Retailers can boost both financial returns and customer loyalty by taking a new approach to private label lifecycle management, says Evan Barlow, Regional Director EMEA Revionics, an Aptos Company
While private labels have been growing as a proportion of all grocery brands for nearly 30 years, an acceleration in recent years as well as during the pandemic, may well outpace grocers’ ability to manage them profitably across the lifecycle.
The private label opportunity goes far beyond its lower price advantage. Grocers, often more than brands, can tap directly into their customers’ preferences on the back of already established relationships. In addition, according to eMarketer, “private labels are the reason many shoppers choose particular retailers; 66% said that if they like a retailer, they generally assume they will also have good store brand products.”
On top of this, not only are retailers blessed with data that helps new product development meet customer expectations, they are also in a trusted position with their customers, in contrast to many brands that are decreasingly trusted in areas such as ingredients, packaging and wider sustainability.
This trusted position was enhanced during the pandemic because shoppers were forced to try store products, such as toilet paper, when their preferred brands were sold out. During the crisis, around a quarter of consumers tried private labels for the first time, according to a survey by research firm AlixPartners. At least 30% of consumers who tried new private label products during the crisis plan to stick with them, Alix found.
However, being able to align pricing, goals and brand perception for a private label is a real challenge because of how each element affects the others, and how each area is currently managed separately.
Here are five things to consider to increase returns from private labels
Build a Consistent Brand Gap Architecture
Private label can’t be priced higher than the national brands for one product, and lower for another. Maintaining a consistent brand gap across all products is important to the private label’s success.
To start building the brand gap architecture, consider what’s already out there in the market. Where does the product fit into the ecosystem? Setting prices is about more than just looking at costs. Listen to customers and factor in elasticity signals and demand behaviour.
Has pricing been set against a competitor’s own private label brand, or the national brand next to the product on the shelf? Or Perhaps both.
Look at customers’ cross-shopping behaviour. For products with high price sensitivity and substitutability with competitor’s private label product, there’s a good chance that’s where the competition is. There are many factors that influence consumer shopping behaviour, which is why it’s important to closely examine the data on how customers shop.
AI and data analytics take the guesswork out of a private label pricing strategy best practices, so retailers are better prepared to detect changes in the market, and evolve their pricing and private label indexes as consumer demand evolves. Using analytics is a savvier way to assess consumer behaviour and how pricing can influence it, as well as track and respond well to competitors’ price changes.
Instead of relying on traditional merchant methods, analytics can ascertain the optimal brand gap structures with more consistency and accuracy. For example, a merchant may look at cost and determine the private label product should be 10% lower than the national brand, but demand analytics leverages all data to calculate that 8.5% is the true optimal brand gap.
Private Label Promotions
By competing using private label, brands are likely to commit less vendor funds. However, grocers can now decide how to run the promotions and focus on what will be most effective for the brand and business goals.
Plus, it is simpler to get clear promotional performance results and analytics without vendor funds muddying the data.
By promoting private label, grocers can shift more consumers to margin favourable and exclusive products. Vendors know they will have to sweeten the deal if they want to be promoted over the private label.
Private Label Markdowns
Markdowns present an extra challenge to retailers when it comes to private label products. With a national brand, sometimes the vendor will help cover some of the loss on unsold product or help remove a product to make room for a new one. But with private label, retailers are more or less on their own. AI can help better manage markdown plans, optimising for consumer demand and improving sell-through.