Can CPG Makers Balance Sales of
Name Brands and Private Label?

By Lynne Cooke

Food makers take note: Producing both private label and name brands – called “dual-tracking” – is a fairly risky strategy. Yes, it can pay off, but only if the private label part of the business is economically viable on its own and is fully embedded in the supplier’s strategy.
 
That’s the warning issued by Rabobank’s global Food & Agribusiness Research and Advisory group. A special report looks at the growing private label market, especially those produced by food suppliers that also make “B-Brands,” which are second-tier brands that lack real traction with consumers.

Rabobank’s report predicts that private label goods are set to double their market share to half of all goods sold in supermarkets by 2025. This presents a particular challenge for second-tier brands. The report said these brands already suffer from overcapacity and being able to make the most efficient use of their assets, which is critical to their profitability. As a result, they will have to focus on cutting costs and finding new strategies to maintain production capacity.

One option, the report offers, is to consider producing private label products as well. Why? It’s a way to make the best use of their facilities. By locking in new private label supply contracts, these supplies may be able to offset – or at least alleviate – the pressure on their branded production volumes.

However, while this may work in the short term, it is not as straightforward a strategy as it might appear, says Rabobank analyst Sebastiaan Schreijen. In fact, it’s risky.

The danger for those that adopt a “dual tracking” approach is that they weaken their bargaining position in relation to their branded products, which rests on the information asymmetry between supplier and retailer as to the supplier’s cost base, pricing structure, and innovation pipeline. Private label suppliers have to disclose more of this information, so dual trackers may find their negotiation position undermined with potentially detrimental impact on their profitability levels and brand power.

"Dual-tracking can pay off but only if the private label part of the company is a viable business in its own right and is thoroughly embedded in the supplier's organization," stresses Schreijen.
Schreijen outlines a number of strategies to make dual-tracking work:

  • Firewalls: By using completely independent sales teams, activity-based cost accounting or splitting the branded and private label businesses by geography and/or market segment, the brand and private label production can coexist. This allows the dual tracker to benefit from the economies of scale, but making it difficult for food retailers to back them into a corner.
  • Opportunistic: Brand suppliers may fill spare production capacity on an ad hoc basis. This makes it difficult for a food retailer to get a grip on the dual tracker, but it can increase earnings volatility.
  • Defensive: A private label specialist may be using fancy brands to augment the overall product offering and facilitate the needs of specific customers. Typically, the supplier is not supporting these fancy brands with any marketing effort.
  • Category Management: Consumer knowledge of the brand supplier may prove a valuable asset in order to maximize the shelf return for the food retailer by offering different price points, creating a win-win situation for both retailer and brand supplier.

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                                                                               March 2013
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