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Magic products, Private Label products

Tomoo Noguchi
Professor at Faculty of Social Sciences, Waseda University

Fabulous sales effect

This year, Private Label (PB) products were pushed into the spotlight.

"The Ranking of Hit Products for 2008" announced by Nikkei MJ (Nikkei Inc.) in December 3 ranks "Seven Premium" by Seven & i Holding group and "Top Value" by AEON group in the West Yokozuna (highest position in sumo). Both are PB products developed by manufacturers based on the retailers' specifications.

In fact, their sales effects are fabulous. In AEON group, "Best Price" (another PB of AEON group) products have reached a record-breaking sales amount; sales of breads increased by five times and those of cup noodles increased by three times over last year. Also Seven & i Holding group, which had been thought to be unwilling to develop PB products, released "Seven Premium" products last May, and achieved sales amount of as much as 80 billion yen for 380 items in only a year. Since I have published "PB Strategy in an Era of Price Destruction" (Nikkei Publishing Inc.), I was interviewed on this topic by some mass media.

History of PB

Some people may think PB products are relatively new ones developed in recent years. However, PB products have a long history in Japan, too. Daimaru, a department store, introduced its original business suit named "Trojan" in 1959, and one year later in 1960, Daiei, a supermarket, developed canned oranges named "Daiei Orange".

PB products were originally intended to make consumers feel "less expensive" or "more cost-performance" compared to national brand (NB) products. Therefore, they have strongly appealed "low price" and enjoyed great popularity under economic stagnation. Looking back on history, in the mid-80's when high-yen recession proceeded, there appeared "New Saving", "Aichaku Shiyou (much-loved style)", and "COLTINA" from Daiei, "Simple Rich" from Jusco, and "From Life Series" from Nichii. Similarly in the early-90's recession after the Collapse of the Bubble Economy, Jusco released "Top Value" and SEIYU developed the first PB beer "BEER OH!".

Background of the PB boom

The recent PB boom has almost the same background of the past. Financial crisis triggered by the "subprime problem" in the Unites States generates the greatest recession wave of "the century" all over the world, which is now overwhelming Japan. In Japan, national disposable income has drastically decreased due to pay cuts of employees and large-scale unemployment, which forces consumers to hold their purse strings more tightly. Such a severe economic situation gives momentum to "desire to protect our livelihood" and drives us to buy PB products, which are less expensive than NB products.

Another background of the current PB boom is "improved product quality." Conventionally PB products were regarded as cheap in price and therefore bad in quality. Though not expensive in price, then PB products could not always satisfy needs of quality-conscious Japanese consumers. In association with this, I had a bitter experience in the past. Once I found PB washing powder for laundry at half or less the price of NB equivalent at a certain large retailer, I was pleased to buy it. When I tried to use it, however, it hardly dissolved in water and was of no use in washing.

As seen in my example, conventional PB products made "sacrifices" to achieve low price. This is why PB products have not been so widely expanded, still remaining around 5% market share in total retail sales amount though 50 years have passed since the first PB product appeared.

Recently developed PB products, on the other hand, show considerable improvement in quality. We can say recent PB products supplied by major retailing groups have quality of as good as or better than NB products, because they are OEM-supplied by leading manufacturers unlike conventional PB products. Besides, retailers make requests from a consumer viewpoint to manufacturers in product development.

Why do leading manufacturers develop PB products?

Then, why do leading manufacturers recently develop PB products? If they are devoted to developing PB products, PB sales will increase, but naturally NB sales, their Raison d' etre, will decrease. That is, cannibalization will occur between PB and NB products.

Nevertheless, leading manufacturers are recently eager to develop PB products because:

First, PB products are basically not returned because they are "custom-ordered" products by retailers. This means as many products as orders taken will be always sold. Under the current economic situation where goods do not sell well, "full purchase" is very favorable for manufacturers because it facilitates production planning and ensures the estimated amount of sales.

Next, PB products require little promotion cost. To promote NB products, manufacturers need to place a large-scaled advertisement in TV and other media, which results in an increased amount of promotion cost. It is said promotion cost generally occupies 30 to 50% of the total NB product cost. On the other hand, PB products require almost no promotion cost.

These merits prompt leading manufacturers to challenge development of PB products in recent years. In an unprecedented recession where goods do not sell well, PB products can bring benefits to consumers, retailers, and manufacturers. PB products are truly "magic products.

Tomoo Noguchi
Professor at Faculty of Social Sciences, Waseda University

The author is now a professor at School of Social Sciences, Waseda University. He got Ph. D at Graduate School of Commerce and Management, Hitotsubashi University in 1984. Following an associate professor at Yokohama City University, he was appointed an associate professor at Waseda University in 1992, and promoted to the current position in 1993. His work "Aspects of Today's Retail Distribution" won the Japan Society of Marketing and Distribution award in 1988. For a period from March 2006 to March 2008, he mainly studied American commerce as visiting researcher at Economics Department, Stanford University. His main works include "Distribution, Mega-battle" (Nikkei Publishing Inc.), "I-type Distribution Revolution" (Kodansha Ltd.), and "PB Strategy in an Era of Price Destruction" (Nikkei Publishing Inc.).