Private label or house brands refer to products manufactured by a third party, exclusively sold by retailer under their own brand name. Demand for private label products have witnessed significant growth in the FMCG (Fast Moving Consumer Goods) sector, driven by high inflation and fear of recession. Consumers are tightening their budgets, opting for more affordable alternatives, and searching for offerings that provide value for money. Several projections indicate that private label penetration will surpass branded products within five years. This article explores key factors that contribute to the success of private label in the FMCG industry.
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Table of Contents
Strategic Sourcing
Prior to sourcing products, companies must first recognise the role of private labels in their businesses. The initial phase involves conducting market research on the target market segment, including their consumption behaviours and spending habits. Subsequently, it encompasses identifying gaps in the market and defining the attributes of the product category. Then, determine the product with demand and profit potential, steering clear of those with low margins or operating within highly concentrated market. Finally, evaluate how the products could offer value to the target consumers in terms of uniqueness, superiority and affordability compare to national brands. Strategic sourcing entails extensive long-term planning, ensuring that procurement activities are align with a company’s goals and objectives. It necessitates a comprehensive approach which considers factors like cost, quality, innovation, and risk management. Given the volatility within the FMCG sector, it is imperative for companies to adopt short-term planning cycles, anticipating developments in the upcoming weeks During shortlisting of manufacturer, companies should perform comprehensive background checks on their financial stability, verify their credentials and assess their reputations. A trustworthy supplier with track record of ethical business reduces risk of fraud. At the same time, companies must not neglect manufacturer’s production capacity, quality control procedures, adherence to regulations and pricing. Suppliers should be chosen and managed based on their potential for establishing long-term partnerships and contributing to value creation.
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Cost Efficiency
Characterised by its fast-paced nature and cut-throat competition, cost efficiency is the primary motivator driving private label procurement within the FMCG industry. The procurement team must possess the ability to negotiate favourable terms that aligns with the best interest of their company. This involves understanding market dynamics, supplier capabilities and leveraging purchasing power. Companies could negotiate for discounted rates by consolidating purchases and buying in larger quantities, capitalising on economies of scale to minimises per-unit expenses. Extended payment term provides financial flexibility. Companies could optimise cash flow to free up funds for other strategic initiatives. This approach maintains healthy liquidity while reducing reliance on short-term financing. Beyond transactional engagements, establishing long term partnerships with suppliers is critical. Regular communication and cooperation on joint initiatives foster mutual understanding and trust, potentially resulting in preferential pricing and access to new product offerings. With fuller control over the supply chain and eliminating licensing and marketing expenses, companies could sustain their pricing strategy to attract budget-conscious consumers. They also gain flexibility to respond to market fluctuations, adjust prices according to demand, and implement promotions without compromising profitability. Price remains a leading factor influencing consumer’s choice and a fundamental differentiator and cornerstone in a company’s purchasing strategies. However, to attain success with private labels, companies must also prioritise delivering an exceptional customer experience. At the same time, they also need to be mindful that consumers are unwilling to compromise quality for affordability.
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