Increased Interest In Generic Products May Rock Brand Equity In Electrical Market

Oct. 11, 2007
No-name or unbranded generic products may become more of a threat to the industry than private-label products, according to research by our firms, Allen Ray and Associates, Kennedale, Texas, and Channel Marketing Group, Raleigh, N.C.

No-name or unbranded generic products may become more of a threat to the industry than private-label products, according to research by our firms, Allen Ray and Associates, Kennedale, Texas, and Channel Marketing Group, Raleigh, N.C.

In an article that will appear in this month’s issue of Electrical Wholesaling, we explore many facets of the impact of generic and privately labeled products on the electrical market. One of the reasons we believe generic products will become more popular than privately labeled products in this industry is that for electrical distributors, purchasing generic products requires a nominal investment — frequently no more than changing or adding a supplier. Order size or duplicate inventory may be a consideration, but the distributor would avoid the costs and other risks of product development, sourcing, branding, supply chain management and liability costs typically incurred in a private-label program.

That being said, don’t overlook the fact that many of the national chains and some of the larger regionals will develop private-label lines as a point of differentiation and as a profit enhancer. A few do it today, but within five years we expect most to offer an array of self-branded products.

The decision to develop a private label brand can be prudent for distributors who have a long-term horizon, are willing to invest in the infrastructure to replicate manufacturer core competencies, and recognize that private labeling is not solely a pricing and gross-margin strategy. Alternatively, from a manufacturer viewpoint, competing against private-label and generic products may cause many companies to reconsider their marketing and distribution models.

The underlying challenge to the industry appears to be coming from generic product manufacturers, especially ones that receive and carry UL and/or CSA approval. The key advantage of generic products is that they enable a distributor to achieve a customer’s price point for an acceptable quality. Consider it a “quality product for a fair price” scenario, especially if no value-added services are desired. Some of these manufacturers may belong to marketing groups, so rebates are still earned.

Based on our findings, some distributors are using generic products to test the marketplace with a goal of establishing a lower price range for a future product offering. Once this range is established, the distributor may take the steps necessary to offer their own private-label products.

Especially in the residential market, the end-customers are not concerned about product brands. They are concerned with acceptable quality at a low price. As industrial specifications continue to add “or equal,” this trend will migrate to all market segments for many product categories.

Another potential threat from generic or contract manufacturers is that these companies may offer products to the end-customer, either through manufacturers’ reps or direct.

Given the present market conditions and the continued tightening of the residential market, distributors will be pressed to continue to lower their pricing to maintain cash flow and market share while responding to contractor and end-user demands. Many will look at generic products as a way to satisfy their price needs, while others will take the plunge into the world of private-labeled products.

Of concern to some will be potential product liability issues from private label or generic products. Until a distributor becomes involved in a lawsuit over “their” product, the issue will only be a concern to be managed, not a financial reality.

Generic products will pose the greatest threat to manufacturers and distributors because of low unit prices, the availability of warranties for many products and the low cost of entry. With a noticeable change in end-user attitudes to “just so long as it is good for a year,” we predict that many distributors will soon offer more generic products in price-sensitive categories while continuing to offer name-brand products from companies that can show a clear brand preference in the marketplace.

While private labeling is an issue to be aware of, developing strategies to more competitively position your company to combat the commoditization of the industry is critical to long-term success. Only when manufacturers and distributors gain customer preference can the branded products in the warehouse move to job sites.