For years, the retail landscape has been a platform for established consumer brands to make their way into their customers’ homes. This platform has been the fundamental channel where consumer brands and consumers connect.
Apart from just facilitating transactions, retailers play a pivotal role in brand-building with consumers. But retailers want in on the party. And they want in, big time.
Photo supplied. Artwork by Melusi Chiposi.
What this means for the retail landscape
Exclusive offerings from retailers – or private labels – are increasingly being manufactured by retailers who sell these brands through their retail groups. Conceptually this sounds like a good idea because increased competition is good for the consumer. But the devil is in the details.
Retailers with huge data sets and technological capabilities can harness sophisticated analysis and emerging capabilities, such as AI and machine learning to gain a substantial advantage over long-established brands.
For instance, each transaction made on a retail platform like Amazon means an increase in that retailer’s ability to win.
The same goes for retailers such as Shoprite Checkers, which has both a substantial online and real-world physical store footprint.
In these instances, extensive networked data points feed valuable information to retailers. And integrating this with consumer data from store loyalty programmes, retailers now know what consumers are likely to buy – and when – with a fair amount of accuracy.
In a world where technology is advancing in leaps and bounds, data is owned by retailers, not brands. This leaves brands more vulnerable.
Unlevel playing field and conflict of interest
There is room for a potential conflict of interest because retailers can achieve greater margins selling their privately labelled products (20% to 40% depending on item and channel) versus the traditional business model of brand retail (1% to 3%).
Let’s say a cereal brand is looking to run a promotion to increase its sales on one of its products at a particular outlet. The brand approaches the retailer to have this promotion available – running a 30% discount for a week, for instance.
The retailer assesses the promotion and realises that after running the numbers through its prediction algorithm, the 30%-off promotion will negatively affect the sales of its own privately labelled product, as the discount will be lower than its own product’s price. And according to Brandbook, about 55% of consumers happily switch brands based on price and promotional factors.
So when the retailer accepts this promotion from the brand, it offsets the brand’s promotion by running a discount of its own to compete. The result is that the brand’s promotional campaign will have little to no effect on its sales, and when the administrative costs are added for setting up the promotion, the retailer loses more than expected. And this can spiral.
The promise of a better price point
While the rise of private labels presents a challenge for established brands, it’s also essential to consider what this means from a consumer’s viewpoint. This shift in the retail landscape has significant implications for consumer behaviour, preferences and decision-making processes.
Consumers are drawn to private labels for several reasons. First, private labels often offer products at a lower price point compared to established brands. This price advantage can be particularly appealing in a time of economic uncertainty or for the budget-conscious consumer.
But it’s not all about price: Retailers have been investing significantly in improving the quality of their private-label offerings, dispelling the old perception that lower cost equates to lower quality. Many private labels offer products that are comparable, if not superior, to the quality of traditional brands.
The paradox of too much choice
As retailers harness data and technology to better understand consumer preferences, they can tailor their private-label offerings more effectively. For instance, a retailer could identify a trend towards vegan or gluten-free products among its customer base, rapidly introducing a private-label line to meet demand. This agility and responsiveness to consumer trends give private labels an edge.
The proliferation of private labels also increases the choices available to consumers.
While choice is generally seen as a positive thing, the paradox of choice can come into play. When presented with too many options, consumers may experience decision fatigue, leading to decreased satisfaction.
Moreover, consumers value transparency and authenticity, which retailers can provide through their privately labeled products. By controlling the manufacturing process, retailers can provide clear information about product sourcing, ingredients, and production methods, appealing to ethically and/or environmentally conscious consumers.
But the rise of private labels also has potential drawbacks. With retailers promoting their brands, consumers may find it harder to locate their favourite established brands or may find less diversity in product offerings over time.
Take charge of digital transformation
There is no taking away the power and purchasing data retailers have at their disposal and their ability to leverage it to their favour. Instead, brands need to adapt their strategies to remain relevant to modern consumers.
Digital transformation is pivotal to the success of modern brands as they are mainly targeting digitally sophisticated consumers. Instead of relying heavily on retailers for connecting to consumers, brands ought to be seeking digital solutions to reach their customers to deliver personalised experiences for them. And what is critical is to have these solutions be independent of retailers.
By no means am I suggesting brands distribute their products to consumers directly. This would be impractical given the large scale of the current retail environment and platform. Instead, brands should focus on engaging their customers one-on-one through data-driven digital platforms comparable to avoid retailers.
Only then can brands get close to leveling the playing field and, most importantly, engaging with their customers uninterrupted and without conflict. So, as established brands pivot towards digital transformation, it’s essential to consider how these strategies can enhance the customer experience.
Direct-to-consumer channels, personalised marketing, and a strong social media presence can help brands build deeper relationships with their customers, offering value beyond the product itself.
The rise of private labels in retail is not merely retailer versus brand. It’s a shift that impacts consumers significantly, altering their shopping experiences, product choices, and brand relationships.
The lesson from this trend is to lean ever inward toward the consumer as the North Star for brands.