Private Label Cosmetics: Optimizing Positioning and Product Line

Private label cosmetics are sold under a retailer's brand name and may be created by the retailer for exclusive marketing purposes.

Many different products, including cosmetics, have been widely sold through private labels. A recent Nielsen report found that private label products make up 18% of U.S. and Canadian retailing markets and over twice as much in Europe.

Optimizing Positioning

While refrigerated food is much more prevalent as a private label product, cosmetics comprise 5% of the private label market. One of the key factors that makes these products stand out is pricing. Private label products are priced 31% lower than national brand (NB) equivalents on average. For cosmetics the average price differential can be as much as 46% compared with 16% for refrigerated food.

While some retailers position their private label brands as premium, most take advantage of discount opportunities. Premium products are not always needed when products of lesser quality sufficiently satisfy an existing market. The main reasons for retailers to launch a private label brand are to segment a market and to strengthen the retailer's bargaining power with suppliers and manufacturers of competing products.

Segmentation is a strategy of dividing a market into segments to provide certain consumers with alternatives, creating extra competition that reduces market shares, levelling the playing field. Strengthening bargaining power with suppliers is a priority for more aggressive players. They may know from in-house research that demand exists for a particular national brand, but more because of the product quality than loyalty toward the brand. They may also find that certain sectors of a market want a certain type of product that national brands do not provide.

The introduction of private label products affects the supply, which makes pricing more competitive and attractive to consumers who are struggling financially. Lower pricing can make a private label brand appear heroic to consumers shopping for bargains. By increasing industry surplus, private label brands can create market disruption. Positioning partly depends on product quality. If a PL product is comparable in quality to that of an national brand product, then the private label product can be positioned as the better deal for the consumer.

Competitive Dynamics

The process of determining competitive pricing between private label and national brand products for retailers follows this pattern:

retailer decides private label product quality
NB marketer offers a non-linear tariff
retailer sets a retail price

The retailer controls the quality of its brand, which can lower the demand for national brand products if it meets customer satisfaction. If the national brand marketer does not react and keeps its prices higher for the same perceived quality, it opens the door for the private label retailer to gain a competitive edge.

Access to retail shelves can be a concern for the national brand producer when a market is cornered by private label retailers. In some cases the private label retailer may choose to market a premium product if the quality clearly compares with that of national brand products. The retailer must first weigh whether or not the profit margin is worth the investment.

When an national brand producer locks into contracts before private label positioning occurs, it allows the retailer to have the advantage of deciding on whether private label quality can be a factor. Both modes of private label strategies allow the private label retailer to set different prices for different types of consumers.

Studies show that strategic positioning of private label products affects the bargaining associated with supply terms between the retailer and the national brand producer. One of the effects of private label positioning is the decrease of differentiation in product category. Researchers have also found that private label and national brand products are always supplied to meet market demand.

A 2006 study by Avenel and Caprice found that national brand producers prefer to deal with retailers of both national brand and private label products when the goods are similar in quality so that it can affect private label retailer profits.

Private label Bargaining with Suppliers

Some private label retailers may use their private label brand as a strategy for buying national brand products at lower levels so that they can increase profit margins. Suppliers gravitate toward developing two product types: one that's innovative and widely advertised and another that's a lower-priced alternative that is not expected to sell as well. The strategy of suppliers developing two different items for the same product category allows them to work with retailers at solving quality inefficiencies.

Private label retailers can play an influential role when national brands fiercely compete against each other. Once the private label retailer evaluates the product quality of both brands and can provide a sufficient substitute at a lower price, it can gain bargaining power with suppliers for putting national brand products on shelves and lower costs.

Conclusion

Both quantity and quality of private label cosmetics that challenge national brand products can affect a retail market. A retailer has the advantage of setting prices competitively for its private label products according to the established quality of national brand competitors. Retailers can gain further competitive advantages by using the success of their private label cosmetics brands to negotiate with suppliers costs of national brand products.