“Some famish and some feast” – this old saying should start ringing bells in the minds of many, looking at the title of this write-up. Since the outbreak of coronavirus earlier this year, economies around the globe have officially entered a recession worse with a GDP growth drop worse than 2008-10 financial crisis. Investors are shying away from making optimistic moves, and the uncertainty is even higher in the case of emerging economies. This pandemic is definitely the largest humanitarian crisis since the second world war. However, if we look back in time and observe situations in the recent past that are similar to this one, it is typical of private labels to have exploited the macroeconomic crises each time. Coincidence? We think not.
In 2003, the SARS Coronavirus broke out in China, infecting a figure of 8000 people. 800 of the infected succumbed to the disease and perished. The crisis forced millions of people to weeks-long homestay that was uncalled for. The whole Chinese economy was at the brink of collapse as China’s retail sales growth went down to 4.3%, a record minimum. However, during this economic slowdown, China’s growing e-commerce sector experienced a massive boost. As people became reluctant to go outside to make purchases, the demand for online services peaked resulting in an inclination towards e-commerce. E-commerce giant Alibaba rode on the opportunity and surfed brilliantly through the high waves. For obvious reasons, many became unwilling to spend extra money to chase brand names, which created a smooth ground for the private labels to get in the picture. As e-commerce got its boost, private label brands grabbed the opportunity with both hands and made a fine outcome out of the mess.
Rise of Chinese Private Labels in Global E-Commerce
Here we are going to discuss why, when the rest of the economy famishes, private labels feast.
1) Recession fears drive customers towards private labels
As mentioned earlier, an economic slowdown gives people enough reasons to cut costs and get inclined towards low cost products. Even the rich and wealthy would prefer to buy one less Gucci bag or Tod’s show. People will go into savings mode, and would prefer to get the same quality as a luxury brand at a tenth of the cost. Private label brands certainly provide customers with better value for their money. If you have a sure shot way of producing cashmere sweaters and sell them below the average big brand price, then your private label can indeed shine.
If the revenue of a big brand is broken down, the profit margin is significantly high, mostly because of the goodwill and the brand value. It’s obvious that the perceived value of goodwill falls during a recession. On the other hand, private labels offer a better value at a better price. As a result, customers get inclined towards private labels.
An interesting outcome of this purchase pattern is the shopper’s inclination towards fast fashion. Fast fashion offers cheap and trendy clothing that are designed, being inspired from designer clothing and catwalk or celebrity culture. Fast fashion in a private label often becomes the obvious choice for many people who do not actually care about the brand value, especially at tougher economic situations, and opts to look good and feel good. This bandwagon effect takes the wheel at these tough times.
Source: McKinsey & Company
2) Adaptation is key
Adapting to tougher situations is a landmark for the toughest of businesses. However, that’s not as easy as it is to say, right? Adaptation and flexibility are another issue where private label tops brand names.
Let’s think of big brands as massive heavy-duty trucks and private labels as two-wheelers. Even if both of them travel with the equal speed, the truck has a greater momentum, i.e. it’s more difficult to control it. The case is similar when big brands face tough economic situations. Large companies have larger fixed costs that drain a lot of money even when they are not earning enough to cover them. These situations push them to make desperate moves like lay-offs, and at times declaring bankruptcy. On the other hand, private labels due to their lower momentum and overall size, are easier to control on rougher roads. They can assess situations quickly, execute pivots, and respond promptly. This is one of the major reasons why private labels seem to outperform large brand names during the time of economic hardships.
3) The myth of price-quality inference
Regular shoppers tend to infer the quality of a good from its price. Buyers usually want to avoid the uncertainty concerned with buying a non-branded product even at the cost of the extra money that apparently doesn’t provide any extra value.
As recessions come and force most households to tighten their budgets, they switch to similar private label brands. Making the transition, most of the people do not experience any difference in perceived quality between the two, at least most of the time. As a result, recessions effectively crush the myth of price-quality inference in household decisions, Once shoppers identify the fact, there is little incentive to go back to a big brand that does not really offer good value for their money. Historically, it was observed that during recessions, this shift is perfectly inelastic.
Although tougher economic situations are easier for private labels to excel, they still have to offer the proper value of the revenue they are making. The appeal for premium private label brands is on the rise, now that the whole world is going through a recession. So, if you are a custom clothing manufacturer thinking about going private label, if not now, then when?