Private-label products or services, also known as "phantom brands", are typically those manufactured or provided by one company for offer under another company's brand. Private-label goods and services are available in a wide range of industries from food to cosmetics to web hosting. They are often positioned as lower-cost alternatives to regional, national or international brands, although recently some private label brands have been positioned as "premium" brands to compete with existing "name" brands.
Growing market shares and increasing variety of private label consumer packaged goods is now a global phenomenon. However, private label market shares exhibit widespread diversity across international markets and product categories. Empirical research on private label products has been of substantial interest to both marketing academics and managers. Considerable work has been done on well-defined areas of private-label research such as private-label brand strategy, market performance of private-label products, competition with national brands, market structure, and buyer behavior.
For example, Richelieu Foods is a private-label company producing frozen pizza, salad dressing, marinades, and condiments for other companies, including Hy-Vee, Aldi, Save-A-Lot, Sam's Club, Hannaford Brothers Co., BJ's Wholesale Club (Earth's Pride brand) and Shaw's Supermarkets (Culinary Circle brand). Another example is the Cott Corporation, which manufactures private-label beverages for supermarket chains. McBride plc is a Europe-based provider of private-label household and personal care products.
Private Label Manufacturers Association
- Large national brand manufacturers that utilize their expertise and excess plant capacity to supply store brands.
- Small, quality manufacturers who specialize in particular product lines and concentrate on producing store brands almost exclusively. Often these companies are owned by corporations that also produce national brands.
- Major retailers and wholesalers that own their own manufacturing facilities and provide store-brand products for themselves.
- Regional brand manufacturers that produce private-label products for specific markets.
Marketing and business tool
Retailers have extended the concept of private label to identify a brand with a store, a concept known as the "store brand". This can be far more profitable than selling nationally advertised brands. To illustrate, a Food Marketing Institute study in the United States found that retailers earn a 35% gross margin on store-branded products compared to 25.9% on comparable nationally advertised brands.
Several corporations source products from specialized manufacturers, which may or may not own their brands, as establishing their own production facilities would require substantial investments in equipment, human resources, and patents. Sourcing from a specialized company that has already made such investments with spare production capacity may be a viable alternative. If the two companies find that the market situation allows to avoid or minimize direct competition without stealing each other's market share (cannibalization), then both companies may find an agreement whereby the specialized manufacturer supplies the goods to the other. The methods to reduce cannibalization are general marketing practices such as dedicated distribution channels, different image and customer perception of the brands, pricing, and separate regional presences. The same basic concepts apply to the service industry (e.g., customer services helplines).
Private labels may be behind the decision of some companies to enter the market with products that are quite different, but somehow associable, to those that have made them famous (e.g., apparel companies launching perfumes, car companies launching watches). Private labels may be extremely profitable for companies with a dominant market share and for certain products that enjoy high customer recognition.
Safety and quality
As sophisticated technologies become widespread (and even subsidized) in emerging countries, sourcing of a wide range of products can be made at very low cost. These same products may have prices that allow for net margins to account up to several times the cost of the goods sold. Customers may be unaware of this business practice and may be paying higher prices for products that differ little from others with less famous brands. On the other hand, some companies do provide additional guarantees to these products offering better quality, customer support, and additional services.
Private label products are generally sold in many countries, so it is essential that all products are of high quality and comply with all the relevant single or global market standards, including sustainability and environmental impacts. This can be done by performing certification and audits, inspections, hygiene monitoring, and testing of food, beverages, and packaging.
Use by small companies
The use of private-label products by small companies has grown. Small companies usually do not have any input in the recipes or packaging of the products they buy. They buy from a specialty food company that uses their recipes and simply label for the individual retail store. Small companies do this for advertising benefits. For example, if John's Farm Market sells jams or salsas, each time the consumer uses the product they are reminded of their visit to John's Farm Market, where they will have to return to repurchase it. The brand also benefits when products are gifted, as this allows the gift recipient to become another potential customer. In recent years, Amazon has been a popular channel for small companies to launch a private label product, where almost 500k products are released on a daily basis, many of which are private label products. By leveraging Amazon FBA infrastructure, small companies can launch private label brands without having to invest into any storing facilities.
There are various advantages for the retailers to go for private-label brands:
- Control over product or service pricing
- Marketing independence
- A personalized image (and higher customer loyalty)
- Higher control of production, marketing, distribution and profits
- Personalized inputs such as logos and taglines
- Changing customer preferences
These advantages provide an edge over the other brand, which help create a personalized and unique brand for retailers. Retailers with pretty good private-label brands will be able to create better sales opportunities for themselves. They can build value and recognition from the customers. Private-brand products allow retailers to differentiate their products from competitors' products, and provide consumers with an alternative to other brands.
2007 pet food recalls
In 2007, there was a recall in the United States of more than 60 million cans of pet food sold under more than 100 brand names made by Menu Foods. The mass recall lifted the curtain on a common practice in consumer products that competing brands are often made by the same manufacturer. However, ingredients, designs and quality may differ substantially among the labels made under the same umbrella.
- Baltas, G. & Argouslidis, P. (2007). Consumer characteristics and demand for store brands. International Journal of Retail and Distribution Management 35 (5): 328-341
- Corstjens, M. & Lal, R. (2000). Building Store Loyalty through Store Brands. Journal of Marketing Research 37 (3): 281-291.
- Baltas, G. (2003). A combined segmentation and demand model for store brands. European Journal of Marketing 37: 1499-1513
- "Richelieu experiences hiring boom, starts expansion". WCFcourier.com, RC Balaban, August 27, 2006.
- Lisa van der Pool (February 23, 2009). "There's new appetite for peddlers of cheap eats". Boston Business Journal.
- "Store Brands Drive Differentiation and Profit". storebrandsdecisions.com.
- "How To Private Label a Product". Jungle Scout.
- 101 Brand Names, 1 Manufacturer, Wall Street Journal, Vol CCXLIX, No. 108, May 9, 2007, p. B1
- Media related to Private labels at Wikimedia Commons