They’ve become forces in their own right, accounting for about 21% of sales in the $1.7 trillion US food industry, according to IRI.
But the origins of private label remain largely secret.
Retailers are typically not open about the companies that make their brands. And manufacturers also have little incentive to disclose that they make similar products to their brands under a different label that sells cheaply.
Although private labels compete ostensibly with manufacturers’ national brands, manufacturers often have overcapacity in their production lines. To generate additional profit, some will use this extra capacity to produce private labels.
Other brand manufacturers will produce private labels as an incentive for retailers in the hope that they will be rewarded with better shelf space and placement for their own national brands.
“Most manufacturers aren’t open about it,” says Jan-Benedict EM Steenkamp, a University of North Carolina marketing professor who studies private label and branding. “Manufacturers don’t want it to be known because it undermines the power of their own brands.”
Eight o’clock coffee and Kenmore
Macy’s sold earthenware whiskey jugs under its own name. According to Christopher Durham, president of the Velocity Institute, a private label trade association, customers could bring the jugs back for refills.
Montgomery Ward developed its own line of aspirin in wooden containers, while the Great Atlantic & Pacific Tea Co. (aka A&P) sold branded condiments with the slogan “Take Grandma’s Advice, Use A&P Condiments”. A&P later developed Eight O’Clock Coffee, one of the most famous private labels of the time.
In 1925 Sears founded the Allstate brand for automobile tires. A few years later, Sears released its first Craftsman wrench, according to Durham. The Kenmore line, which began in 1913 as a sewing machine brand before branching out into vacuum cleaners and other household appliances, became the leading brand of household appliances in the United States.
However, these own brands were the exception.
Most customers were very loyal to specific brands, not retailers. A business that didn’t carry major brands would likely be crushed, giving manufacturers tremendous clout.
In addition, many private labels were also seen as boring, cheap imitations of national brands.
Private label hit rock bottom in the 1970s, Durham said, as stores tried to cut costs and introduced generics with plain white backgrounds and black letters that identified the product — beer, soap, cola, beans and other staples.
Retailers produce private labels for a variety of reasons, including to increase profitability and sometimes as a negotiating tool against brands.
Private brands often have profit margins that are 20% to 40% higher than national brands because stores do not have to pay the advertising, distribution or other mark-up costs that are included in big brand prices.
In the mid-20th century, many retailers began developing their own labels to regain bargaining power from dominant suppliers and keep their prices in check. With the consolidation of US retail over the past few decades, the power dynamic between retailers and suppliers has reversed. Now stores have more leverage to launch their own labels – whether brands like it or not.
“Forty years ago, antagonizing Walmart against P&G would have been a risky situation. Now Walmart is a lot bigger than P&G,” said marketing professor Steenkamp.
Today, store branding is more sophisticated than ever and a much bigger focus for chains.
Today, stores are more likely to develop a distinctive private label or product to differentiate themselves from the competition and create customer loyalty, said Krishnakumar Davey, president of customer loyalty at IRI.
The U.S. House Judiciary Committee and other lawmakers and regulators around the world have been investigating whether Amazon is using seller data to create its own brands and illegally favoring its own brands on its website.
Most shops start small with their own brands. For example, grocers often introduce a durable product first, such as pasta, flour, sugar or rice, that is easier to manufacture and where brand loyalty within the category is not strong.
“You don’t start with the most difficult things,” said Steenkamp. “As stores gain more experience and success, they enter new categories.”
How to find out who makes private labels
So how do you find out who is behind your favorite brands?
Product recalls are often the most revealing way to find out which brand manufacturers are behind specific private labels.
For example, last year Dole recalled fresh salads and vegetables, including store brands from Walmart, Kroger and HEB.
Some large retailers also manufacture their own private labels. Kroger, for example, makes about 30% of its own private products.
Perhaps the strangest private label makers are retailers who make private label for their competitors: Lucerne Foods, which is owned by Safeway, makes private label for Safeway’s competitors.