What Is a White Label Product?
White label products are sold by retailers with their own branding and logo but the products themselves are manufactured by a third party. White labeling occurs when the manufacturer of an item uses the branding requested by the purchaser, or marketer, instead of its own. The end product appears as though it has been produced by the purchaser. White label products are easily spotted on store shelves, as they have that retailer's own name (commonly known as the "store brand") on the label—for example, Whole Foods Market's "365 Everyday Value" line of products.
Understanding White Label Products
How does white labeling work?
White label products are manufactured by a third party, not the company that sells it, or necessarily even markets it. The advantage is that a single company does not need to do it all: one firm can concentrate on producing the product; another on marketing it; and another can focus on selling it, each according to its expertise and preference. An advantage of private label brands is that they do not include specific marketing costs. Further, if a supermarket has an exclusive deal, then average transportation expenses could be lower and the company would benefit from distributional economies of scale. Because of lower transport costs, the retailer could sell the product for less and reap a bigger profit margin.
A worldwide phenomenon
Private label brands have become increasingly popular, which suggests that consumers are becoming more sensitive to price and less loyal to their favorite traditional brands. In many countries, the growth of private label brands is hurting national brands’ (the manufacturers') market share.
What Kinds of Businesses Use White Label Brands?
Retailers are big adopters
Although technically, white label products may in appear in any industry or sector, large retailers have done quite well with them.
Multinationals and mass merchandisers
In 1998, Tesco (LSE: TSCO)—a British multinational grocery and general merchandiser—began segmenting its customers and developing brands that cater to each group. In the United States, retailers were quick to follow Tesco's precedent. White labeling in the U.S. has worked particularly well for big-box retailers like Target Corporation (NYSE: TGT), which at least 10 different brands each catering to a specific consumer group and product line, and together bring in at least $1 billion a year.
The electronics sector
Private label branding is not limited to the supermarkets segment. Major electronics manufacturers of top-tier mobile phones and computers often put their brand names on cheaper-priced white label products to expand their offerings.
- White label products are made by one company and packaged and sold by other companies under various brand names.
- Big-box retailers have been successful in selling white label items that feature their own branding.
- Private label branding is a worldwide phenomenon that has been growing steadily since the late 1990s.
White Label in the Form of Services
White label products don't always need to be tangible items. Service offerings also have adopted white labeling. Some banks, for example, use white label services like credit card processing when they do not have these services in house. Furthermore, businesses that have no banking operations often extend branded credit cards to their customers, which also is a form of white labeling. For example, L.L. Bean Inc. offers its consumers a branded credit card, though the card is actually provided by Barclays Bank (BCS). Macy’s (M) also offers its customers a branded card, and theirs is provided by American Express (AXP).
A major benefit of white label branding is that it saves companies time, energy, and money in terms of marketing costs.
Advantages and Disadvantages of White Label Branding
The concept of white labeling comes with numerous considerations, both positive and negative.
Some potential advantages
- Expanded product lines. Firms can use white label brands to expand their offerings and target customers strategically; in turn, this could bolster their competitive advantage.
- Large contracts. Third-party producers get huge contracts, which could come with guaranteed sales and revenue.
- Discounted sales. Stores can boost revenue selling white label products at a discount relative to national brands.
- Quality. White label brands can be just as good as national brands, as they often use the same producers; high quality creates satisfied customers.
Some potential disadvantages
- Copycatting. Using very similar packaging among brands is called copycatting, which can be illegal in some cases. Private label brands must differentiate themselves sufficiently so as not to mislead consumers.
- Monopsony. A powerful retailer could push out smaller competitors, resulting in a market condition where there is only one buyer.
- Barriers to entry. The growing dominance of white label brands could make it hard for new firms to enter the market, reducing overall competition.
Example—Costco Wholesale Corporation
Another large retailer that's being creative with branding is Costco (COST)—the U.S.-based warehouse club operator—with its Kirkland brand of private label products. Does this mean that Costco makes all of the Kirkland products you see on the shelves? Not at all. They simply contract with various producers that have agreed to put their products into the Kirkland packaging.
A Kirkland-branded product often sits next to the national brand (that actually makes the product) on the shelf—identical products, different names, the national brand selling at a higher price. For example, Costco sells Saran Wrap—Saran is a trade name currently owned by S.C. Johnson & Son—but also sells its own Kirkland Signature stretch-tite plastic food wrap.
Costco has further blurred the line between national brands and private labels by using premium offerings and co-branding strategies with the likes of Starbucks (SBUX), Quaker Oats, a subsidiary of PepsiCo, Inc. (PEP), and Tyson Foods, Inc. (TSN). Interestingly, both consumer product and retail executives tend to believe that co-branding between retailers and traditional national brands is a win-win situation.