How the Rise of Private Labels Is Challenging the CPG Industry
Published February 26, 2019
The Business Dictionary’s definition of private labels is ““a brand owned not by a manufacturer or producer but by a retailer or supplier who gets its goods made by a contract manufacturer under its own label. Also called private brand.” Private labels are quickly gaining popularity in the consumer packaged goods (CPG) industry. There are two opposing ways of thinking when assessing the ongoing shift in demands from today’s consumer. First, one could hypothesize that the cheaper prices are appealing to a wider consumer base. Or, it is possible that retailers selling high-quality (but more highly priced) store brand products are damaging their market base by offering the average consumer too many purchasing options.
The rising popularity of private labels is creating a new challenge for the greater CPG industry that must be quickly addressed. It is possible that changes and declines will start being seen across the market as the demand for private labels continues to increase. The question is this: what does the new (and increasing) demand for private labels mean for the established CPG industry, and how do CPGs rise to the occasion to capture this potential business? Below, we have listed our best insights into this problem, and how INSITE is staying on top of the challenge.
Advantages of Private Labels: Why Companies Are Using Them
1. Little to No Overhead
Marketing and promoting known brands requires a large marketing budget. More expensive displays, costly commercial marketing campaigns and attractive, premium packaging all work together to drive up costs throughout the CPG and secondary packaging industries. In turn, these expenses correspond to a higher overall price on the product once it hits the shelves. When the CPG industry introduced packaging machinery that applies private label goods directly into boxes and on the shelves, these costs started to decline. The marketing budget necessary to work with a smaller or lesser-known product is typically much lower than working to produce a name brand product. This allows for more funds to be allocated to other parts of the budget.
2. Higher Profit Margins
As we discussed above, the overhead costs to produce private label goods are traditionally less than the costs to produce commercial label goods. When manufacturers have the ability to lower their costs, without having to worry about the expensive marketing dollars, their return on investment increases automatically. These funds can now be funneled elsewhere, which provides businesses an opportunity for new growth and expansion.
3. Increased Consumer Satisfaction
Forbes uses the Costco store brand, Kirkland, as an example of brilliant private labeling. This quickly growing grocery store and mass marketing chain has caught on to the incredible value that their private label off-brands add to their overall profits. In fact, their private label, Kirkland, now accounts for over 25% of their overall sales. With customers loving the reliability and lower price of the Kirkland brand, Costco has put in the work to make their private labels as attractive as any name brand item on their shelves.
Costco’s success proves that not only can private labels compete with commercial ones, but that when marketed correctly, can quickly become the secret to a company’s success.
Potential Problems With Private Labels
1. Inventory Issues
When placing a manufacturing order, there are often minimum amount requirements that must be met. Determining the correct product to order, and at what quantity, is a tough decision for every businessperson to make. Privately labeled products are almost always non-returnable, which adds even more weight to this decision. If too much inventory is ordered, the seller will be forced to drop their prices and lose profits. If too little inventory is ordered, the company will miss out on potential sales.
2. Brand Name Bias
Although brands like Costco are proving that private label brands can compete with commercial brands, consumers prefer to support brands that they know and can trust. The Small Business Chronicle reports that consumers usually rely on past experiences or word-of-mouth from family and friends when selecting new brands or products. For this reason, new or privately labeled brands can have a hard time being accepted into the mass market.
How the CPG Industry Can Rise to the Challenge
The most successful CPG companies secured their positions as major supporters in the packaging and secondary packaging industries through large-scale marketing campaigns and a commitment to customer service and quality products. CB Insights has identified common denominators for maintaining success in the CPG industry despite the rise of private labels:
- Consolidated manufacturing and streamlined distribution for quality and pricing control
- An Investment into effective marketing that produces user-friendly, interactive media a consumer base can stand behind
- A willingness to adapt to and cater products and insights based on customer feedback
At INSITE, these common qualities represent some of the core reasons we operate our growing business the way we do. The experts at INSITE are committed to harnessing the creativity and commitment to quality demonstrated at Douglas, and applying it to our new, streamlined approach with the goal of providing customers access to exceptional standardized packaging equipment. Our streamlined and reliable packaging operations are a great option for any company seeking CPG expertise. Contact us to schedule a tour of our facility, or get a quote today.