Private Labels Will Boom in '08

I project that 2008 will be a banner year for private labels in wholesale distribution. Growth will be driven by customer demands for lower-cost alternatives in a weakening economic environment. I also see a number of compelling reasons why the U.S. dollar's fall (shown on the right) will not necessarily stop import-led private label growth.

Trading Down

As I document in Facing the Forces of Change®: Lead the Way in the Supply Chain, roughly four out of ten distributors sell some kind of a private label product.

As customers start to feel more economic pressure, they often trade down to private labels. This pattern is playing out right now for consumer products, where private label sales for 10 household and personal care products grew by 21% in the second half of 2007 although overall industry sales were only up 1 to 2 percent. (See Even Package Goods Not Immune in Advertising Age.)

I believe that the same pattern is occurring in business-to-business markets. Customers may be more receptive than ever to moving away from a national brand in categories where the manufacturer's brand does not add enough value to the customer. (See Brand Killers.)

Dollar Devaluation

The flipside to this story is the value of the dollar. The trade weighted value of the U.S. dollar has fallen by more than 25% relative to other currencies since 2002, leading to a boom in exports from the U.S. (See slide 20 of my 2008 Economic Outlook presentation and the audio discussion for how savvy distributors can benefit from the export trend.)

Since almost 60 percent of wholesaler-distributors with private labels source their product from an overseas plant, we might expect the cost advantage between private labels and imports will narrow as the dollar depreciates and imports become more expensive.

However, there are at least four reasons why a currency-related increase in private label imports will not necessarily get passed on to customers.

1) China is the most important source of imported products for wholesaler-distributors with private labels. However, the yuan has appreciated much less against the dollar than other currencies since China stopped pegging the yuan’s value to the dollar in July 2005. (That said, the Chinese yuan has still risen ~14% against the dollar.)

2) Many so-called “US manufacturers” actually outsource production to China, too. So dollar depreciation is being felt by both private labels and the “national” brands.

3) Customers will only see a portion of the cost increase because most distributors will not want to pass on substantial cost increases in a weak economy. Historically, less than one-quarter of currency depreciation gets passed through as higher prices for imports.

4) It's unlikely that the dollar's record drop in 2007 will continue. (See Weak Dollar Might Change Course.)

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My bottom line: I see private label strategies accelerating as the economy weakens. Wholesaler-distributors will be able to stabilize or improve their margins with private labels even as economic conditions worsen, if appropriate for their business and done with selected product categories for the right customers.