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The Idea in Brief

You know the old joke: Just because you’re paranoid doesn’t mean they’re not out to get you. In a nutshell, that describes how manufacturers of brand-name products react to competition from private labels. On one hand, manufacturers are right to be concerned: There are more private labels – “store-brand” goods – on the market than ever before. Collectively, private labels in the United States command higher unit shares than the strongest national brand in 77 of 250 supermarket product categories. And they are collectively second or third in 100 of those categories. But on the other hand, many manufacturers have overreacted to the threat posed by private labels without fully recognizing two salient points.

First, private-label strength generally varies with economic conditions. That is, private-label market share generally goes up when the economy is suffering and down in stronger economic periods. Over the past 20 years, private-label market share has averaged 14% of U.S. dollar supermarket sales. In the depth of the 1981-1982 recession, it peaked at

17% of sales; in 1994, when private labels received great media attention, it was more than two percentage points lower at 14.8%. Second, manufacturers of brand-name products can temper the challenge posed by private-label goods. In fact, in large part, they can control it: More than 50% of U.S. manufacturers of branded consumer packaged goods make private-label goods as well.

It is difficult for managers to look at a competitive threat objectively and in a long-term context when day-to-day performance is suffering. Examples of big-name brand manufacturers under pressure from private labels and generics aren’t reassuring. What manager wouldn’t worry when faced with the success story of Classic Cola, a private label made by Cott Corporation for J. Sainsbury supermarkets in the United Kingdom? Classic Cola was launched in April 1994 at a price 28% lower than Coca-Cola’s. Today the private label accounts for 65% of total cola sales through Sainsbury’s and for 15% of the U.K. cola market.

Reactions to private-label success can have major repercussions. Consider what happened in the week following Philip Morris’s announcement in April 1993 that it was going to cut the price of Marlboro cigarettes. Wall Street analysts interpreted the price cut as the death knell of brands; Philip Morris’s stock lost $14 billion of its value; and the stocks of the top 25 consumer packaged-goods companies collectively lost $50 billion in value.

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