Coproduction of “B-brands” — second-tier brands that lack real traction with consumers — and store brands (i.e., “dual tracking”) is a fairly risky strategy that can pay off. However, it only can pay off if the private label part of the business is economically viable on its own and is fully embedded in the supplier’s strategy, says a new report from the Food & Agribusiness Research and Advisory group of New York-based Rabobank.

“Producing Both Brands and Private Label” says private label goods are set to double their market share to half of all goods sold in supermarkets by 2025. This presents a particular challenge for the B-brands, as they already suffer from overcapacity, and being able to make the most efficient use of their assets is critical to their profitability. As a result, the manufacturers will have to focus on cutting costs and finding new strategies to maintain production capacity.

One option is to adopt an “If you can’t beat them, join them” approach and move into producing private label products as well — but it is a risky strategy, the report explains. As the pressure on smaller, second-tier suppliers rises, many will look to private label goods as a way to retain their scale and make the best use of their production facilities. By locking in new store brand supply contracts, these suppliers might be able to offset — or at least alleviate — the pressure on their branded production volumes.

However, while this strategy might work in the short term, it is not as straightforward of a strategy as it might appear, said Sebastiaan Schreijen, Rabobank analyst. The danger for those companies that adopt a dual-tracking approach is that they weaken their bargaining position in relation to the branded products, which rests on the information asymmetry between the supplier and the retailer as to the supplier’s cost base, pricing structure and innovation pipeline. Private brand suppliers have to disclose more of this information, so dual trackers might find their negotiation position undermined with potentially detrimental impact on their profitability levels and brand power.

“Dual tracking can pay off, but only if the private label part of the company is a viable business in its own right and is thoroughly embedded in the supplier’s organization,” Schreijen said.

Schreijen outlined a number of strategies to make dual-tracking work, such as:

• Firewalls – By using completely independent sales teams, activity-based cost accounting or splitting the branded and private label businesses by geography and/or market segment, the national brand and store brand production can coexist, Schreijen noted. The coexistence allows dual trackers to benefit from the economies of scale, and makes it difficult for food retailers to back them into a corner.
• Opportunistic – Brand suppliers might fill spare production capacity on an ad hoc basis, Schreijen stated. This strategy makes it difficult for a food retailer to get a grip on the dual tracker, but it could increase earnings volatility.
• Defensive – A store brand specialist might be using fancy brands to augment the overall product offering and facilitate the needs of specific customers. Typically, the supplier does not support these fancy brands with any marketing effort, Schreijen explained.
• Category Management – Consumer knowledge of the brand supplier might prove to be a valuable asset in order to maximize the shelf return for the food retailer by offering different price points, thus creating a win-win situation for both the retailer and the brand supplier.

For more information, visit www.rabobank.com.