By Joseph King

Walk down the aisles of any major mass merchandiser and you will find store branded products competing side-by-side with national brands.

Industry statistics show that more consumers are turning to lower cost store brands instead of national brands.

In a nationwide study conducted by the Gallup Organization in 2002, 75 percent of consumers defined store brands as “brands” and ascribed to them the same positive product qualities and characteristics—such as guarantee of satisfaction, packaging, value, taste, and performance—that they attribute to national brands. Moreover, more than 90 percent of all consumers polled were familiar with store brands, and 83 percent said they purchase these products regularly.

According to the Private Labeling Manufacturers Association (PLMA), store brands now account for one of every five items sold every day in U.S. supermarkets, drug chains, and mass merchandisers, and represent more than $50 billion of current business at retail and are achieving new levels of growth every year.

A major advantage of store brands, in the eyes of the consumer, is price. Private label food and non-food products typically cost considerably less compared to national brands. One reason is because store brands do not carry the expense of national advertising and marketing campaigns built into the prices of national brands.

“Since private label manufacturers don’t have a national brand to advertise, the dollars that are saved in that arena allow for premium quality supplements to be priced below those national brands even when higher than typical margins are used at the store level,” said Bob Norman, national sales manager for Vitamer Labs, Lake Forest, CA. “It is not unusual for a retailer to be able to capture more than a 50 percent margin while keeping retail prices 10 or more percent below the premium national brands.”

With national brands, the manufacturing, raw material, testing, and advertising costs are mainly incurred by the brand manufacturer, according to Mary Miracle, formerly marketing manager for Somerset, NJ-based Reliance Private Label Supplements.

“What’s great about using a private label house brand is that even though we [Reliance] will incur similar costs in raw materials, manufacturing, and testing, we don’t have national advertising costs, as the end consumer doesn’t need to know who we are.”

Miracle noted that Reliance customers pay a one-time label fee, “a minuscule drop in the bucket when it comes to what a national brand pays to nationally market their product to the consumer.

“And when a national brand advertises its product, remember it is not specific to any one store,” she said. “With a private house brand, the label fee retailers pay comes back to them over and over when their label walks out the door with a customer purchase. It is free and effective advertising every time that label is seen. The return on investment is huge; much more effective than paying the premium costs for a national brand that can also be purchased at the competing retailer down the street.”

Although Reliance suggests different retail pricing levels for its customers, it stresses that each retailer must price the store’s house brand so it makes sense for the marketing strategy. “If it were me,” Miracle said, “I would price my house brand slightly below the national brands, but high enough that I make a higher margin on the house brand.”

Cheaper Doesn’t Mean Inferior

Although store brands typically cost less, they are produced using the same or comparable ingredients as the national brands, and because the store’s name or symbol is on the package, the consumer can feel confident that the product is manufactured to the store’s quality standards and specifications.

U.S. consumers had enough confidence in store brands to save an estimated $15.8 billion buying store brands vs. national brands, according to PLMA.

Consumer confidence in a store brand offers retailers the chance to increase business through customer loyalty, according to Miracle.

“Most obviously, private label products, or house brands, bring the customers back to that store for repeat business,” she said. “Whenever you train a customer to buy a national brand you train them to shop in all the places they can get that national brand product based on price.

“When that customer is loyal to that house brand, they are loyal to that store…period,” she added.

Norman agreed, adding, “A key benefit of having private label supplements is building brand equity for your business. Premium quality supplements with your ‘brand’ on the label assures that your shoppers will be satisfied with the results and the value that they receive.

“Gaining consumer loyalty to your private label supplement line can be an excellent way to help ensure that those consumers return to buy products throughout your store,” he added. “The image of service and trust that you have worked so hard to develop will be greatly enhanced in your customers’ minds through the marketing of your premium private label line.”

Another advantage store brands offer to retailers is building store value. “Maybe less obviously, if and when an owner ever decides to sell their store, that business will be inherently more valuable if a large percentage of its sales come from products that can only be found at that store,”Miracle said. “Anyone can open a store and sell national brands, but only through the purchase of that store can the buyer of the business benefit from the private label business that’s been built.”

Whether a store brand carries the retailer’s own name or is part of a wholesaler’s private label program, store brands give retailers a way to differentiate themselves from the competition.

“Brand identity is important because retailers face competition from so many other outlets,” said Candy Scott, CEO of Mt. Angel, OR-based Highland Laboratories. “If a retailer can build a brand that includes their label, I think that’s an advantage to them.”

“It’s no secret that retailers as diverse as Wal-Mart and Whole Foods Market have capitalized on private label in all categories,” Norman said. “Obviously, savvy retailers know that building their own brands is key to differentiating themselves in our increasingly competitive market.

“With virtually all the national brand products available with a few mouse clicks - and often at deep discounts - brick and mortar stores have to find their own unique position,” he added. “A well-thought out and executed private label program can form the core of that position.”

Although store brands do not carry the extra costs involved with national advertising and marketing campaigns, branding your product is important.

“The degree to which your consumers will recognize the quality of your private label depends upon the message they receive when they walk in your door,” Norman said. “From signage to labeling, from your advertising to the words that your staff use to sell your brand, you control how your customers perceive your private label.”

Store brands give retailers more control over their advertising campaigns since they can create their own promotions rather than relying on the promotion program from a national brand.

“Retailers should be advertising their store brand,” Scott said. “With your store brand you create the marketing plan you want.”

An effective marketing plan, according to sources, includes displays and shelf talkers with the store brand’s name and logo—all of which should be available through your private label manufacturer.

Miracle noted that store brand exposure is not only important for the product, but also for the store.

“Every time that house brand product is seen it is a free advertising impression for that store,” she said. “On a kitchen counter, in a bathroom cupboard, on an office desk…it’s advertising.

“This makes private label one of the best defense mechanisms against competition; be they other retail stores, mail order, drug stores, the Internet, etc.,” she added.

From the largest natural products retailer to the smallest, sources agree private labeling is one way for a retailer to compete in the marketplace.

“In the natural products industry, if you have competition for your business, then you are a good candidate for private labeling your wares,” Miracle said. “It is a proven business model in established industries and our industry is definitely at the size that private label makes sense.”

Competition for natural product retailers is growing and there’s an increasing number of market channels where consumers can purchase their dietary supplements, such as doctor’s offices, chiropractic practices, independent pharmacies, medical spas, day spas, gyms, and sports catalog companies.

However, these outlets also offer retailers the opportunity for word-of-mouth advertising.

“We have retailers who met with eye doctors in their areas and let them know about their store-branded eye support products,” Scott said. “They gave the doctors samples to pass along to patients.”

Getting Started

Retailers must consider a couple of key factors before venturing into building store branded products.

Choosing the right partner is the first major step, according to Norman, who said retailers should seek out a private label manufacturer with whom they can establish a partnership.

“Once you have found the quality and value you are looking for, the manufacturer should make the next steps very simple,” he said. “If you have a good graphic image of your logo, the private label partner will create sample labels that build on your own design work.

“The sales and marketing team should help you determine the right product mix for your demographics and work out merchandising and promotion plans with you,” he added.

A commitment to the product is another key factor, according to Miracle. “Their (retailers) work comes in when it comes to the commitment to build their house brand into their number one line in the supplement section,” she said.

Miracle said Reliance is able to get an account up and running in as little as eight weeks. “All we need is a retailer’s commitment to creating their own brand, and some artwork to get started,” she said. “We do all the label design and we work with each customer until they are satisfied with their label.

“We work very closely with each retailer to bring in a product set that makes sense for them,” she added.

One decision retailers must make is to decide whether to go with off-the-rack formulations or work with private labelers to develop their own formulations.

“For most retailers, the advantages of using the manufacturer’s standard formulas—minimum purchases as small as three bottles of a product and quick turnaround time—greatly outweigh the expense and time involved in creating custom formulas,” Norman said. “Once you have established your private label brand and developed your relationship with the supplier, you can begin to look at the custom product options.”

However, custom product options can be costly for all but the largest of retailers. “We occasionally have a retailer ask us to ‘tweak’ one of our existing formulas, or they may feel they have a formula that no one has come up with yet,” Miracle said. “The problem with this scenario is that it raises the minimums to such a high level that 99 percent of the retailers out there can’t manage it.

“For many private label or contract manufacturers, a minimum pill run is 100,000 to 150,000 pills or capsules at a time,” she added. “If you bottle 100 pills to a bottle, that means the retailer has to manage taking and paying for and storing 1,000 to 1,500 bottles of one product at a time and it would take far too long for a retailer to turn that kind of inventory to make it profitable.”

Sticking to the stock items of a private labeler still offers retailers the uniqueness of a house brand that can be managed more effectively.

“But it helps to work with a private labeler that has a product developer on staff that stays on top of the science out there and can produce effective and unique formulas based on scientific research,” Miracle said. “With Reliance, we offer about 240 products, and many of those are unique formulas that will differentiate the retailer from what the national brands offer in the way of formulas. This gives them even more power to keep their customer loyal to their house brand.”

In an industry known for its product quality, sources suggest retailers embarking on a private label campaign work with suppliers who meet GMP standards.

“Quality is a much misused term in our industry today, because it is hard to define, considering the minimal amount of regulation on the raw materials used in supplements,” Miracle said. “It doesn’t matter if it is a national manufacturer or a private label manufacturer selling their stock line, a retailer must do due diligence when qualifying the products they will put on their shelves.”

While retailers do not have direct control over the product quality and content, retailers do have the final say over which private label company they choose to work with.

“Product quality and content are determined by the manufacturer, whether the product has a brand-name label or your own logo,” Norman said. “However, retailers have control to the degree that they choose the right partner to make their private label, and the relationship they build with that manufacturer.”

Besides meeting GMP standards, be sure the private label supplier has been in the business for a substantial period of time, and be sure to inspect its production facilities yourself and ask for documentation of its procedures.

“Ask from whom do they buy raw materials? What quality controls are in place? Do they maintain their own laboratories to test each batch of product? What agencies oversee the manufacturer’s procedures?” Norman added.

“The retailer must trust our integrity and ethics when it comes to the raw materials we purchase and how we manufacture our products,” Miracle added. “They need to educate themselves on raw material issues and manufacturing issues.”

If a retailer decides to create a custom formula, he or she needs to understand the complexities of the manufacturing process.

“Only in the case where a retailer chooses to have a custom formula manufactured does the retailer need to have an understanding of product design,” Norman said. “The private label manufacturer should offer a comprehensive range of products, available to ship immediately, so that the retailer has no need to purchase large lots of custom formulas or become involved in the technical side of product development.”

Given the minimum product runs between 1,000 and 1,500 bottles of many private labelers, a retailer would have to pay for and store that much of a custom formula in the store.

“If a retailer does want to try formulating their own product, before anything, they need to be aware of the quantity that is required to run a product through a manufacturing facility,” Miracle said. “Most independent retailers cannot pay for and store that large amount of product.