Source: Deloitte & Touche USA LLP - United States Many suppliers are losing brand equity. Consumer purchases are increasingly driven by price instead of brand loyalty. Most shoppers see only minimal differences between higher priced nationally branded goods and the more value-oriented private labels from retailers. Between 1998 and 2002, supermarket sales of store brands increased 18.4 percent to $42 billion. Sales of national brands increased only 11 percent over that same period.

Manufacturers face the significant challenge of convincing consumers that their branded products have unique value that is worth seeking out. Some branded food companies are already being singled out by analysts for their weak earnings figures that in part are said to result from charging more than private label brands. One response has been to increase promotional activity to narrow the gap between the manufacturer’s retail prices and those of private label products.

These brands are even more popular in Europe, representing 41 percent of sales in the United Kingdom, 31 percent in Germany, and 25 percent in France, according to ACNielsen. In Europe, Wal-Mart’s private label goods make up half of its sales, compared to a quarter in the U.S. Further, Wal-Mart is said to be expanding the private label products in its German stores by 20 percent in 2004.

The attraction of private label used to be simply lower cost, but manufacturers of private label continue to improve the quality of retailers’ brands. A national Gallup survey done for the Private Label Manufacturers Association (PLMA) found that 70 percent of U.S. consumers consider store brands just as good as manufacturer’s brands in packaging, value, taste and performance. Additionally, U.S. retailers have become effective marketers of own-label products, developing customized brands that fit with regional/local tastes.

Private label has made particularly strong inroads in products that are viewed as basic. Eggs, cheese, bread, soup and soda are areas where private label has excelled. Private label, however, is growing strongly at the premium level, where nationally branded products have traditionally dominated.

House brands give retailers an identity in crowded markets, a higher return on sales, and better operating economies. Because private label brands carry little or no marketing costs, this gives retailers another advantage over branded manufacturers. Further, retailers who sell private label have gained negotiating strength to demand better terms from suppliers. This makes life more difficult for manufacturers, but can increase operational efficiency and product innovation. Manufacturers might want to consider responding to the growth of private label by investing in research and development that will produce innovative products for consumers and maintain or increase their own brand equity.