The number of private label (brands exclusive to a retailer) products has grown steadily in recent years. In particular, a number of supermarket chains have increased private label products in their supermarkets as part of their strategy, mainly for differentiation and profitability purposes.
But why would a large manufacturer want to produce a private label product that will directly compete against their flagship product? Hopefully this activity will provide the answer.
Assume you are part of the management team of a cookie manufacturer. A major supermarket chain has approached your firm to manufacture a private label version of one of your best-selling and most profitable cookie product lines. The supermarket chain would like a cookie that is a similar design, look, and reasonably similar quality (can be a little less).
While they want the packaging to look fairly basic (to communicate a lower price biscuit), but they want it clear to consumers that the product is comparable to your popular cookie line. They want to purchase this new product at a 25% lower price than they now pay for your current cookie line. They then plan to retail both products, virtually side-by-side, with the private label version retailing at $1.99, compared to your cookie normal retail price of around $2.50.
- To what extent will the private label product directly compete with your existing brand?
- Are your loyal customers likely to switch to the new private label product? (That is, is the target market for the private label line your existing customers or budget shoppers?)
- Is this approach an effective way for your firm to gain a share of the budget shopper market without damaging your brand with price reductions?
- Therefore, would you decide to manufacture the ‘competitor’ private label cookies for the supermarket chain, or kindly decline their offer? Why?