As 2024 reaches the turn of spring and summer, the FMCG market is eerily cold, with various factors combining to blow a chill wind signaling the arrival of the 'shrinking volume' era. From platforms, brands, distributors to terminals, everyone is trembling, but the heat around 'private labels' has suddenly risen, becoming a powerful weapon against economic cycles. Yonghui Superstores has incubated Yonghui Farm, Tianqu, Yousong, Chan Dashi, Ofresh, etc.; Dingdong Maicai has developed private labels in categories like fresh produce, craft beer, and mooncakes; Wumart has Daily Fresh, Liangshiji, and more. Many retailers are increasing the proportion of private labels. What exactly is a private label? What types of enterprises are more suitable for developing private labels? How should enterprises develop private labels to avoid pitfalls? These are questions that enterprises aspiring to develop private labels need to ponder deeply. Private labels are relative to full-domain brands, typically referring to product brands developed by retail platform enterprises through OEM or ODM. Private labels are more suitable for platform-based retail enterprises (platform e-commerce, chain retail) to achieve a model of high quality and low price through independent development, production outsourcing, quality control, and flattened procurement and sales. But not all platform retail enterprises are suitable for developing private labels; it should be based on 'quantity' resource endowment and capabilities, because the development and production of private labels have thresholds. If the platform's average daily sales are below 10 million yuan, the platform's scale is insufficient, and private label sales volume is limited, it will cause systemic pressure on the supply chain, making it difficult to ensure cooperation with strong suppliers. At the same time, the scale is insufficient to support a professional private label development and operations team. Therefore, small-scale enterprises are not suitable for developing private labels. How should platform-based retail enterprises develop private labels? First, solve the strategic issue of private labels. The private label strategy is the relationship between the private label and the parent brand, with the following three approaches: The advantage of the parent brand private label strategy is that it can leverage the parent brand's brand equity to quickly enter the market and enhance awareness, while also accumulating positive equity for the parent brand. The disadvantage is that if the private label has a negative impact, it will also damage the parent brand's image. For example, the private labels of Liangpin Shop and Miniso share the same name as their parent brands. The hybrid private label strategy adopts a compromise approach, combining 'parent brand + sub-brand', which not only borrows the parent brand's momentum but also maintains the private label's independent personality. Because of the strong association, consumers can directly identify the relationship between the two, but conversely, negative impacts will also damage both. For example, 'JD Made' is easily recognized as a series of products from JD.com, while 'Jingzao' maintains the metaphysical personality of creation, smart manufacturing, and manufacturing. The independent brand strategy appears to have no direct connection with the parent brand at first glance; only by examining the OEM can one see the relationship with the parent company. If it is registered as an independent legal entity, even checking the OEM may not reveal the connection; only by checking capital relationships can it be known. This is more covert. The independent brand structure gives consumers and suppliers a greater sense of fairness, avoiding the discomfort of the platform acting as both referee and player. Formally, it can also avoid the risk of private labels directly negatively impacting the parent brand. For example, COSTCO's private label is 'Kirkland', and Hema's private label is called 'New Species'. Each approach has its pros and cons. Enterprises should decide based on their own plans, and once determined, they should try to stay stable, unless the initial investment is small or the determination to change is strong, such as 'Tmall Xuanxuan' which resolutely changed to 'Miao Manfen' after five years of operation. Second, there must be a clear private label development strategy. The development of private labels has its inherent laws, generally going through four stages (as shown in the figure below), with different private label strategies formulated according to the characteristics of each stage. Goods are exchanged for price, and the initial 'private goods' stage mainly uses price as a competitive means, with profitability as the main purpose. In the 'private goods' stage, private labels are just starting out, with small volume and strong randomness. Generally, there is no very professional development team; personnel come from the procurement system, adopting a price competition strategy, manifested as homogeneity and low price. In the early days, a common way for supermarket private labels was to enter popular categories with 'homogeneous, low price' strategies. For example, the grain and oil category of supermarket private labels adopted strategies such as the same quality grain and oil products, 30% lower price for the same specification, or 30% more capacity for the same price. Products are exchanged for value, and products have value orientation. Therefore, the second stage of private label development, the 'private product' period, is a branding process and a very important stage. At this stage, private labels have a basic volume and have built a more professional private label team, making plans, establishing processes, focusing on target consumer value, and focusing on quality. Develop private label products with value differentiation, pursue rapid, quality scale growth, accumulate brand imprint and reputation. Currently, most domestic private label enterprises are still in the early stage of the private product stage. In the third stage, the private label team's organizational structure is stable, the development process and operation model are mature, performance grows rapidly, and the company's attention and investment increase. This is the high-speed development period for private labels. The trial-and-error cost for platforms operating private labels is relatively low, so private labels can rapidly expand across categories, and both category width and SKU count will quickly increase. After fierce 'survival of the fittest' on the platform, advantages and disadvantages in categories gradually emerge. For categories with potential, the proportion of best-selling items will be greatly increased, quickly establishing category advantages or monopoly. Target consumers also form category-directed consumption during the process, achieving the purpose of collective empowerment. By the fourth stage, private labels not only have a larger volume but also have obvious advantages in categories, becoming representatives of a certain category or multiple categories. They not only have high awareness, reputation, and loyalty but also form unique, relevant, consistent, and stable brand equity. At this point, private labels have grown into full-domain brands, no longer limited to platform-specific communication and sales. They can formulate complete and independent brand communication plans, and better leverage brand leverage for expansion, achieving full-domain marketing under independent operation. The above four stages are a logically complete process, but there can also be leaps, depending on the characteristics of the category, competitive environment, and investment. How to build a scientific private label development and operation system? Private labels need to adhere to the principle of value differentiation development for target consumers. Value differentiation is the foundation for the longevity of private labels and a powerful means to enhance platform competitiveness. Differentiation is a variable concept, a single-dimensional or multi-dimensional competitive comparison. There is no eternal difference; only differences in a certain time period, space, single dimension, or multiple dimensions. This difference must meet the value of target consumers to be market competitive. Value differentiation is a tool to ensure quality output. First, a lot of preliminary work is needed, including broad research on target consumers, related industries, related categories, competitive scope, main competitors and capabilities, etc. Based on extensive information research, a feasibility report for product or category development is issued. The feasibility report belongs to the concept testing stage. Concept testing determines the feasible direction after professional team focus discussions and quantitative research. Then product development and design are carried out. This stage is the process of concretizing product positioning, requiring qualitative discussions and quantitative tests on selling points, packaging and image, product content, pricing, etc. A private label product only after passing strict concept, product, and packaging tests can be approved for pilot production and recommended for listing, meeting consumers. Therefore, doing valuable and different things is the lifeline of private labels. Private labels are a process of brand deconstruction and brand construction. During operation, there will be conflicts and frictions with regular procurement in terms of interests, so the company level needs to determine rules and boundaries. Platform shelf or traffic space is limited. The continuous expansion of private labels will occupy more and more shelf or traffic resources, compressing the control of regular procurement resources. In addition, private label teams pay more attention to consumer value and long-term interests, while regular procurement focuses on sales and short-term gross profit. Therefore, in actual work, private label teams and regular procurement often have different views and debates on category planning, new product listing, operational promotions, etc. How to resolve internal conflicts? First, private labels are a new business direction and a company strategic layout. It is recommended that private labels operate independently to ensure the direction of operation. Second, make a clear division of responsibilities, rights, and interests in categories, clarifying the role, responsibility, scope, and boundaries of private label categories or products. If a category is operated by private labels, private labels must be responsible for category revenue and be assessed; if a private label product has potential and needs cultivation and development, set stage goals and stage elimination mechanisms; if a category belongs to the free competition category, private labels and other products compete under the same standard, with survival of the fittest. In addition, the development of private labels has a certain cycle. From concept determination to product development, there may be plan adjustments due to environmental changes. It is recommended that private label teams establish a communication mechanism with the regular procurement department during product development, such as monthly development plan communication meetings, performance review and analysis discussions, etc., to digest problems, reach consensus, and coordinate development during the process, avoiding the situation of private labels 'dancing in chains'. Private label development is a must for platform enterprises now and in the future, because domestic private label operation time is not long, experience is limited, and enterprises often fall into misunderstandings and suffer heavy losses. Misunderstanding 1: Procurement mindset: The private label team is entirely from procurement, with weak brand awareness, weak consumer insight, not good at product value development, only comparing prices, forming homogeneous conflicts. It is recommended that private label team members not only have commodity procurement and category management experience but also consumer insight and brand building and operation capabilities. The team should be mainly composed of personnel with product development and brand operation experience, supplemented by some personnel with procurement experience. Misunderstanding 2: Platform differences: Each platform's consumer group has differences, with their own characteristics and category orientations. Not combining platform characteristics to do private labels often leads to poor results. Therefore, the development of private labels should be determined based on the analysis of one's own consumers, rather than rushing into all categories, causing unnecessary losses of manpower and material resources. For example, JD Made developed private labels from the 3C and general merchandise categories where its consumers are more concentrated and concerned. Misunderstanding 3: Unclear brand positioning, especially for e-commerce platforms: They dare not, do not want to, or cannot clearly define the private label platform entrance, making it difficult for consumers to choose among multiple traffic entrances. For example, on a certain group platform, there are a certain elephant supermarket, supermarket convenience, quality department store, and a certain group preferred, which cannot clearly distinguish the differences in traffic entrances, only noting 'self-operated', which is neither direct nor clear for consumers, leaving them at a loss. Misunderstanding 4: No limit on SKU count, leading to traffic overdraft and failure to accumulate brand value. Offline platforms have strict control over SKU count due to space limitations. For example, convenience stores maintain around 1200 SKUs, so product introduction requirements are high, and the number of private label products is relatively restrained. But e-commerce platforms have fewer SKU space restrictions, which does not mean unlimited development; otherwise, it will overdraft traffic, cause category self-consumption, and be detrimental to value accumulation. Generally, controlling 4000-6000 SKUs is more appropriate. Misunderstanding 5: Product development does not keep up with trends; being too early or too late has risks. Be cautious about 0-1 new product development, i.e., product development in entirely new categories. New categories require a consumer education process, which takes time and resource investment, with high failure risk. Private labels require rapid volume growth, so it is not suitable. It is recommended that private labels do more 1+1 micro-innovation development, i.e., superimpose micro-innovations on existing categories, enhance consumer experience, add value without increasing price, differentiate competition, improve best-seller rates, and reduce return and loss rates. For example, in 2021, a chain enterprise's private label carbon-grilled squid shreds product suffered great operational pressure. At that time, category homogenization competition was fierce, but the sub-category had a certain volume. Facing this situation, the private label made micro-innovations to the carbon-grilled squid shreds, combining with the beer consumption scenario, embedding a special seasoning packet in the product packaging, and upgrading the packaging to highlight differentiated value, upgrading without raising the price. It quickly grew into a best-seller in the category. Final Thoughts Everything in the past is a prologue. 2024 has already passed half. Facing the industry changes brought by economic downturn, those who go farthest are definitely not opportunists, but those who practice internal skills solidly. Do a good job in deploying promotions for each key solar term, motivate employees and manufacturer partners who have both the ability and the willingness to do things. I believe that even the coldest winter will feel warmth and vitality. Xue Wenfa, with over 20 years of experience in product development and brand management in large listed companies, has been responsible for the management and operation of private labels at the largest platform enterprise in China. Recommended Reading