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Brand Loyalty and theImpact of Private LabelProducts

Deloitte Debates

Sit tight or fght back aggressively?

The struggling economy has given private label products a big boost on the store shel and on consumers shopping lists.

Between 2006 and 2009, the market share or private label products in the U.S. increased in nearly three out o our

product categories within personal care, household goods and ood and beverage according to Inormation Resources,

Inc. In total, private label in the U.S. now accounts or more than 20 percent o grocery store sales and 18 percent o

superstore sales.

What should national brands do about this growing trend? Should they sit tight and hope or a reversal as the economy

improves? Or should they fght back aggressively?

Heres 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.

The deep and prolonged recession

prompted many consumers to substitute

private label products or national brands.

And many ound they couldnt tell the

dierence or even preerred the store

brand.

Other companies might need

to worry, but our brands are

bulletproo.

Research shows that very ew brands are

sae rom the threat o private labels. Even

elite brands arent completely immune.

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Deloitte Debate 2

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 o private labels could be in or a nasty

surprise, based on a recent consumer survey as well as an executive survey. According to a recent Deloitte study o more

than 2,000 U.S. consumers, more than 9 o 10 say they have permanently changed their buying behavior during this

recent recession. The survey shows that many consumers eel guilty and embarrassed about the way they used to shop

(e.g., impulsive spending, wasteulness, knee-jerk reaction to promotion o 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 labelproducts and many have ound little or no dierence between the two, according to our study conducted with Harrison

Group. In act, 80 percent o 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 hal o the consumer product executives

believed that consumers see store brands as manuactured by the national brands.

Also, according to a recent Deloitte executive survey o 193 consumer product and retail executives, more than three out

o our consumer product executives and nine out o ten retail executives expect store brand market share to increase or

increase signifcantly 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 cant. Focus on brand attributes that are difcult or retailers to replicate, such as

exclusivity, product saety, 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 difcult to replace with private label products, since many

consumers are unwilling to accept a substitute. Its important to note that while many companies believe their

oerings qualiy as destination brands, our research shows ewer 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 doesnt mean you can aord to ignore local

market needs. Identiy regional or local variations in tastes and preerences and use them to create new and unique

products that can compete eectively against the localized oerings o private labels.

Point Counterpoint

Fight back

Do everything possible

to stop the bleeding and

regain lost market share.

The severity and length o this

recession is having a permanent

impact on consumer buying

behavior. Savvy shoppers are the

new normal.

These things tend to be cyclical. When

the economy improves, the problem could

just disappear.

This isnt just a battle or short-term

market share; its a battle or long-

term control o the consumer. Will

the brands people buy dictate where

they shop? Or will where they shop

dictate the brands they buy?

What can we do to fght back? Todays

consumers are very price conscious, but

aggressive price promotions undermine

the perceived value o our brand.

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Deloitte Debate 3

Make it hard or retailers to copy you. Me-too private label products that look similar to national brands encourage

side-by-side comparisons at the store oten to the detriment o the national brand. Establish an aggressive cadence

or product innovation, including requently rereshed packaging and product obsolescence, that orces retailers and

private label manuacturers 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 oering existing customers direct replenishment through your

website.

Reduce reliance on price promotions. While price promotions remain an important marketing tool, i overused can

steadily undermine your brands perceived value. Excessive promotions train consumers to wait or deals and shit the

ocus rom product attributes to price a shit that plays to the strengths o 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 d irect experience competing against private

label products. On the shelves o most drugstores, major branded medications oten have a store-branded product

right next to them that claims to be the same drug or less money. The act that both products eature the exact sameactive ingredients tends to work in the store brands avor. On the other hand, the act that consumers may perceive the

decision to chose between the two brands as an issue o health and saety creates a distinct advantage or the better-

known national brand.

Ironically, there are situations where strong name recognition can actually work against a national brand. Perhaps the

most amous example is the Tylenol scare o the 1980s, which generated an extraordinary amount o negative publicity

because it centered around a well known brand. In that particular case, the manuacturer, Johnson & Johnson, was

able to salvage its reputation and even improve its long-term image through careul handling o the crisis. But the eort

required a huge amount o money and resources.

One way or a brand name drug company to protect itsel rom private label competition is to modiy the non-clinical

characteristics o its products adding a gel coating, or example. Another tactic is to aggressively cut prices on products

that are nearing the end o their patent lie. By reducing the proft margins on a particular drug, the company makes iteconomically less attractive or 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 rom private labels might not be as ominous as it seems. And it certainly doesnt have to

escalate into a ull-scale war. There is a natural limit to how much shel space retailers can dedicate to their own private

labels beore brand-conscious consumers take their business elsewhere. Also, private labels have struggled in the past to

move rom the value category up to the mid and premium tiers.

Rather than launch a d irect assault against private labels, manuacturers should try to reshape the conversation through

retailer education and collaboration. What retailers ultimately are looking or is higher margins. Private labeling is just one

o the many ways to achieve that goal and by no means always the most eective.

In act, private labels might not be as proftable as they seem, given the hidden costs or marketing and brand-building,

not the opportunity costs o displacing popular private brands, that retailers are likely to encounter as they expand their

private label eorts. National brand companies should make sure retailers are aware o these hidden costs and then

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This publication contains general inormation only and is based on the experiences and research o Deloitte practitioners. Deloitte is not, by

means o this publication, rendering business, fnancial, investment, or other proessional advice or services. This publication is not a substitute

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related entities shall not be responsible or any loss sustained by any person who relies on this publication.

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Copyright 2010 Deloitte Development LLC. All r ights reserved.

Member o Deloitte Touche Tohmatsu

propose alternatives or collaboration that can help retailers improve their margins.

For example, a manuacturer could oer to help retailers re-merchandise entire sections o their stores to maximize

sales and profts. Or it could oer to produce customized packaging that is more appealing and consumer-riendly.

Also, in an assisted selling environment such as retail electronics, a manuacturer could oer to provide sales training

that helps retail sta steer customers toward higher margin products.

National brands have invested a lot o time and money in understanding consumers and market segments. Many are

willing to share some o this inormation and insight, oten in exchange or more shel space. I done in a spirit o true

transparency, this can strengthen their relationships with retailers and help retailers boost their margins above whatprivate brand oerings would achieve.

For urther inormation, please visit:http://www.deloitte.com/us/brandloyalty.

For urther inormation about this debate, please contact:

Pat Conroy

Vice Chairman and U.S. Consumer

Products Leader

Deloitte LLPpconroy@deloitte.com

Glenn Snyder

Principal

Lie Sciences

Deloitte Consulting LLPgsnyder@deloitte.com

Tom Compernolle

Principal

Retail

Deloitte Consulting LLPtcompernolle@deloitte.com

Related Insight:

The Battle or Brands in a World o Private Labels

The battle between national and store brands heats up.

Competing Against Store Brands

Top o mind issue or consumer products executives.

The American Pantry Study

The new rules o the shopping game.

The Changed ConsumerRecession has changed the way consumers go to market.

Related Content:

Library:Deloitte Debates

Services: Consulting, Strategy & Operations, Proftability Management and Pricing

Industries: Consumer Products, Lie Sciences and Retail

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