Brand companies invest in R&D in order to be more innovative and, therefore, to maintain their market share and margins. In the past, smaller rival processors were not strong enough to be threats. But now private labels are eroding those advantages.
Some practices are contributing to a decline in innovation by brands: the delisting of a large number of SKUs at short notice affects sales, profitability and investment; brand marketers are cautious about discussing coming new product innovations with retailers for they can beat them to the market with the help of another private label supplier (such as Ralcorp or ConAgra); Nielsen data shows that private label products often have more shelf space and more SKUs than is warranted on the basis of their turnover; and information shared by brands about their strategic plans can be used by retailers to promote their store brands.
While national brands work hard at differentiating themselves, private label competition is becoming savvier with respect to brand building and much better at developing private label names that rival the best national brand names.
Private label brands face challenges too
Seemingly despite many advantages over brands, private labels can hit a brick wall where copyrights, trademarks, patents and intellectual property rights are concerned.
Rumors swirled more than a year ago that TreeHouse Foods had developed a generic coffee pod for the popular Keurig single-serve coffee makers. But it never was unveiled to the market, apparently because there were enough patents to protect Green Mountain Coffee's K-Cup design. However, those patents reportedly are set to expire in September, which should open the floodgates for private label alternatives.
Copycatting (or copycat packaging) refers to selling private label products with packaging similar to that of a rival brand. That may induce consumers to buy the private label product either by mistake or by (rightly or wrongly) assuming that the copycat label has the same reputation as the branded product. Some private labelers try hard to fool consumers into believing the product is produced by the branded manufacturer.
But, intellectual property law provides branded manufacturers with tools to limit copycat packaging. Regardless of the efficiency of the current litigation circuit, where such matters are largely settled, the question is whether producers can actually invoke their rights if they find themselves in a dependent position.
Businesses that produce both leading brands and private labels may be reluctant to stand up for their brand out of fear of consequences on the private label contract. And brands may be reluctant to sue a retailer that is a major customer. In consequence, intellectual property rights may be insufficient to protect branded products against their copycats, in particular private labels.
Private label penetration is concentrated in a relatively narrow band of categories and consumers, according to Nielsen. The top 50 private label categories account for 69 percent of private label sales, compared to 48 percent of sales for top brands, and heavy private label users account for almost 62 percent of private label sales. Private label brands need to find ways to increase sales in categories like pasta sauces, candies, frozen pizzas and other products where they traditionally have not fared well while retaining and growing their strong performance in categories such as cheese, frozen chicken and snacks.
Rising commodity prices also present a significant challenge for private label. Certain segments are affected more severely than others. Consumers tend to be less price sensitive about staples such as bread and milk, but will become increasingly selective in other categories as prices increase. For private label vendors in those categories where price increases are not a good option, it becomes increasingly important to find ways to reduce costs while still maintaining margins.
Many companies try to reduce packaging costs. Others reduce the quantity of product per package instead of increasing prices, as consumers have demonstrated they are more sensitive to increases in price than they are to decreases in quantity. Companies pursuing this strategy try to make changes in ways that are less perceptible to customers; for example, by keeping the height and width of the package the same, but changing the depth so that the packages' profile on the shelf remains similar.
Interestingly, the Internet may be one of the best weapons held by brands. Branded marketers have been leaders in using e-commerce and social media to strengthen their ties with their consumers, pitch products interactively and conduct market research to gain added insights into their markets.
Branded products' edge on the Internet may be of particular concern when demographics are considered. Younger consumers already tend to be more brand conscious, and are among those most effectively targeted through online strategies. Private label brands will need to work to differentiate themselves through strategies that connect with the passions of this generation, such as expanding ethnic food offerings and developing "green" strategies, such as reduced packaging and other eco-friendly production and distribution programs.
Similarly, private label brands need to retain and grow their relatively stronger position with baby boomers by ensuring that their products reflect the changing health needs in this market as it ages.