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Own trade mark (OTM) is a brand owned by the structure that sells it. They can be created by both individual retail retailers and cooperatives and purchasing unions of chains, regional associations of wholesale and distribution companies, and large importers.
Own trade mark (OTM) is a brand owned by the structure that sells it. They can be created by both individual retail retailers and cooperatives and purchasing unions of chains, regional associations of wholesale and distribution companies, and large importers.
Pricing and popularity among the consumer audience of these goods is largely determined by national characteristics, quality of life, consumption culture, development of national brands and many other reasons. In Europe, private label penetration is highest in Switzerland, Great Britain, Germany, Spain and the Netherlands, where the market share of such products in value terms exceeds 30%. At the same time, in terms of volume, their part is even higher, since the difference in price between private labels and analogues of well-known brands on the western market is 30-40%.
Despite the fact that from year to year retail chains declare the development of private brands as one of their priority tasks, today the share of these goods in the revenue of domestic retailers is much lower than in other countries. There are many reasons for this: starting from solving such a difficult task as producing high-quality products at a low price, and ending with the no less complexity of its promotion. In addition, minimum batch restrictions make such products available mainly to federal chains, purchasing unions or regional associations of small retail chain stores.
The advantage of private labels in price is on average 25-30%, and in the non-food category the difference can reach 40-50%. This fact significantly reduces their attractiveness for the retailer.
Benefits of working with private labels
When deciding to launch a product under its own trademark on the market, the retail chain pursues the following goals:
1. Increased loyalty to the network. In this case, the product under the private label is designed to better meet the needs of price-sensitive buyers. All economy class brands are focused on this. Image products are designed to fill niches in the product range and maintain the loyalty of regular customers. As a rule, the name of such brands is consonant with the name of the chain store. Innovative products Products are produced in accordance with the latest market trends and trends and are intended for those who like to experiment, try the unusual.
2. Growth in profitability. As mentioned above, most of the goods produced under its own trademarks, regardless of the price segment, positioning and tasks, allow the chain to increase profits. This goal is achieved through high sales volumes and optimization of the production process and logistics on the way from the factory to the final consumer.
3. Guaranteed quality. As a rule, federal retail chains pay great attention to quality control issues for products manufactured under private labels, starting with the formation of technical specifications for the product and packaging and throughout the entire period of manufacture and sale. Compliance with all the required measures is a laborious and costly process. At the stage of formation of the production of "own" goods, retailers assigned the responsibility for quality control to the employees of the private label development department, which most often turned out to be ineffective due to the workload and low competence of managers in purely technical issues. Recently, federal and even some regional networks and associations are paying more and more attention to the quality of their products, creating special services for this or attracting highly qualified specialists for outsourcing.
Guaranteed product availability.
Control of all stages of the production process allows you to optimally schedule the release of products and ensure a sufficient amount, taking into account the seasonality of sales and planned promotional activities. This protects the network from possible interruptions that could arise when working with the manufacturer's brand.
It would seem that the advantages are obvious. However, when drawing up an economic model for working with products under a private label and comparing it with the sale of branded goods from a manufacturer, a retailer incurs a number of additional costs. In order to estimate these costs, let us consider the full cycle of work with private labels, starting from the development of an idea, a name, and ending with the disposal of unused packaging.
Production costs
When working with the manufacturer's brand, the supplier comes to the retailer's office, agrees the price and promo plan, provides a deferred payment (commodity credit), delivers the goods to retail outlets, assists in merchandising, at his own expense and carries out marketing campaigns on his own, pays a trade bonus ... One drawback is that the products are presented in all competing chains, and the retailer is forced to keep a low margin.
In the case of private labels, the markup can be 15 or even 30 percent higher. But they are successfully "compensated" by additional costs. The entire process of launching a new product under a private label takes from six months to a year and includes the following steps:
Defining a private label strategy, name, logo Forming a concept, strategy, creating a logo for your own brand is an important and expensive task that a retailer usually entrusts to a marketing agency. The costs of developing the brand of the chain are transferred to all products released under the brand name. Selecting a product category for a product release. As stated above, private labels are designed to best suit any of the needs of a potential audience. Be that as it may, in order to form an optimal price offer for a non-unique product, it is necessary to obtain the lowest price from the manufacturer, and this is possible only if the product has large sales volumes and the buyer is not sensitive to the brand. In addition, it is desirable that there is no clear leader in the product category. According to research carried out by Nielsen and analysis of private labels of leading retail chains, the most attractive sectors in this regard are dairy products, groceries, confectionery, juices, water, beer, alcoholic beverages, as well as paper products, personal hygiene products and household chemicals.
More than 90% of private labels turnover falls on generic trademarks (names of which are not associated with the brand of the chain or manufacturer) and imitators (umbrella brands). At the same time, a large share of private brands is concentrated in the “economy” class. In recent years, they have begun to actively develop in the middle and high price segment, but their level of penetration is still insufficient.
Development of a product launch strategy to the market To date, experts identify three main strategies for the development of their own brands:
Dumping. The most common strategy, since in the conditions of market stagnation and expectations of a recession, most consumers remain quite sensitive to the price of goods with acceptable quality.
Substitution of a competitor. A more sophisticated approach that focuses on the tastes and established preferences of the buyer. The challenge is to replace flagship products in those categories where brand habit is not important when choosing. As a rule, this strategy is implemented in stages or in case of significant disagreements during negotiations with the sector leader. The path is quite risky, since it is not possible to avoid a decrease in the level of sales in quantitative terms and a certain loss of loyalty even if a competitor is completely replaced in terms of profitability.
Brand expansion. The strategy, the essence of which is that the customer's loyalty to the name of the retail chain is transferred to products under their own brands. In this case, private label becomes a full-fledged brand, which allows it to be positioned as a direct competitor to a popular manufacturer in the same price segment, and over time it can go beyond the network.
Based on the chosen strategy, the rest of the requirements for the product are formed.
Development of technical specifications and packaging design. Certain costs are associated with the involvement of specialists in the establishment of the technical specifications of the product and the design of its appearance.
Holding a tender for production. In principle, this stage does not require any special costs. Various retail chains hold open or closed tenders. But after agreeing on the terms on the price and production volumes, it is necessary to conduct a study of the production capabilities and reliability of the supplier, and this is already associated with business trips, the involvement of specialists and, as a result, with additional costs.
Purchase of raw materials and components. As a rule, after agreeing on the commercial terms of production, the supplier can only reimburse the money spent. In this case, the cost of purchasing raw materials and packaging falls on the shoulders of the retailer. The main problem with the release of goods under a private label is that in order to obtain a competitive price, it is necessary to purchase raw materials and components in large batches, which leads to large advance payments, storage of containers, and sometimes large quantities of products, payment of credit (instead of a commodity credit in in the case of work under the manufacturer's TM).
Then there are the costs associated with product promotion, merchandising, regular quality control, and the eventual disposal of leftovers.
Another significant cost item is logistics. In the production of goods under a private label, the entire logistics chain from the factory to the store counter is taken over by the retailer, and this, depending on the product category, can be very costly.
Let's estimate the total costs: trade premium - up to 10%;
advertising, placement in places for additional display, price promotions - up to 15%;
logistics costs and merchandising - 2-5%;
funds for launching a project, purchasing raw materials, quality control, disposal of residues - 2-5%.
Hopes and fears
What does the manufacturer expect and what is he afraid of when releasing a product under a private label? There are several logical explanations according to which an enterprise can start producing goods under the private label of a retail network:
gaining loyalty of the network in order to introduce or expand the product line under its own brands;
advertising of their brands and themselves as a manufacturer by associating in the mind of a consumer with the name of a retail network; loading of production facilities;
optimization of logistics in the supply of their products by increasing supplies to the vehicle; receiving guaranteed and timely payment for the goods;
additional income.
The main concerns of the manufacturer are related to the possibility of incurring losses. They are due to the fact that the economic model of enterprises differs significantly from the western one.
In Europe, private labels are issued by companies that initially built their business on the principle of exclusively working with private brands of the chain and were thus spared from the organization of an extensive sales and distribution system. They do not need marketing and sales departments - by the way, quite costly - otherwise these costs are included in the cost of goods. Thus, the European manufacturer can ensure the supply of products of acceptable quality at a reasonable cost.
The manufacturer's risks are as follows:
To receive a loss from cooperation due to the need to provide the retailer with a price lower than the full cost of the product.
To become dependent on the seller due to the fact that when the production is reoriented towards the production of private labels, it will be necessary to reduce commercial divisions and the active sales department, as well as abandon the customer base accumulated over the years. In case of termination or termination of the contract with the network, it will be impossible to quickly restore the volume of sales, which will inevitably entail serious financial losses.
If a retail chain insists on the release of an "umbrella brand" similar to the TOP positions of its own assortment, there is a danger of substitution and displacement of its products.
A win-win move
A huge number of manufacturers strive to supply retailers with private label products. How to get the desired contract? There is a simple and effective rule: you need to understand what the retail chain's private label manager is guided by when making a decision and make him an offer that you yourself would accept if you were in his place.
Assess the retailer's needs: analyze the market and range of the network; evaluate the network strategy when working with private labels;
formulate the requirements for the product required for the network. Weigh your own strengths and capabilities: check if you can conduct a product with the required characteristics at the required price;
objectively assess your production capabilities: will you be able to supply products in the required quantity without prejudice to the existing sales volume; indicate the need for financing the project and determine the sources of fundraising;
identify suppliers of raw materials and components and make sure of their reliability and readiness to provide everything necessary for the production of private labels;
Calculate the cost of production before and after the launch of your private label project. Track how the increase in volume affected the cost price. Develop a cost reduction program;
compare the economics of a contract in cooperation with your brand and private label network;
formulate what goal you are pursuing;
assess your risks and, if they are significant, draw up a program to reduce them.
Make an offer that will be beneficial to both the retailer and you, and make it without waiting for the tender to be announced. Your offer will become significantly more attractive if you:
conduct preliminary research on your own;
simplify the quality control procedure or take on some of the costs;
minimize network costs for the purchase of raw materials and packaging and storage of finished products;
distribute a package of additional services provided to your trademarks and private label networks.
The proposed operation algorithm can be effectively implemented for domestic manufacturers. The weakening of the rate of food supplies at the beginning of the year reduced the competitiveness of foreign goods. Nevertheless, the emerging tendencies towards a drop in supplies, an increase in prices for imports of food products from European countries and the orientation of a number of Western enterprises towards the production of private labels for European retailers makes cooperation with retail chains in the production of private brands and their own imports promising.
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