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Case Study
A third prong of retailer power, after bigger shops and computerized control of distribution,
is own label (known as private label in America). As margins drop and competition
intensifies, retailers are becoming ever more aware that selling goods under their own brand
– name has two important advantages. The first is that own brands provide fatter margins.
The cost of goods typically makes up 70-85% of a retailer’s total costs: anything it can shave
off that cost must be good business. The second benefit is that own-label goods strengthen a
retailer’s image with its customers. Since shops the world over increasingly look the same,
exclusive products can make a helpful difference. Own label is most developed in Britain
where Marks and Spencer is unique among large international retailers in selling only own-
label goods- and in food retailing. It accounts for close to 60% of sales at Sainsbury
supermarket chain. Own label has helped British food retailers to achieve profit margins
averaging 8% of sales which is high by international standards: a typical figure in France and
the United States is 1-2 %. Britain’s lead in own-label goods goes back a long way. Retail
co- operative societies pioneered own label during the 19th century. Around the turn of the
century Sainsbury began setting up its own farms and food processing plants to ensure
quality and value for its customers as well as higher profits. Weak trade- mark legislation has
allowed British supermarkets to sell close copies of manufacturers’ brands. In a relatively
small, cohesive market food retailing soon became concentrated in a few large hands.
But own label is no longer just a British phenomenon. Across Europe, its share of food
retailers’ sales is rising steadily. This trend has further to go: for example, Promotes, a large
French food retailer, plans to boost its own-label sales from 17% to 26 % of its total turnover
in the next two years. And supermarkets’ own –label products are now challenging some of
the world’s most powerful brands. In America, private label was long regarded as a cheap
and nasty generic substitute for the real thing, rolled out by retailers during recessions and
discarded once the economy picked up again. But no longer is that so. Private- label good’s
share of total supermarket sales of packaged groceries increased to 19.7% by volume in
1993, from 15.3% in 1988, according to IRI, a market research firm. Just as importantly, the
growth came from premium private label- goods that compete in quality with manufacturers’
top brands; the share of cheap generics is tiny and declining. Several American supermarket
chains have decided to increase or upgrade their private- label programmes, and some of the
industry’s largest firms are making the fastest progress. Mark Husson, of JP Morgan
Securities, a stock broker, reckons that by the end of the decade private label will account for
27% of American supermarket sales.
Questions:
Q1. Explain the position of super markets in deciding the quality generics in private label
goods.