Private Label Cosmetics: How Business Cycles have Influence on Success

Private labels have grown enormously in recent decades for a variety of reasons, but this growth can generally be tied to the overall economy. During economic booms a nation's market share of private label brands, including cosmetics, usually declines while during economic downturns it increases. Here's a deeper look into how business cycles affect private labels.

Trends and Myths Surrounding Private Labels

A major misconception about private labels is they only perform well in periods of high unemployment, high inflation and slow growth. While it's true they tend to advance as the economy declines, it's not out of the question for a private label brand to maintain market share during economic up cycles.

Consumers are usually quicker to embrace private labels as the economy begins to sour than they are shifting back to national brands when the economy recovers. One of the factors that supports these trends is that large manufacturers tend to pull back on advertising during downturns, anticipating lower sales. This action fuels a self-fulfilling prophecy of lower net profits.

But not all consumers can be generalized to move in these patterns, as some shoppers prefer to stick with store brands even after a recession has subsided. Factors that affect an industry in which national brands compete with store brands include:

manufacturer strategies
amount of advertising
proactive marketing
product innovation

Manufacturing Strategies that Affect Market Share

When demand for a product drops, manufacturers use two primary strategies to quickly cut costs. They pull back on innovation, reduce advertising or sometimes both. These strategies help maintain short-term profit margins, although they can also cause loss of market share over extended periods. Manufacturers commonly follow this game plan during recessions, sometimes without realizing that it opens the door to competition from retailers.

How Advertising Affects Brands

Large well-funded companies usually dominate markets due to widespread media advertising. Small companies usually cannot reach the same levels of profitability, since they don't have the budgets for expensive marketing. Private labels cannot afford to ignore advertising completely since they still have to communicate product differentiation to target audiences.

Studies by Frankenberger and Graham (2003) reveal that firms gain competitive advantages by increasing advertising during recessions, which can create added value that extends to a year after the climax of a recession. Combining advertising with introducing new products creates five times greater advertising elasticity for new products, compared with established products, according to research by Lodish (1995).

Impact of Proactive Marketing

Proactive marketing is a strategy that includes introducing new products supported by heavy advertising. This strategy is helpful to national brands during economic declines in terms of preventing consumers from permanently shifting to private label brands. Focusing on new product development based on market research is another dimension to proactive marketing. Retailers can also follow this strategy with private label brands to disrupt markets, which can lead to long-term success.

Why Innovation Matters

Innovation has become a major key to market disruption, especially in the 21st century. Abandoning innovative thinking during a recession can sometimes do more harm than good, especially when private labels enter the picture. When national brands scale back on innovation in conjunction with private labels ramping up new products, it's possible for retailers to gain a competitive edge over national brands, especially if new private label products fill a void for consumers in the market.

Intense innovation, however, can backfire if it is not supported by awareness campaigns such as media advertising. The key for private labels depends on how manufacturers react to recessions.

Momentum of Private Labels

Over 20% of global grocery sales now represent private label products, with some market experts projecting that share will increase to 30% by 2020. Market shares for private label products vary by country. According to a 2003 AC Nielsen survey, the market share for private label brands in the United States stood at 15%. Several Western European nations reported higher levels, such as the UK at 39% (nearly doubled from 21% in 1980), Switzerland 38%, Spain 23% and France 21%.

By 2013 the US market share for private labels had grown to 18%, attracting nearly 100 million consumers, according to Statista. Private labels also increased market share that year in Switzerland to 45%, Spain 41%, UK 41% and France 28%. In 2016 the fastest growing product category in the US for non-food goods was eyeliner with lipstick also in the top five.

Conclusion

A solid future for private labels has been paved over the past several decades. While overall economics is an influential factor, so are specific actions taken by both both national and store brands. Cosmetics are well positioned to continue increasing market share for retail brands around the world regardless of global economics. The key is to give consumers a better deal in terms of price, quality and image.