If you have been paying attention to e-commerce as of late, you might have noticed there were (and continue to be) massive supply chain shortages and delays within the past year. Closures, deficits, and delays due to the Covid-19 Pandemic have made retailers resort to getting creative. Within the last year, private labels have made an enormous leap, while other retailers have been floundering.
Oxford Dictionary states that Private Label means "Denoting a product manufactured or packaged for sale under the name of the retailer rather than that of the manufacturer." Generally, companies who take the private label route make a more considerable profit margin. When a retailer creates a private label, it removes the need for middle distribution. The private label holder sets the goods' costs because they go straight from the manufacturer to the shelves. They also have better control of the supply chain, allowing for a grasp of shortages and product availability. Working with a third-party supplier means you are not privy to total inventory numbers.
If you haven't invested in private labels yet, here is how you can benefit from this 2020 trend:
Pivot Products to Meet Customer Needs
When retailers have more control over their sellable products, they can regulate what gets made, what gets sold, and how much a consumer will pay for it. This regulation means they can perfectly curate a product line based on a specific customer base. Whether you are listening to customers through social media, surveys, or just simply following the purchasing data, you are in control. It's not about what your suppliers are offering; it's about what you as a company are offering.
Improved Margins and Vertical Integration
Supply chains are naturally built into vertical integration, which is different for each company. When you tighten your vertical integration, it leads to higher profit margins. The Motley Fool recently reported, "Grocers' margins on outside brands' packaged foods, for instance, are on the order of 1% of its sales price after all related expenses are paid. Margins on private-label packaged foods, though, are between 25% to 30%, according to data from CB Insights." It also says that more consumers than ever are reaching towards private label products. The Motley Fool reported that 25% of US consumers' average shopping cart, regardless of their age, consists of private-label goods. So, not only are retailers making a higher profit margin, but they are also selling a higher volume of products.
Customer loyalty is crucial for every industry. Marketing Metrics states that the probability of selling to an existing customer is up to 14 times higher than the possibility of selling to a new customer. Bain & Company and Harvard Business School report that "increasing customer retention rates by 5% increases profits by 25% to 95%."
It's no secret that customer loyalty is profitable. Although it does take time to build up brand identity and create loyalty around that brand, it does pay off.
Private label is more positioned towards customer loyalty for these reasons:
- Responds quicker to customer feedback
- The same quality of name brand images with about 20% cheaper price
- You're destined to sell more if a consumer trusts your overall brand
- Less likely to have supply chain headaches
These points are not possible with a 3rd party supplier. For example, even though customers love a specific brand and often buy that brand from a particular store, the manufacturer selling it usually controls the pricing and inventory. When retailers can manage the product, they have more control over these elements. Control means communication and quick-to-pivot solutions to ensure continued customer loyalty.
More Control Over Inventory
As mentioned above, more control over inventory leads to better customer service, but it helps in more ways than that. When you have more control of your merchandise, you are setting your entire company up for success. When you control your inventory, you also have more control over your shipping, the product positioning on the shelf, the profit margin, and the overall ability to keep supply chain bottlenecks few and far between. More control over your inventory means more control over your business.
Naturally, not every product in your store is going to be a private label product. It is best to choose one product from each department to turn into a private label and use the data to move forward if you are starting. If no one is buying your private label show, but you can't seem to keep the sweatshirts on the shelves, then it's time to expand that product line. You can also invest in focus groups and your current loyal customers to learn what they will want to see on your shelves. Whichever way you choose to take the private label plunge, we wish you nothing but tremendous success!