumers
have more money to spend, they
will come back to the national
brands they know and love.
Other companies might need
to worry, but our brands are
bulletproof.
The deep and prolonged recession
prompted many consumers to substitute
private label products for national brands.
And many found they couldn’t tell the
difference – or even preferred the store
brand.
Research shows that very few brands are
safe from the threat of private labels. Even
elite brands aren’t completely immune.
 Point Counterpoint

Fight back
“Do everything possible
to stop the bleeding and
regain lost market share.”
The severity and length of this
recession is having a permanent
impact on consumer buying
behavior. Savvy shoppers are the
new normal.
This isn’t just a battle for short-term
market share; it’s a battle for long-
term control of the consumer. Will
the brands people buy dictate where
they shop? Or will where they shop
dictate the brands they buy?
These things tend to be cyclical. When
the economy improves, the problem could
just disappear.
What can we do to fight back? Today’s
consumers are very price conscious, but
aggressive price promotions undermine
the perceived value of our brand.

My take
Pat Conroy, Vice Chairman and U.S. Consumer Products Leader, Deloitte LLP
National brands that are relying on an improved economy to stop the onslaught of private labels could be in for a nasty
surprise, based on a recent consumer survey as well as an executive survey. According to a recent Deloitte study of more
than 2,000 U.S. consumers, more than 9 of 10 say they have permanently changed their buying behavior during this
recent recession. The survey shows that many consumers feel guilty and embarrassed about the way they used to shop
(e.g., impulsive spending, wastefulness, knee-jerk reaction to promotion of products) and have become much more
strategic and calculating in how and what they buy.

Many consumers who used to be loyal to national brands have opened their eyes, minds and wallets to private label
products and many have found little or no difference between the two, according to our study conducted with Harrison
Group. In fact, 80 percent of the surveyed consumers believe that most store brands are produced by the same company
and are essentially identical. Interestingly, in our executive survey, less than half of the consumer product executives
believed that consumers see store brands as manufactured by the national brands.

Also, according to a recent Deloitte executive survey of 193 consumer product and retail executives, more than three out
of four consumer product executives and nine out of ten retail executives expect store brand market share to increase or
increase significantly in the next two years.

To regain their competitive edge, national brands must demonstrate and deliver superior value to the consumer. Key
strategies include:

• Develop a brand that retailers can’t. Focus on brand attributes that are difficult for retailers to replicate, such as
exclusivity, product safety, social causes, innovation and sustainability.
• Create a “destination” brand. The leading brands are so strong that loyal consumers are willing to switch stores or
make a special trip just to buy them. Such brands are difficult to replace with private label products, since many
consumers are unwilling to accept a substitute. It’s important to note that while many companies believe their
offerings qualify as destination brands, our research shows fewer than 1 in 3 brands in most product categories are
viewed as “must-have” by those consumers who purchased the brand.
• Think local. Just because your brand is nationally distributed and marketed doesn’t mean you can afford to ignore local
market needs. Identify regional or local variations in tastes and preferences and use them to create new and unique
products that can compete effectively against the localized offerings of private labels.

Deloitte Debate 2
 • Make it hard for retailers to copy you. “Me-too” private label products that look similar to national brands encourage
side-by-side comparisons at the store – often to the detriment of the national brand. Establish an aggressive cadence
for product innovation, including frequently refreshed packaging and product obsolescence, that forces retailers and
private label manufacturers to make continuous investments in order to keep up.
• Go direct to consumer. Use the Internet to establish direct relationships with consumers and increase your presence in
the decision-making process. Build customer loyalty by offering existing customers direct replenishment through your
website.
• Reduce reliance on price promotions. While price promotions remain an important marketing tool, if overused can
steadily undermine your brand’s perceived value. Excessive promotions train consumers to wait for deals and shift the
focus from product attributes to price – a shift that plays to the strengths of your private label competitors.

A life sciences perspective

Glenn Snyder, Principal, Life Sciences, Deloitte Consulting LLP
Pharmaceutical companies that sell over-the-counter name-brand drugs have direct experience competing against private
label products. On the shelves of most drugstores, major branded medications often have a store-branded product
right next to them that claims to be the same drug for less money. The fact that both products feature the exact same
active ingredients tends to work in the store brand’s favor. On the other hand, the fact that consumers may perceive the
decision to chose between the two brands as an issue of health and safety creates a distinct advantage for the better-
known national brand.

Ironically, there are situations where strong name recognition can actually work against a national brand. Perhaps the
most famous example is the Tylenol scare of the 1980s, which generated an extraordinary amount of negative publicity
because it centered around a well known brand. In that particular case, the manufacturer, Johnson & Johnson, was
able to salvage its reputation and even improve its long-term image through careful handling of the crisis. But the effort
required a huge amount of money and resources.

One way for a brand name drug company to protect itself from private label competition is to modify the non-clinical
characteristics of its products – adding a gel coating, for example. Another tactic is to aggressively cut prices on products
that are nearing the end of their patent life. By reducing the profit margins on a particular drug, the company makes it
economically less attractive for store brands and other “me too” products to enter the market.

A retail perspective
Tom Compernolle, Principal, Retail, Deloitte Consulting LLP
For national brands, the threat from private labels might not be as ominous as it seems. And it certainly doesn’t have to
escalate into a full-scale war. There is a natural limit to how much shelf space retailers can dedicate to their own private
labels before brand-conscious consumers take their business elsewhere. Also, private labels have struggled in the past to
move from the value category up to the mid and premium tiers.

Rather than launch a direct assault against private labels, manufacturers should try to reshape the conversation through
retailer education and collaboration. What retailers ultimately are looking for is higher margins. Private labeling is just one
of the many ways to achieve that goal and by no means always the most effective.

In fact, private labels might not be as profitable as they seem, given the hidden costs for marketing and brand-building,
not the opportunity costs of displacing popular private brands, that retailers are likely to encounter as they expand their
private label efforts. National brand companies should make sure retailers are aware of these hidden costs and then

Deloitte Debate 3
propose alternatives for collaboration that can help retailers improve their margins.

For example, a manufacturer could offer to help retailers re-merchandise entire sections of their stores to maximize
sales and profits. Or it could offer to produce customized packaging that is more appealing and consumer-friendly.
Also, in an assisted selling environment such as retail electronics, a manufacturer could offer to provide sales training
that helps retail staff steer customers toward higher margin products.

National brands have invested a lot of time and money in understanding consumers and market segments. Many are
willing to share some of this information and insight, often in exchange for more shelf space. If done in a spirit of true
transparency, this can strengthen their relationships with retailers and help retailers boost their margins above what
private brand offerings would achieve.

For further information, please visit: http://www.deloitte.com/us/brandloyalty.

For further information about this debate, please contact:

Pat Conroy Glenn Snyder Tom Compernolle

Vice Chairman and U.S. Consumer Principal Principal
Products Leader Life Sciences Retail
Deloitte LLP Deloitte Consulting LLP Deloitte Consulting LLP
pconroy@deloitte.com gsnyder@deloitte.com tcompernolle@deloitte.com

Related Insight:
The Battle for Brands in a World of Private Labels
The battle between national and store brands heats up.

Competing Against Store Brands

Top of mind issue for consumer products executives.

The American Pantry Study

The new rules of the shopping game.

The Changed Consumer

Recession has changed the way consumers go to market.

Related Content:
Library: Deloitte Debates
Services: Consulting, Strategy & Operations, Profitability Management and Pricing
Industries: Consumer Products, Life Sciences and Retail

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