eli5, how do “store brands” work?
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Yeah I worked at Tate and Lyle sugar company for a little while and the exact same product was getting bagged up as Tesco own, it’s a very common thing
Sorry can’t really explain the why’s behind, just something I always thought was funny
manufacturers get a guaranteed sale in bulk as long as the store brand does not advertise their source on the new label.
other perks for the manufacturer may be lowered quality, food batches missing an ingredient, or simply overstock.
Answer: Stores make a nearly identical product to the “name brand” and then don’t have to spend any money on advertising because the product is already advertised by the name brand and they stick the store brand or “generic brand” right next to the known name brand. They even double piggyback on the advertisement of the name brand by saying on the label “Compare to [name brand].” They also typically use a factory which is fairly close to them to produce the store brand so shipping costs less. They can then charge you less for the same product because they save on the advertisement and shipping cost.
Depends a bit on the product, but often you get one product sold as many different brands, because the people that own those brands are all buying from the same factory.
A major brand of paper towels might have contracts with a lot of different paper mills, and have detailed specifications about how those paper towels are made so they’re all consistent with each other. This might mean paying tens to hundreds of thousands of dollars on modifications to the equipment, as well as the downtime to switch everything over.
A store brand might not care as much about having the pattern embossed into the paper all match each other, they can just use whatever the factory already has. So they get a better price because the factory doesn’t have to change their process to fill the order. They just print a different label.
In other cases, like table salt, the brand name might be literally identical to the store brand, and the store is only saving on the advertising costs of the major brand.
Stores contract with manufacturers to make product specifically for them, usually at a cheaper rate.
Some ways that they get a lower cost:
sometimes the food manufacturer is not the same as the brand name one. sometimes this is cheaper.
sometimes its the same, but volume agreements are negotiated leading to a cheaper price. sometimes the same, but the packaging is cheaper, or the ingredients are cheaper.
usually this provides little margin for the main manufacturer, but it keeps the lights on/machine running when its very expensive for machines to be down.
sometimes its whats called a ‘copacker’ and they usually do the packaging in place of a manufacturer actually producing it. for them, its a matter of replacing the packaging/labelling and continue producing. ive seen very little difference in product (brand v “generic”) when its made by a copacker.
source: i work with copackers, private labels, and brands for some of these products
Often referred to as “white labelling”.
Manufacturer produces a product, for half they apply their own branding. The other half has another branding applied.
It’s sometimes more about volume of sales rather than price per unit.
I.e if Big Co beans sell for 90p a tin but CrappyMcCrap Beans sell for 50p that’s a huge gulf between the pricing but if CrappyMcCrap outsells Big Co Beans at a rate of 100-1 then its a tidy profit.
The benefits are, those people that have brand loyalty pay the extra but those on a budget get what they want and the manufacturer makes their money either way (as does the retailer).
Other comments have covered the basics, but to expand: a place like Total Wine puts their house labels at eye level, and most everything else above and below (when they can). Tito’s, literally the #1 selling spirit in the US, is placed on the bottom shelf. They will mimic labels of popular brands as well. I had to merchandise those stores during Covid, and if a customer asks for, say, Don Julio (random example), they will try to talk you into their house brand version. Their floor reps are incentivized to sell them. About a quarter of the products at Total Wine are in-house brands, FYI.
There are companies called contract manufacturers or “white label” manufacturers that make particular types of goods. A store chain can either go to them with a recipe to make, work with them to develop one, or just have them package an existing product they make.
So maybe Costco goes to XYZ Baking Co. with a specific recipe for a chocolate chip cookies they want to sell under Kirkland brand. Wal-Mart goes to XYZ Baking Co. with a request for a 1lb. package of chocolate chip cookies that costs $1 or less to make, so they can sell for $2. They collaborate to develop the recipe that can hit that price point.
So one week the plant churns out the Kirkland cookies, the next week they make the Wal-Mart Great Value cookies.
These same plants may even make cookies for big name brands, too, when there are surges in demand (maybe Oreos get really popular due to a TikTok challenge), need for specialized baking equipment, need capacity for limited run products (say line of Christmas cookies), a way to reduce fixed costs by outsourcing, etc.
Same process plays out for all the various store label goods, whether cleaning supplies, ketchup, bacon, canned vegetables…
It’s a way of extracting more profit out of a single product, by selling to different market segments at different prices.
If there is only one price for beans, then the manufacturer has to trade off between volume produced and profit per tin.
For example, as a group, “beans customers” might be willing to buy 100 tins at $1 each. If the price is $1.10, let’s say that twenty fewer people will buy beans, which means they can sell 80 tins at $1.10, Let’s also say they can sell only 10 tins at $2, to the people that really like beans and are willing to pay that price.
If each tin costs $0.80 to produce, the profit earned on all the sales in each case is 0.2 times 100=$20, 0.3 times 80=$24, and 1.2 times 10=$12. So the manufacturer will choose to make 80 tins, and sell them at $1.10, because this is the most profitable price and sales volume for them.
But, if the manufacturer can sell branded tins at different prices with the same product inside, they can make more profit.
If they price “bargain-beans” at $1, “decent beans” at $1.10 and “fancy beans” at $2, and buyers believe that the products are different quality, then they will be able to make more money. This is because they can sell more beans in total (to the customers who can’t afford $1.10, but can afford $1), and also sell some of their beans at a higher per-tin profit than the earlier optimum price (to the 10 customers who are willing to pay up to $2 for beans).
The products are often slightly different, to justify the different branding, but the perception of what a product is worth is largely psychological rather than based on the attributes of the product itself. Nobody’s out here buying all three kinds of tinned beans and comparing them – life’s too short- so people often use price and presentation as a mental shortcut for quality, and assume that they are getting better because they are paying more.
When it comes to apparel, it is rarely the manufacturer and store working together. It is usually an agent who is coordinating the private label program, and the cost savings is because there is zero advertising from the agent or factory side, it is all on the retailer to push brand. Retailers don’t want to buy directly from factories because they would have to do all the due diligence like making sure there is not slave or child labor, safety testing, etc. It is better for them to have a large agency partner who assumes most of that risk/liability. And also handles paying factory so retailer doesn’t have to pay for goods until after they are on shelf. Source: former sales rep for clothing companies that sold large national and regional retailers.
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