Most products are branded, but that does not mean that every kind of product should be branded. Branding is not a cost-free measure due to the added costs associated with marking, labeling, packaging and legal procedures. These costs are especially relevant in the case of commodities (e.g. salt, cement , diamonds and other products). Commodities are unbranded or undifferentiated products which are sold by grade and not by brand. As such, there is no uniqueness, other than grade differential, that may be used to distinguish the offerings of one supplier with those of another. Probably branding is undesirable because brand promotion is ineffective in a practical sense and adds unnecessary expenses to operations costs. The value of a diamond, for example, is determined by the so- called the four C’s- cut, color, clarity and carat weight, and not by brand.
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From a positive point of view, the no brand product allows flexibility in quality and quantity control, resulting in lower production costs along with lower marketing and legal costs. The basic problem with the commodity or unbranded product is that its demand is strictly a function of price. The unbranded product is thus vulnerable to any price movement or price cutting. Branding, when applied transforms a commodity into a product (Chiquita Bananas; Dole Pineapples). A product is a value-added commodity , the value added being given by the certain product attributes- physical, psychological or real or imaginary, as perceived by the consumers. Branding makes premium pricing possible because of better identification, awareness, promotion, differentiation, consumer confidence and brand loyalty.
Although branding provides the manufacturer with some insulation from price competition, a firm must still find out whether it is worthwhile to brand the product. In general, the following prerequisites should be met: Quality and quantity consistency, not necessarily the best quality or the greatest quantity. As an example, Nike’s unique designs allowed the company to differentiate its brand from others and to become the top-rated brand among serious joggers.
Private Brand versus Manufacturer’s Brand Branding used to promote sales or move products needs a further branding decision: whether the manufacturer should use its own brand or a distributor’s brand on its product. Distributors in the world of international business include trading companies , importers and retailers among others; their brands on products made by US companies, as evidenced by Matsushita’s purchases of major appliances from White.
Even though it may seem logical for a distributor to carry the manufacturer’s well-known brand, many distributors often insist on their own private brands for several reasons. First, a distributor may be able to create a unique product by bundling or unbundling product attributes and then adjusting the price to reflect the proper value. Carrefour, a French retail giant, sells some 3000 in-house products at prices about 15 percent lower than national brands. Here in Romania, Carrefour started since 2004 introducing this kind of practice in its stores in Bucharest and Brasov.
In the UK, the retailer J. Sainsbury PLC has a private brand that is able to win 30 percent of the detergent market, moving it ahead of Unilever’s Persil and just behind Procter and Gamble’s Ariel which is the market leader. It is believed that private-label products now account for one third of supermarket sales in the United Kingdom and a quarter in France. Distributors can convert fixed production costs into variable costs by buying products made by others.
Perhaps the most important reason for a distributors insistence on a private brand is due to brand loyalty, bargaining power and price. In spite of the lower prices paid by the distributor and ultimately by its customers, the distributor is still able to command a higher gross margin and than what a manufacturer’s brand usually offers. The lower price may also be attributed to the distributor’s refusal to pay for manufacturer’s variable costs , but not all. If a firm has any problem with the supplier, it has the flexibility of switching to another supplier to make the identical product , but maintaining brand loyalty and bargaining power without any adverse effect on sales.
There are a number of reasons why the strategy of private branding is not necessarily bad for the manufacturer. First, the ease in gaining market entry and dealer’s acceptance may allow a larger market share overall while contributing to offset fixed costs. Second, there are no promotional expenses associated with private branding, thus making a strategy suitable for a unknown brand. Suzuki cars are sold in the USA under the GM Sprint brand name. Ricoh’s facsimile machines are sold under AT;T’s well-known name.
Third, a manufacturer may judge that the sales of its own product are going to suffer to a greater or lesser degree by various private brands. In that case, the manufacturer may as well be cannibalized by one of those private brands made by the manufacturer. There are also reasons why private branding is not good for the manufacturer. By using a private brand, the manufacturer’s product becomes a commodity, at least to the distributor. To remain in business and retain sales to the distributor, the manufacturer must compete on the basis of price, since the distributor can always switch suppliers.
By not having its own identity, the manufacturer can be easily be bypassed. Furthermore, it loses control over how its products should be promoted- this fact may become crucial if the distributor does not do a good job in promoting the product. The manufacturer’s dilemma is best illustrated by Heinz’s experience in the United Kingdom, where consumer recognition for its brand is greater than in any other country in the world.
Whereas Campbell Soup and Nestle ‘s Crosse and Blackwell make some products under private labels, Heinz makes products only under its own brand because, as the largest supplier of canned foods there , it has the most to lose . To preserve its long-term market leadership at the expense of short-term earnings , Heinz has held down prices, introduced new products, launched big capital spending programs and increased advertising.
Heinz does make private-label merchandise in the USA, where private brands account for 10 percent of US sales. Its logic is that the slow growth of US private labeling does not pose a serious threat as it does in the United Kingdom. Clearly, the manufacturer has two basic alternatives- its brand or a private brand. Its choice depends in part on its bargaining power. If the distributor is prominent and the manufacturer itself is unknown and anxious to penetrate a market, then the latter may have to use the former’ s brand on the product.
But if the manufacturer has superior strength, it can afford to put its own brand on the product and insist that the distributor accept that brand as part of the product. Private branding and manufacturer’s branding is not necessarily an either/or proposition : a compromise may often be reached to ensure mutual coexistence. If desired, both options can be employed together. Michelin, for instance, is world renowned for its own brand, but most people do not realize that Michelin also produces tires for Sears and Venture.
The popularity of private brands varies from country to country . In the UK , the key factors that have contributed to the evolution of retail brands within British grocery retailing, are changing the basis and use of retail powering the distribution channel, centralization of the management activities, and appreciation of what constitutes retail image. British grocery retailers have successfully managed these factors.
As a result, their retail brands are regarded by consumers as being as good as, if not better than the established manufactured brands. Some branding and manufacturing strategies illustrate the potential benefits and problems of private branding. By putting their brands on the products made by outside suppliers, the brand owners are able to take care of the gap in their product lines quickly and economically while solving their inventory problems. However, this strategy will make product differentiation more difficult. Well informed customers may not find a good reason to pay extra for these brands.