With millions of people looking for price-sensitive alternatives to popular brands, mega-retailers like Wal-Mart have the potential to increase overall profitability drastically. How?
By providing and promoting their own private brands. For example, over the past few years, Wal-Mart reduced the amount of space it provided large branded manufacturers and increased the availability of their own private label offering. Their Equate brand, used for consumable pharmacy and health and beauty items, has taken over a majority of shelf space in their stores.
Private labels do offer a cost benefit to customers, as their prices are often significantly less than a national brand’s for the same product. From the retailer’s perspective:
- The margins on private label goods are an average of 10% higher than the margin on similar products.
- Because a store’s private label products are unique to that store, they can cultivate that same sense of brand loyalty that consumers once felt for the national brands.
- Private label goods are cheaper to produce, due to the lack of advertising and marketing expenses, creating higher profit margins.
- Selling private brands gives them direct control over product pricing and services.
- Specialized marketing plans can more directly address specific customer demographics, providing for efficiently targeted marketing.
This shift to selling more private label products is working for Wal-Mart in one respect: According to a recent study, five of the top 10 private-label brands consumers are likely to purchase are Wal-Mart offerings.
What are the risks to Wal-Mart relying too heavily on private brands?
According to experts, they may be damaging their reputation as the place to get the same products at a lower price. Founder Sam Walton had “a relentless focus on providing the customers with products at lower prices,” according to Neil Stern, a senior partner with McMillanDoolittle, an international retail consulting firm. That has been Wal-Mart’s overall brand strategy for decades: sell well-known brands at incredibly low prices.
“The idea was that national brands provided a ‘common currency’ by which shoppers could easily compare Wal-Mart’s prices to other stores’ and convince shoppers of Wal-Mart’s value,” according to Jim Hertel, a managing partner with retail research and consulting firm Willard Bishop.
Time will tell if consumers will continue to seek lower prices above brand recognition. At Smith Hanley, we value our role as a national leader in the placement of market research professionals and pride ourselves on keeping our clients up to date on happenings in the industry. If you’d like to find out what else we can do for your company, call or contact us anytime!
