2024-03-13 21:03:00
Hello.
More and more private labels (private brands) are appearing in Russian retail; we can see such brands in completely different areas, from food to electronics. There are many misunderstandings around private labels; there are stereotypes that these are necessarily first-price goods, the cheapest products, which, of course, is not the case. Another cliché is that private label must be created by a retail network, and if someone else does it, then we are talking regarding OEM. Let’s try to understand everything using examples, I hope that following this material you will have an idea regarding the quality of private label brands, their tasks and how they can differ.
Let me start with the fact that private label in the English-speaking world is called private label, these words have exactly the same meaning, there are no differences here. As a rule, a private label is created by a company that has its own sales channels, benefits from their presence and knows its customers. There is no difference in what channels of product sales are retail or wholesale. Therefore, the myth that a private label can only belong to a retail chain does not stand up to criticism; a company that is focused on wholesale sales can also create its own brand. The only difference here is who you are selling to. Another fundamental difference is that the retail chain, as a rule, does not supply its private labels to other players, and the latter are not interested in this. While the wholesale player, on the contrary, supplies its private labels to all interested clients, saturating the market with them in all possible ways.
Let’s look at examples. The Eldorado retail chain launched the Hi brand in 2019, replacing the Elenberg private label. The story of Elenberg is remarkable in every sense, as it describes the life story of the classic STM. In 2019, this brand was registered in the UK, but the goods were supplied and sold only in Russia in the Eldorado network; later the equipment appeared in neighboring countries.
Various products were presented under the Elenberg brand – teapots, coffee makers, small and medium-sized household appliances. When choosing equipment in Chinese factories, they were guided by the minimum cost; these were first-price goods. Direct deliveries, the absence of an intermediary – all this made it possible to achieve noticeable margins for the retail network. By 2006, the Elenberg brand accounted for up to 10% of equipment sales in the Eldorado network. There were even attempts to produce telephones, but the experience was unsuccessful.
In 2011, Eldorado’s strategy changed; the owners of the retail chain decided to completely abandon private labels so as not to associate themselves with goods in the first price category. This is how the Elenberg brand disappeared; today, spare parts for old equipment are produced under it; you can even find discounted goods, for example, teapots. They were collecting dust somewhere in warehouses until they were found during the next inventory.
Sometimes, following the death of a private label, a brand is picked up by completely foreign companies and parasitize on it. There are many examples of such parasitism, but the most striking is the second life of Vertu following bankruptcy in the UK. In China, the company’s stores are open and new models are being released. One of the Chinese companies simply decided that this was a great option to take over someone else’s brand. There was simply no one left who might make a claim, because the original Vertu went bankrupt. Of course, Vertu is not a private label in any sense, but this is an excellent example of third-party companies parasitizing on other people’s brands. When a complete copying of a company name occurs. And this is not the same case as partially copying the name of an existing company (Abibas and Adidas are good examples of this approach).
Let’s look at an example of a private label that belongs to a wholesale player; for example, let’s take Trinity Falcons (TFN, as many call the company, today many know it as the TFN group of companies). The company’s own trademark is simply called TFN. Under it, many different accessories are produced that can be found at gas stations and in various retail chains. For example, in the summer I talked regarding charging stations under the TFN brand. There are no restrictions on sales channels here, since TFN is not a competitor to different retail chains and they choose this product along with others. At the same time, TFN’s portfolio also includes brands that directly compete with private label products; the same Anker produces external batteries of one kind or another. But there is no internal conflict; rather, this is a plus for TFN, as they expand their offer. Retail players have exactly the same approach; private label is a convenient tool for increasing sales and creating competition between different suppliers.
How are private labels created, why don’t we see advertising for such brands?
Any major retail player knows its customers well, sees what goods they come to stores for, what exactly they buy and what they may be missing. With wholesale companies, plus or minus, the situation is the same, so creating a private label to some extent becomes a simpler matter – you know what you want to get and put on your shelves. A huge plus is that, unlike any brand, you don’t have to solve the complex problem of how to get on store shelves and reach customers. You already have a shelf at your disposal. It remains to resolve the issue of quality (the level of predicted defects).
Let’s focus on terms like OEM/ODM, since there is also a lot of confusion here. OEM usually means re-sticking nameplates when a product has already been created and exists, and you buy it from a factory and then sell it under your own brand. Many private labels do the same; the degree of modification of the goods varies.
ODM refers to products whose development, for example, design, is carried out by the brand owner, but production is already located somewhere in a third-party factory. For example, a company like Apple resorts to the ODM model, does not have its own factories, but develops the design of products, their filling, sometimes even components, but then contract manufacturing begins to work (the same Foxconn).
In most cases, private label brands use the OEM model; the degree of elaboration of the goods and their changes relative to the original vary. At the same time, the ODM model is often too expensive in terms of investment in the development of new products, so this model is not applicable for private labels, and the economy does not grow together.
What does a retail network, or, to a lesser extent, a wholesale company have? Customers to whom you can offer your products. You walk into a store and see shelves (including virtual shelves in online stores). The next question is how to convince you to buy a brand unknown to you and show its advantages. To do this, you can increase the motivation of sellers to promote private labels, since your margin on such brands is higher than when selling any other equipment.
In 2023, the Russian market was discussing a new DNS strategy; within the company they relied on the promotion of private labels (most people only know DEXP, in fact there are much more such brands). The company’s partners discussed that DNS wants to ensure that up to 70% of sales come from private labels. From an arithmetic point of view, if such a goal is achieved, the company will show amazing financial results. The only question is how capable DNS are of convincing their customers that brands unknown to them are interesting and worthy of attention. The question is not as simple as it might seem at first glance. I have no examples of retail selling exclusively private labels and refusing well-known brands. And in many ways this will be a unique situation both for Russia and for the world. It’s one thing to expand the model range and gain sales outside key categories; it’s quite another thing to try to replace brands that consumers have literally known since childhood through private labels.
Typically, retail chains use manufacturers’ marketing budgets (100%, partial payment) to attract customers to their stores. You’ve probably seen many types of advertising where you are offered an interesting price for something in such and such a retail chain. And then we come to the conclusion that private labels are not advertised like that. External advertising outside of your own stores, your own website is too expensive for private labels. To promote private labels, they use store shelves (the product can be placed in more advantageous places) and the power of persuasion of sellers. And precise knowledge of your assortment, how to highlight your private label so that the buyer is almost guaranteed to choose your brand.
Private label quality – first price or price/quality ratio
One of the simplest approaches to creating private labels has always been the creation of first-price goods, that is, the most inexpensive products that have the undeniable advantage of low cost. And such a price often makes you turn a blind eye to the lack of certain features, as well as to the fact that the product may break following some time. People often think that the price is low, if it breaks in a year or two, I’ll buy something else. And therefore, selling first-price goods is in some ways easier.
It was this approach that created the perception of private labels; the same Hi brand from Eldorado mentioned above is precisely first-price goods. Which does not mean that the retail chain, which orders goods under its own brand, seeks to save money on everything and make them of low quality. This is not beneficial to anyone; by creating a private label, everyone strives to eliminate future problems and reduce potential defects to a minimum. There are low-quality products, and this happens with any company (my acquaintance with the same Bork led to the breakdown of two teapots, it turned out that they had a massive defect – following that I did not try the brand. By the way, Bork is not a private label).
Last year, MVideo created the Carrera private label; unlike the Hi brand, this brand is aimed at the middle price segment. And if MVideo-Eldorado de facto inherited the Hi brand, the new private label was created for the client of the retail chain with a clear understanding of what he needs. And the first sales of various products prove that this knowledge is converted into significant sales.
I tried the Carrera food processor, the price is 30 thousand rubles, it competes with well-known European brands. The advantage is that it has a metal base (the bolts are not an illusion for beauty) and a metal cup. And sellers in stores easily sell metal, since in the mass consciousness metal parts are more expensive than plastic ones. And, therefore, you can close your eyes to the unknown brand. At the same time, Carrera is positioned as a German brand with production in China. And it is immediately added that other brands also produce their goods in China.
Another important point is packaging. Usually they save on it, it looks familiar. MVideo knows its customers and that household appliances often act as gifts. Hence the investment in packaging that looks expensive, as if you are buying a premium product, which, of course, is not the case.
I haven’t tried products under the Carrera brand, but I understand why in company stores they can easily redirect customers from the Moulinex brand to these products (I quote the words of the MVideo seller, who described the sales process in sufficient detail, how easy it is to lure a person to the Carrera brand when directly comparing products ). This is a good example of how private label works within retail. MVideo has not yet presented an updated strategy for the next few years, this will happen later. But, as far as I understand, the bet on private labels will be made, since the Carrera experience puts us in an optimistic mood.
Second-tier brand or private label, what should the buyer choose?
An important and pragmatic question is what will be better for the buyer – purchasing a private label product or something from a B/C brand that operates on an OEM model. As always, details are important here, because the quality of goods follows not only and not so much from the name written on the product, but from the company’s approach. Heterogeneity of products is possible, since they are produced in different factories, which leaves its mark. The advantage of a private label is that the distribution network bears warranty obligations to you; as a rule, these are players who do not disappear without a trace. On the other hand, I have a capsule coffee machine from MediaMarkt that was once a gift; following the retail chain left Russia, the capsules quickly disappeared (there are substitutes, but they are of poor quality). These are the risks that buying a private label brand entails; at some point it may disappear or be left without support. But B/C brands also have such risks, so the risk is approximately the same.
When choosing such products, you need to read reviews regarding a specific model to understand what flaws it has. Or read reviews regarding previous models; most likely, new ones are produced at the same factories. There is nothing wrong with private label; the quality of goods is at the level of other manufacturers. Their promotion differs, as you understood from the text above.
PS Perhaps someday I’ll gather my strength and describe all the private labels in Russia that exist in consumer electronics. But I don’t feel in good shape for such painstaking work yet.
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