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A premium private label may have once been an oxymoron, but that's no longer true. Consider the case of Loblaw's, Canada's largest grocery chain and a pioneer in the trend toward high quality premium brands.
Back in the early 1980s, [Loblaw's] added the new premium President's Choice line to its traditional unbranded product. In categories where consumers value high quality, President's Choice products compete directly with major brands. In its marketing messages, Loblaws stresses the quality of the ingredients and the preparation of President's Choice. Its olive oil, for examples, is "harvested from trees planted more than 80 years ago and produced from the first cold pressing of sun-ripened olives." That's a far cry from a cheap knockoff.
To fulfill its claims of quality, Loblaws works closely with suppliers. A case in point is the Decadent chocolate chip cookie, which Colonial Cookie helped Loblaws develop in the late 1980s. Colonial, a subsidiary of the Parmalat food group, markets its own line of cookies, but it has always focused on the private-label market. Loblaws's market research indicated that customers wanted a richer cookie that the market leader, Nabisco's Chips Ahoy!, which as 19% chocolate chips by weight. After lengthy joint research and development, Loblaws and Colonial came up with a cookie that was 40% chocolate chips and used pure butter instead of margarine. With high levels of both butter and chocolate, the product tended to turn to mush on the production line and was difficult to keep fresh. But Colonial's product-development division eventually overcame those problems. The Decadent product was a runaway success, becoming Canada's market leader in chocolate chip cookies despite being sold only in the 20% of the market held by Loblaws. The high volume brought large returns to Colonial, easily justifying its investment in product development.
Although Loblaws introduced President's Choice as a way to differentiate itself from rival grocers, the line has become so popular that the chain now licenses it to retailers across the United States, where Loblaws has no stores of its own. Its success shows not only that premium private labels are viable but also that they can be a major force in consumer goods.
Premium private labels now have enough appeal for consumers that they are leading the way in creating entirely new categories. Loblaws, in fact, has a large R&D group doing just that. The group created, for instance, President's Choice frozen boxed meats - a line offering chicken strips, sausage rolls, and other products. Other manufacturers have since moved in with their brand-name goods and are enjoying healthy sales.
Although Loblaws usually takes the initiative in creating new categories, it is also willing to work with manufacturers that have ideas of their own, thus giving those manufacturers a chance to try out product ideas at much lower costs. That's an enormous benefit, because most manufacturers have to spend heavily on national advertising to attract consumers' interest as well as pay retailers substantial "slotting fees" just to place the product on shelves. The budget for a national launch in the grocery industry can run to the millions of dollars. And yet with private-label agreements, the retailer takes on the responsibility for advertising and promoting private labels, and, of course, does not charge slotting fees for its own product.
Thus, when manufacturers aren't sure if a new product will work, they can limit the risk exposure by working with retailers to supply a premium private-label version. Just as in established categories, premium private labels can actually boost innovation - not kill it.
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