Private label products or services 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.
Richelieu Foods, for example, is a private label company producing frozen pizza, salad dressing, sauces, marinades, condiments and deli salads for other companies, including Hy-Vee, Aldi, Save-A-Lot, Sam's Club,[1] Hannaford Brothers Co.,[2] BJ's Wholesale Club (Earth's Pride brand) and Shaw's Supermarkets (Culinary Circle brand).[2]
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The Private Label Manufacturer's Association (PLMA)[3] categorizes PL manufacturers into 4 main categories:[4]
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 a far more profitable business than selling nationally advertised brands. A Food Marketing Institute study in the U.S. found that retailers earn a 35 percent gross margin on store-branded products compared to 25.9 percent on comparable nationally advertised brands.[5]
Use of Private Label goes well beyond the Store Brands, though certainly this is the most frequent situation in which a customer will have contact with one.
Several corporations source an extremely wide range of products from specialized manufacturers, which may or may not own their brand. The reasons for this business practice are several. A company, having identified a business opportunity in a new product or groups of products, may assess that setting up their own production line or facility may require a substantial investment in equipment, human resources, patents and so forth. In many cases, a viable alternative is to source from a specialized company that has already made such investments and that has spare production capacity. 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, separate regional presence etc.
This applies, with basically the same basic concepts, to the service industry (for example, customer services help-lines).
Private Label 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 (apparel companies launching perfumes; car companies launching watches and so on). Private Label may be an extremely profitable business for companies or corporations commanding an important share of the market with certain products that enjoy a high customer recognition.
As sophisticated technologies become widespread, and even subsidized, in emerging countries (generally with export-driven economies), 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 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, additional services.
Another use of private labeled products that has seen good growth is by small companies. Small companies usually do not have any input in the recipes or packaging of the products they buy. These small companies buy from a specialty food company that uses their recipes and simply label for the individual retail store. The reasons small companies look at branding products with their name is for the advertising benefits they receive. For example, if John's Farm Market sells jams or salsas with the John's Farm Market label, each time the consumer uses the product they are reminded of their visit to John's Farm Market. If the private labeled products are really good they will have to return to John's Farm Market if they want more of that particular product. Another benefit John's Farm Market receives is if someone gives that private labeled product away as a gift. This introduces another potential customer to the products carried at John's Farm Market. For this reason private labeling by small companies is a sought after marketing plan. There are many specialty food companies that offer private label.
Private label brands are those offered by retailers. There are various advantages for the retailers to go for private label brands. The advantages include
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.[6]