Is Private Label Merchandise Right for Your Retail Store?
Products (or services) which are generally manufactured or provided by one company under another company's brand are known as private-label. Commonly referred to as OEM products (Other Equipment Manufacturer) these items can add major margin to your store and, if done right, give your store a credibility and trust with shoppers.
The chances are, you have bought a private label product sometime in your life. Whether it was the bottle of ketchup at the grocer or the pills at your pharmacy or the shirt at Target; the truth is people have become very comfortable with private labels and "generics."
Even in my small shoe store chain, we used private-label. Each time I attended a trade show or buying event, I would seek out opportunities to create my own label. Here are some of the benefits of private label.
- Increased Margins. Typically, since you are bypassing the "brand" name, there is no added cost for the vendor. After all, A vendor must add some cost to their products to help promote its brand name to drive people to your stores to buy it. Funny thing is, you are actually paying for the traffic.
- Reduced Competition. If you are a retailer who matches prices (and who doesn't these days), then this one is a great benefit. We would get the vendor to a make us the same shoe but without their label on it. Then we could still charge full price for our shoe when the competition put the branded version on sale.
- Brand Builder. With your own products, you can build your brand. In my shoe stores, we created our own labels for the findings (items like polish, shoe trees and cleaner) for the shoes. We simply bought the products without labels and then attached our own when they came in the store. The vendor was well aware of what we were doing and fully supported it. I have seen retailers try and put their label on the top of another brand. That is not legal or ethical.
- Compensation Booster. I used to run sales contests and spiffs on the private label products. Since I had more margin, I could give more money to the sales team. I ran contests and spiffs on these items versus the branded ones. Even after paying out the incentives, I still made more margin than the branded version My stores were non-commission, so having an added incentive was important, and this is the best one we used.
- Customer Loyalty. If the customer loves the product, they will want more with that label inside. And the only place they can buy it is in your store. In a retail world where loyalty seems to be dead, this is one way to fight back.
Of course, it's not all roses with private label. There are some drawbacks as well.
- Dead Inventory. Sometimes you make a bad choice and then you are stuck with it. With branded merchandise, you can get a return authorization, but with private-label you're stuck.
- Minimum Orders. Most manufacturers will require a minimum quantity in the order before they will consider. And often times (actually most times) this is a lot more than what you would normally buy of that SKU. Try and be creative when ordering and see if you can get some extended dating on the purchase.
- Co-op Funds. With your brands, you get access to co-op funds to help you promote and advertise. With private label, you do not. Plus you also have to deal with the hurdle of putting a brand in the paper no one has ever heard of. Don't try and educate the customer on the private label. Just set it next to the brands and treat it as an equal.
Private label or OEM merchandise can be a great benefit for your store, but it does have some risks. Start slow. Ease into it. Test the idea with one or two products versus a whole line of items. There are still many customers who prefer the brand. In fact, the brands spend millions of dollars to convince them that the brand is better than a generic or private label. So, be careful and conservative. It can work for you if you move slow and steady.