During the last year, as we beleaguered our way through the GFC (Global Financial Crisis), the rise of private label has been apparent. As people look to cut costs, private label looks very attractive, providing a quality product at a budget or, in some cases, a bargain price.
While the retail industry has been known for private label for a fair while, we are beginning to see private label creep up into larger value items. With Aldi selling computers, treadmills and LCD TVs under their own brands, it shows that consumers are more accepting of an ‘unbranded’ or ‘store branded’ products as opposed to their branded equivalents.
But how far will this acceptance stretch? Can this be extended to high value items. Take a car, for instance. Would a family be willing to purchase a ‘store branded’ car rather than a branded one. In my view, the simple answer is YES, and when that happens, it will be the biggest paradigm shift that will occur in the auto market place.
Badge Engineering
I’m actually surprised no one has ventured into it seriously before. We have seen the same car being sold under several badges, in what is called badge engineering. The Ford Laser and the Mazda 323 were essentially the same car, apart from the badge. You can find a full list of ‘badge engineered’ cars here http://en.wikipedia.org/wiki/List_of_badge_engineered_vehicles
Typically, badge engineering is used in different markets where the same car is sold, although due to the concentrated ownership of car companies, it is cheaper to use multiple badges on what is essentially the same car. To the consumer, it looks like they have a wider choice in the market, and they pay different brand premiums for the same car.
Why does it make sense?
There is only so far that car companies can push their sales. There is a brand image that often stands in the way of increasing market shares. You could never try to sell a BMW at a budget price, or a Hyundai for the price of a BMW, even if theoretically they were identical cars. You would do your brand image permanent damage if you tried that. So, if a large carmaker has invested billions of dollars in a car making facilities, and volumes were dropping, in order to recoup their fixed costs, it would be a good idea to fill up spare capacity with a differently branded car.
In fact, it would appear that some private labels are trusted by customers more than regular brands. I would not be surprised, if in Australia, Bob Jane, which has it’s own range of private label tyres ranked higher in trust than a number of international brands such as Dunlop or Goodrich. It would appear that by capitalising on this section of the market, a viable long term brand could be built.
For the manufacturer, it also means not having to spend much on marketing and advertising. It also gives them economies of scale in manufacture and distribution.
What are the pitfalls?
The private label market is not all rosy from a manufacturer’s perspective. Firstly, there are lower margins in private label products, cars included. Secondly, if it looks too similar to a current brand, it could devalue the manufacturer’s own brands. Thirdly, there is a very high risk of cannibalisation of the manufacturer’s own market share from sale of private label cars.
From a retailer’s perspective, the key issue is capital required. To set up a distribution, and potentially a service network independently could be quite expensive. Also, the retailer has to rely on the manufacturer for warranty and service related issues.
Who would be the most likely candidate to enter the market?
Enough said, who do I think has the best chance of creating a viable private label product in the auto industry? Obviously, a current player in the auto industry with a wide distribution network would be ideal. It could be a tyre chain like Goodyear or Michelin, or a service network like Ultratune or K Mart Tyre and Auto. Or it could be an after market retailer like Repco or Supercheap auto. Even an auto services player like NRMA or an insurance company like AAMI could jump into the fray.
All things considered, my money would be on K Mart Tyre & Auto to be the most successful in this space. They already have a large network of service outlets. They have deep pockets through Wesfarmers that owns them (along with Bunnings, Target and Coles). They have a brand name that is well recognised in the market and in the racing industry. In my view, all the planets are aligned for K Mart to get into the private label game.
Who would be the manufacturer? Now, that is more difficult. Most of the obvious choices, such as Toyota and Honda) would not want to be associated to prevent brand damage and cannibalisation. However, I believe an offshore manufacturer that is not yet strong in the country would be the best bet. I believe the market is right for Tata Motors to enter the market. Now that they own Land Rover and Jaguar, and also manufacture significant number of vehicles under the BMW and Mercedes badges, they would be ideally positioned to take advantage of this. They could very easily take a car from a different market and rebadge it for the Australian market.
To top it off, it provides them an entry into a market that they may one day want to get in on their own.
But anyway, that’s my view. And it’s all speculation. But I sure would like to see the day K Mart begins to sell Tata Indicas or Sumos under their brand name.
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