US private label sales practices need update: study

By Nicole Maestri

NEW YORK (Reuters) - Private label products, made by the drugstores and supermarkets that sell them, have shed their cheap, dowdy image in recent years, but some U.S. retailers are still using out-of-date practices to market them, a new study found.

Retailers like Wal-Mart Stores Inc. <WMT.N>, Safeway Inc. <SWY.N>, CVS Corp. <CVS.N> and Walgreen Co. <WAG.N> have sought to woo customers with their own lines of merchandise that resemble those of top brands, but typically at lower prices and wider profit margins.

However, some outdated "rules" are being applied in selling such items, according to an industry white paper by Daymon Worldwide, and DemandTec on private label goods at supermarkets, drugstores, discount stores and club stores.

For instance, the study found that many retailers are still pricing private label products at a "standard" gap – such as 10 percent or 20 percent – below national brands, instead of being based on quality and name brand competition.

"They're leaving money on the table" by following that kind of standard pricing strategy, said Todd Hale, senior vice president of consumer and shopper insights at , of retailers. "That kind of thinking needs to be brushed away and a little bit more of a scientific approach to pricing should be taken."

COMMON MISTAKES

Some prices are too low, giving the impression of cheap goods that consumers pass over, said Marc Dietz, senior director of retail product marketing at DemandTec. But some private label products are priced too close to national brands, so that shoppers decide to splurge on the "better" brand name instead, he added.

Prices can vary widely among retailers. For instance, a 2-liter bottle of caffeine free Diet Coke costs $1.33 on Safeway's Web site, while the same size of Safeway Select caffeine free diet cola is priced at 75 cents.

Retailers also make the mistake of cluttering shelves with a large selection of store, national and local brands.

"Retailers have a tendency to offer more and more (items) in an attempt to provide the consumer with more variety," Dietz said. "But when there are too many choices, it's difficult to figure out what to buy."

Instead, the study found that retailers could boost their bottom line by removing name brand items that do not add diversity to their product line and "cannibalize" sales of their own private label merchandise.

"In many cases, the best opportunity is for (retailers) to remove redundant items that are national or regional brands and sell more of the private label," Dietz said.

IMAGE SHIFT

The study also found that the image of private label products has shifted: they are no longer perceived as just for low- to middle-income, blue-collar families.

But, while private label items are making their way into more shopping baskets, the highest-spending consumers in the study spent a lower average proportion on private label goods than on other brands.

"Clearly, it's an opportunity for both branded and private label to take advantage of the situation," Hale said. Retailers could do a better job promoting private label products to big spenders, while brand name makers can look at how to keep loyal customers, he said.

While private brands are becoming more popular, Hale said retailers should not neglect the name brand merchandise that customers want.

"You have to have both branded and a private label in a retailer," he said. "They have to co-exist."