Manufacturing for Overseas Private Label:
A Win-Win Strategy for Retailers and Producers
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Manufacturing for Overseas Private Label:
A Win-Win Strategy for Retailers and Producers
Yaron Timmor*
* Yaron Timmor is the Academic Head of the International Business Studies and
Marketing Communication Program at the Arison Business School, the
Interdisciplinary Center Herzliya.
Address for correspondence:
Dr. Timmor Yaron
The Arison School of Business
The Interdisciplinary Center Herzliya
P.O.B. 167 Herzliya 46150
Tel: 972-9-960-2716, Fax: 972-9-956-8605
E-mail: timmor@idc.ac.il
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ABSTRACT The study discusses the use of private labels, both for retailers and
manufacturers, within the context of international markets. It is proposed that
agreements between manufacturers and retailers from different markets may solve or
mitigate some abiding frictions and serve the interest of both parties. Using data
collected through 101 in-depth interviews among marketing managers, qualitative
and quantitative procedures were used to explore producers’ attitudes and behaviour
in regard to agreements to manufacturing for overseas retailers’ private labels. The
study revealed that lower transaction costs, quicker penetration into new markets and
retailers’ reputations among customers are the dominant motivators while short-term
strategy, appropriate mainly for grocery items, increases dependency on retailers and
deters manufactures from contracting with overseas retailers’ private labels. The
study also found that gaps exist between manufacturers’ perceptions and actual
behaviour, mediated particularly by firm size and product categories. The findings,
which reflect observed practice, are interpreted through theoretical propositions
related to earlier studies. Managerial implications are provided.
KEYWORDS: retailers, private label, manufacturers, brands, overseas agreements.
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Introduction
Private labels are of primary interest both for retailers and for manufacturers as they
are concerned with power relationships and affect sales volumes, market share and
the profits of manufacturers as well as retailers (Cheng Wu and Jen Wang, 2005;
Obina et al., 2006; Quelch and Harding, 1996; Verhoef et al., 2000). The intensive
growth and development of private label products over the last two decades in terms
of market share, quality and promotion have encouraged a growing number of
scholars to explore the phenomena. Nonetheless, most studies have focused on
retailers’ and consumers’ perspectives, with very few paying attention to
manufacturers’ points of view. The minority of researchers who incorporated
manufacturers’ considerations into their studies examined local producers’ behaviors
in domestic markets (Cheng Wu and Jen Wang, 2005; Dunne and Narasimhan, 1999;
Mills, 1999; Obina et al., 2006).
The rapid globalization of manufacturers as well as of retailers has opened new
business opportunities and alternative ways of coping with private labels and their
apparent influence on producer–seller relationships. For instance, brand
cannibalization may be of less concern when the product is manufactured for an
overseas private label of different market retailers. Likewise, when a retailer sets up a
production agreement for its private label with an overseas producer, this can mitigate
the conflict with the national brand manufacturer.
This study focuses on producers that are manufacturing for the international
markets and examines their perceptions and attitude toward private labels and
overseas retailers, as well as their actual behaviour in terms of their export strategy.
Distributors and mainly retailers can benefit from this study by gaining an
understanding of overseas producers’ attitudes toward their private labels and learn
when it is more advisable, and more beneficial to both sides, to manufacture private
labels. In addition, retailers can learn when overseas agreements are preferable to
local contracts with domestic manufacturers.
Many studies have examined mass commodity products (Burt 2000, Burt and
Sparks, 2003; Calvin and Cook, 2001; Heraud et al., 2006; Obina et al., 2006). While
private labels have appeared in most traditional industries, they are also increasingly
showing up in other categories such as home appliances, electronics, plastics and
even computers and communications. Part of this is the result of greater reliance on
producers in East and South Asia—for example, in India, China and Thailand. The
present study is cross-sectional and incorporates different product categories both in
the more traditional and in the newer industries.
The main objectives of this study are:

To examine private labels and their associated dilemmas both for manufacturers
and retailers within the context of international marketing;

To explore producers’ attitudes and viewpoints regarding manufacturing
agreements with overseas distributors for their private labels; and
 To examine producers’ actual behaviour in regard to overseas private labels.
The study started by addressing the main dilemmas both for producers and the
retailers who own the private labels when drafting agreements to produce the private
labels. This is done by reviewing some of the relevant literature. Next, the alternatives
to formal agreements among overseas players are introduced and the major
advantages for both parties are discussed. Following this the research that examines
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manufacturers’ attitudes and behaviours regarding producing for overseas private
labels and the related propositions are presented. A discussion of the research findings
follows and the study concludes with a review of the academic and managerial
implications.
Private label agreements – strategic dilemmas
The increasing prevalence of private labels, stimulated by the growing force of
distributors, mainly retailers, has put the dispute about private labels’ business and
marketing impact on the main agenda of both retailers and manufacturers (Cheng Wu
and Jen Wang, 2005; Kim and Parker, 1999; Quelch and Harding, 1996; Verhoef et
al., 2002). Private labels, known variously as store brands, own brands, and retailers’
brands, have dramatically developed in the last three decades in terms of quality,
packaging, variety of shelf presentation and communication (Ailawadi and Harlam,
2004; Apelbaum et al., 2003; Burt and Sparks 2003 Richardson et al., 1994).
Consequently, the positive reputation of private labels has grown, their prices have
risen and their “value for money” positioning in consumers’ minds and in comparison
to manufacturers’ brands has improved (Burt, 2000; Dunne and Narasimhan, 1999;
Fearne, 1998; Richardson et al., 1994,).
Private labels’ market shares have increased rapidly. For instance, in the American
apparel market in 1998 they held 20% of aggregate unit sales and in 2002, this had
jumped to 36% (Cheng Wu and Jen Wang, 2005; Sayman et al., 2002) In Spain in
2002 the retail brand share in the mass commodity market accounted for 30.6% in
value in supermarkets (Obina et al., 2006,) and In the U.K., Belgium, Germany
France and Italy private labels reached up to 30% and more in total grocery stores
sales in 2002 (Tarzijan, 2004) Accompanied by structured marketing strategies,
private labels increased their competitive strength in relation to manufacturers’ brands
(Burt, 2000; Calvin and Cook, 2001; Kim and Parker, 1999; Fernandez and Gomez,
2005; Mills 1999).
There are numerous advantages for retailers in developing their own brands, for
example, higher mark-ups, control in managing and promoting the brand, exclusivity
in selling to customers and hence increasing customer loyalty to the store, improved
bargaining positions vis-à-vis national brand producers and establishing closer
contacts with consumers (Corstjen and Lal, 2000; Chinlagunta et al., 2002; Fearne,
1998; Narashimhan and Wilcox, 1998; Sayman et al., 2002). However, problems
arise when manufacturers are also producing and developing their own brands.
Moreover, manufacturers use retailers to distribute, to sell and in many cases, to
promote their brands at the points of sales. Hence for the manufacturer, the retailer
who owns a private label becomes a double agent (both a client and a competitor): on
the one hand, serving as the seller, providing the manufacturers’ brands to the
consumer, while on the other hand, competing with manufacturers with the retailer’s
store brands (Obina et al., 2006). Therefore, it is not surprising that the growth of
private labels has generated friction and dilemmas for both manufacturers and
retailers (Cheng Wu and Jen Wang, 2005; Cotterill et al., 2000; Pustis and Dhar,
1999; Quelch and Harding, 1996). For retailers, the main dilemma, once having
decided to develop and sell their own brands, is who will be their supplier, i.e., their
manufacturer?
Contracting with the big manufacturers or market leaders may better promise a
continuous supply, as their manufacturing capability is higher than small market
players. Large manufactures or market leaders can also mean good quality products,
demonstrated by their customers’ repeated purchases, as well by their extensive
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manufacturing experience. However, there are many drawbacks to such agreements,
mostly deriving from manufactures’ market positions that affect their channel power
(Dunne and Narasimhan, 1999, Heide and John, 1988; Kale 1986; Lal and
Narasimhan, 1996). Probably the main obstacle to initiating such agreements is the
negative attitude and reactions that market leaders tend to have toward private labels.
Most studies have suggested that national brand manufacturers and market leaders
should refrain from producing retailer’ brands. Rather they should fight back by
enhancing their brands’ equity, presenting another, lower-priced brand and
developing promotional strategies (Dunne and Narasimhan, 1999; Hoch, 1996; Kim
and Parker, 1999; Mills, 1999; Puelles, 1995; Quelch and Harding, 1996). Cheng Wu
and Jen Wang (family name only in references) (2005) proposed a positive
manoeuvre (when competing with another producer) whereby national brand
manufactures should produce private labels in a duopoly market. However, their
theory has yet to be examined by empirical studies.
The conflicts between retailers and manufacturers may grow when quality gaps
between private labels and manufacturers’ brands decrease. Moreover, manufactures
can experience cannibalization when customers discover that the private label is
actually the same product as the manufacturer’s brand in terms of quality and
ingredients, and is even produced by the same manufacture (Obina et al., 2006). In
addition, if the private label is sold at a lower price, consumers may feel they have
been deceived by the manufacturer for having paid a premium price “for no reason”.
Retailers’ dilemmas may increase if the manufacturer’s brand, with which they
hope to compete, is highly popular with customers and its marketing communication
is a massive pull strategy. In such cases, retailers are more dependent on the
manufacturer and any counter-actions such as supply shorts can damage their
business strongly.
Retailers, after taking into consideration the potential consequences of initiating
private label agreements with the big market players, may contact small
manufacturers. For small manufacturers, producing for private labels can be an
opportunity to increase their sales with no need for extensive investments in
promotion (Burt, 2000; Burt and Sparks, 2003; Dunne and Narasimhan, 1999; Puelles
1995,). Nonetheless, such a move raises other and somewhat different dilemmas for
retailers. The main issue is whether a small manufacturer can supply the quantities the
private label will require and in a continuous manner. While this problem may be
minor when contracting with big producers, it becomes particularly relevant when a
small or new producer is involved. As argued before, today many retailers view
private labels as a long term strategy, increasing their variety and quality, hence
supply problems would not only damage their sales but also their customers relations
and customers’ evaluation of these brands.
Another dilemma regards the know-how and experience of these manufacturers.
Can they guarantee quality products and product assortments on time? Though
retailers can switch producers if the latter does not meet their standards, in an ongoing
business this is not a simple proposition, especially once customers get used to a
product. Loyalty, it must be remembered, is an important factor in retail sales
(Corstjen and Lal, 2000; Puelles et al., 1997). In addition, and particularly when the
producer’s name appears on the packaging, either because of regulations or because
the retailer prefers a transparency policy to increase credibility, using a small local
producer can be perceived as a compromise and less attractive to customers. This can
be an even greater drawback when the retailer opts for premium positioning (Burt,
2000) and intends to offer his private label as a good alternative to the leading brands.
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Contracting with overseas counterparts
Moving to the international arena means changes and new situations. It offers fresh
opportunities and considerations for private label cooperation both for retailers and
for manufacturers. Below the focus is on the differences between agreements with
local and international counterparts and their apparent effects on both partners’
considerations.
Two main dilemmas for national brands producers were addressed: 1. Should they
produce for private labels? 2. And if so, under what conditions and terms? (Glemet
and Mira, 1993; Hoch, 1996; Verhoef et al., 2002). It has been recommended that
manufacturers of brand name products should refrain from producing for private
labels as they may damage the perceived value of their own brands and, consequently,
their profits (Quelch and Harding, 1996). When firms are active in international
markets, they can more easily diversify their marketing strategy between their
domestic strategy of selling branded products and their overseas strategy of selling
private labels. While such a dual strategy may increase brand cannibalization for a
firm that sells its own brand alongside private labels to the same market, it is of less
concern when dealing with different markets. Moreover, in many cases the
manufacturing firm does not need to identify itself by putting its commercial name or
trademark on the package. Thus even if consumers move or travel they are not likely
to recognize it. In domestic marketing, it was noted above that a firm’s brand image
as well as its credibility can be negatively affected when consumers recognize that
they can buy the same product for a lower price (Obina et al., 2006). However, this
problem is of minor concern when products are sold in different markets.
International reputation is still a privilege of global and multinational firms. The
lack of an international reputation will be a formidable barrier for companies wishing
to extend their sales into foreign markets with their own brand (Angelmar and Pras,
1984, Terpstra and Sarathy, 1997). Many national brand manufacturers, while leaders
in their own domestic markets, are unknown or barely known by customers in other
nations and hold small market shares or apply a niche strategy in global markets. For
example, Elite is the market leader in the Israeli chocolate market where even Nestlé
holds a substantially lower market share; yet in other countries it is a small player,
mainly producing for private labels. Efes Turkish beer is another example of a local
market leader and brand that is less recognized globally. Hence, the economic
advantages that producing for a private label offer local small manufactures—such as
being able to increase their sales without needing to make extensive investments in
promotions—can be of benefit for national brand manufacturers and market leaders in
the global markets (Burt 2000; Burt and Sparks, 2003; Dunne and Narasimhan, 1999;
Puelles 1995).
There are many advantages for retailers who contract with overseas regional
national brand manufacturers for private label production. First, they can get
experienced partners, and less reason to fear for production incapacity or quality.
Second, they can keep their good relations with their local suppliers and avoid
frictions that may stem from pressuring national brand manufacturers to produce for
their private labels. Third, relying on overseas producers can decrease the perceived
threat by the national brand producers when a well-known and identified producer is
recognized by consumers as the manufactures of a private label.
In broader views, an agreement with an overseas producer can also increase a
retailer’s channel power since it reduces his dependency on local producers. This may
be a sounder argument when there are few local potential manufacturing sources.
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International retailers operating in different countries can benefit from such
agreements in terms of physical distribution and shipments since the goods can be
delivered directly to specific markets. In other cases where there are trade contracts
between the producer’s nation and the targeted country’s market or when the two are
geographically close, it can be of economic and financial benefit to both parties.
Producers have been advised to consider manufacturing for private labels if the
market shares of the private labels are considerably high and the main competitors are
already in the business (Verhoef et al., 2002). While this may be the rationale and
justification for national brand manufacturers to produce for local private labels, it
may affect producers in the international arena less, especially if their brands are not
well recognized by the foreign markets. Moreover, if there are fewer competitors to
supply the overseas private labels, producers may have a strategic advantage when
willing to cooperate with the exporting market retailers and produce for their private
labels. Retailers, on the other hand, can more easily find manufacturers for product
categories that are less common in the private label business or when private labels
sales are still in low volumes.
Johanson and Vahlne (1990) suggested that the internationalization of the firm
could be seen as a process in which the enterprise gradually increases its international
involvement. This process evolves through the interplay between the firm’s acquired
knowledge regarding the foreign markets and its commitment of resources to these
markets. Local retailers can more easily provide their suppliers with information
regarding their customers’ preferences and tastes and direct them to produce the
required adaptations that are essential for product sales. Moreover, retailers that
already have their own brands will be more familiar with customer tastes since they
have the marketing and producing information of their private labels and are better
aware of customer responses to any changes or promotional activities.
Launching new markets can be a long and difficult task, especially where there are
many competitors or the market is dominated by a major firm. Other crucial barriers
are cultural differences, differences in legal regulations, and conditions of product use
(Timmor and Zif 2005, Walters 1986). Joining forces with a retailer can mean
quicker penetration and sales for new firms looking to enter the market by
manufacturing for private labels. Multinational or big domestic retailers can also be
attractive for overseas market leaders due to their ability to get solid orders.
Multinational retailers can also enable producers to enter several markets in parallel,
with no need for massive promotional efforts other than some adaptation of product
packaging or meeting of regulation requirements. From the transaction cost
perspective (Bello et al.,1991), a firm’s decision about distribution and integration are
geared to minimize the sum of transaction and product costs (Aulakh and Kotabe,
1997; Klein et al., 1990). When a firm exports its own brand, e.g., Heinz, Toshiba,
Orbit, substantial costs accrue due to marketing communication expenses, for
example advertising, sales promotions and presentations at points of sales. In this
manner, producing for overseas private labels can be efficient in terms of cost saving,
since the firm transfers a major portion of the marketing function to another firm – the
retailer. This can be more cost-effective for short-term cash flow issues.
Being flexible and supporting the overseas distributor (wholesaler, retailer) have
been shown to have a positive affect on the export result (Bello & Williamson, 1985;
Cavusgil et al., 1994; Fiegenbaum and Karnani, 1991; Timmor and Zif, 2005). Such
supports can be expressed through financing the marketing activity, supplying
advertising and sales promotion materials or producing for their private labels.
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Based on the literature reviews and strategic dilemmas discussion, and in the light
of in-depth preliminary interviews, the following propositions were formulated and
addressed:
P1. The more the firm’s managers believe that overseas customers know the retailer,
the more they tend to manufacture for its private labels.
P2. The more the managers believe entering a new market is quicker through private
labels, the more they opt to manufacture for overseas private labels.
P3. The more the managers believe that manufacturing for overseas private labels
means lower costs than exporting their own brand, the more they tend to sign private
label agreements.
P4. The more the managers believe manufacturing for overseas private labels is for
small firms, whereas they consider themselves to be big players, the less they tend to
adopt a private label manufacturing strategy.
P5. The more the managers believe the strategy increases dependence on retailers, the
less they opt to manufacture for overseas private labels
P6. The more the managers believe the strategy is for the short and medium terms
only, the less they opt to manufacture for overseas private labels
P7. Managers will prefer manufacturing for overseas private labels since they believe
it reduces the chances for future lawsuits due to product defects.
P8. Manager will prefer to refrain from manufacturing for overseas private labels
when they believe the strategy is mainly suitable for grocery items and their business
is not in this field.
The Exploratory Study Methodology
This research is based on personal interviews with international marketing managers
of Israeli firms with at least five years of export experience. These managers were
responsible for and directly involved in the export of a specific product line for a
foreign target market. Interviewees managed the marketing aspects of the firm’s
activities including distribution and promotion. Two main procedures were used.
First, in-depth interviews were conducted with the relevant position holders in six
firms that are involved in the international markets either by producing for overseas
retailers or by exporting their own brands. This was important to better understand the
strategic considerations and motivations for manufacturing for overseas private
labels. The interviews were intended to provide more insight regarding the driving
forces and perceived barriers in forming production agreements with retailers for their
private labels. The interviews were conducted with those in charge of international
business affairs, three of them in firms that manufacture for overseas private labels
and three in firms that export their own brands. In order to get as much variety as
possible, small, medium and large firms in terms of sales and which operated in
different industries were studied. In the second phase, a semi-structured questionnaire
was built, followed by a pre-test. A final structured questionnaire was used at the
end.
Unit of Analysis
The unit of analysis in this study is a product–market venture (Cavusgil et al., 1993;
Timmor and Zif, 2005), whereby a manufacturer exports a specific product line to a
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chosen country (target market). The requirements for inclusion were that each venture
must have already lasted a minimum period of five years, and only final products
were considered (no raw materials or products in process).
Population, Sample, and Data Collection
The study population consisted of product–market export ventures of Israeli firms that
had been manufacturing and exporting final products for at least five years. The
sample was taken from the database of the Dun and Bradstreet International Business
Guide. None of the studied firms was engaged in producing private labels for the
local market. Each firm was contacted by telephone to identify the manager
responsible for and personally involved in the export marketing strategy. A telephone
call to the potential interviewee then confirmed that the case conformed with the
research requirements and, after eliciting consent to participate in the study, the
interview date was set.
180 firms were contacted and 126 (70%) positively responded. For each refusal,
another firm, similar in terms of size and industry, was chosen. 106 cases answered
the research criteria (59%); for technical reasons, five interviews could not be
conducted. Thus the final sample consisted of 101 product–market export ventures
from various industries (see the appendix) across different export markets
Operational measures and analysis
For the actual testing of the propositions in the exploratory research, 11 statements
were developed through the in-depth interviews in the first phase and the theoretical
reviews (see Table 1 in the Appendix). Interviewee responses were measured on a
Likert scale: 1. disagree, 2. somewhat disagree, 3. somewhat agree, and 4. agree.
Logistic regression was used to examine the relations between the statement
(variables) scores and the applied strategy: manufacturing for overseas private labels
or exporting the firm’s brand. Correlation analysis was conducted to assess the
relations among the various statements (variables) and a chi square test was used to
find out if there was a correlation between a firm’s size and its reported strategy:
manufacturing for overseas private labels or exporting the firm’s brand.
Findings
The findings are reported separately for each of the methodological approaches. An
integrative discussion is presented in the discussion section.
Interviews – qualitative results
Six in-depth interviews were conducted with the relevant international marketing
managers. The firms can be categorized as one of two types: First, a large firm, in the
food and beverage industry, a medium sized one in the communications industry and
a small one in the textile industry. These were all manufacturing for overseas private
labels. A second group were exporting their own brands and comprised a small firm,
in the computer and software business, a medium sized firm in the textile industry,
and a large firm in the plastics and rubber field.
In general, all six interviewees thought that the private label markets had increased
a great deal and that firms’ considerations regarding international vs. local markets
can often be different, especially due to variations in competition (number and sort of
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competitors), culture (tastes, habits, and manners) and regulation (legal requirements
and standards). However, various arguments were made by the interviewees in regard
to production agreements for overseas private labels. In many cases, interviewees
from firms manufacturing for overseas private labels held similar views, as opposed
to those from firms exporting their own brands. Some interviewees from the
manufacturers for overseas private labels appeared to feel uncomfortable or as if they
were trying to justify their firms’ actions. The major findings of the interviews
regarding manufacturing for overseas private labels fall into two categories:
Motivators that are the perceived positive aspects and barriers that are the perceived
drawbacks.
Motivators – Perceived positive aspects

It is cheaper, requires far less investment than exporting your own (the firms’
brand).

Many times it is quicker because you get an immediate order and you are in
the market.

If the overseas retailer is well known to consumers, it can be better than trying
to penetrate the market using your own brand and building a reputation.

It may be the only way to enter new markets, especially if the private label
sales volume is high and there are already strong competitors in the market.

For small and medium-sized firms, the chances of succeeding can be better if
they agree to manufacture for overseas private labels.

A somewhat interesting argument raised by one interviewee was that there are
fewer risks when manufacturing for overseas private labels in regard to
lawsuits regarding the product.
Barriers – perceived drawbacks

Manufacturing for overseas private labels increases the dependency on the
retailer, and if it is a big client, you may have a serious problem if anything
goes wrong.

It is mainly for grocery items.

It is more appropriate if you are a small player.

Such a strategy may be good for the short or medium terms but not for the
long run.

Many times, it is the overseas retailers that are trying to impose these
agreements.
Quantitative analysis based on the 101 personal interviews
It was found that the firms studied did not have dual strategies, whereby they were
manufacturing for a private label and simultaneously exporting the firm’s brand to the
same export market. This finding is interesting and supports the theoretical argument
regarding the difference between local and international strategic options—diversified
strategies. A logistic regression analysis was applied in which the dependent variable
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was the behaviour of the manufacturer—manufacturing for overseas private labels or
exporting their own brands.
******************
Put table 2 about here
******************
The logistic regression is significant (P< .01), as is the prediction validity of 77.4%.
The correlation analysis (see Table 3 in the Appendix) indicates that though some
correlations were significant, none of them was .5 or more. In line with proposition
P1, manufacturers for overseas private labels believe more strongly that doing this is
a better strategy than exporting the firm’s brand if the overseas customers know the
retailer well. Proposition P2, which stated that entering a new market is quicker if
manufacturing for private labels, was not significantly supported. However, the mean
score for the total sample (see Table 1 in the Appendix) and each of the groups,
private label manufacturers and brand exporters separately, is 3 or higher (3.11, 3.20,
3.00, respectively), indicating that manufacturers do believe that when manufacturing
for overseas private labels the penetration may be quicker.
Supporting P3, manufacturers for overseas private labels significantly more than
brand exporters perceive their strategy as a lower cost one in comparison to exporting
your own brand. P4 suggested that if managers think that manufacturing for overseas
private labels is for small firms, they tend to avoid this strategy mainly because of the
fear of the negative connotation being carried over to their firm. The study findings
support this proposition. Those who export their own brands expressed significantly
higher agreement with this statement. Nonetheless, looking at Table 4 (see the
Appendix) no significant relations were found between firm size in terms of sales and
its overseas strategy. No significant differences were found between the perceptions
of the two groups of manufacturers in regard to the dependency on the retailer (when
manufacturing for an overseas private label, dependency on the retailer increases).
The statement raised by interviewee in the first phase of the study that it is
sometimes the only way to enter new market and it is imposed by the retailer was
examined, and no significant differences between the two groups were found. Thus
P5 was not supported by this study. However, both groups strongly agreed with the
“increased dependency” and “sometimes the only way” to enter the market statements
(mean scores 3.30 and 3.04, respectively). In line with P6, manufacturers that use
their own brand for overseas markets believe significantly more (P< .1) than those
who manufacture for overseas private labels that the latter strategy is suitable for the
short term only.
P7 suggested that manufacturing for overseas private labels reduces the risk of
lawsuit due to a product not being supported. Most interviewees disagreed with this
statement. In line with P8, manufacturers that export their own brand believed, more
than the private labels producers, that manufacturing for overseas private labels was
best suited for grocery items. However, looking at Table 5 (see the Appendix) reveals
that though a higher percentage of manufacturers for overseas private labels were
found in the food and beverage and textile industries, many others were from less
traditional industries such as communication and electronics.
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Discussion
The main objectives of this study were to discuss and explore private labels and their
associated dilemmas both for manufacturers and for retailers within the context of
international marketing. It has been proposed that international markets open new
options for both retailers and manufacturers and can affect their considerations and
decisions in regards to private label agreements. Leveraging strategic variations
between home and overseas markets was suggested as a policy that may overcome or
mitigate some manufacturers’ concerns such as brand cannibalization, and enable
retailers to sign agreements with new players and decrease the apparent frictions with
the national brand manufacturers. The empirical study supports this argument, finding
that all the firms that manufacture for overseas private labels were not engaged in the
private label business in Israel despite its rapid growth in the last decade. Most
previous studies examined the dilemma in the context of domestic markets and
suggested that manufacturing for private labels is mainly for small firms (Burt, 2000;
Burt and Sparks, 2003; Dunne and Narasimhan, 1999; Puelles, 1995,). In line with its
theoretical arguments, this study found no differences in terms of firm size between
those who used their own brands and the ones that manufacture for overseas private
labels. Moreover, some of the Israeli market leaders that hold strong brands in the
local market with greater market shares than global competitors are also
manufacturing for overseas retailers.
The empirical study focused on manufacturers’ views, so as to explore their
attitudes toward manufacturing agreements with overseas retailers, and to examine
what can advance and hinder such contracts. As expected, manufacturers for overseas
private labels believed that having agreements to produce overseas private labels
means lower costs than exporting the firm’s own brands. This can be a counterconsideration to the argument of higher mark-ups, which is given many times to the
retailers for products that are being sold under the retailer’s private label as opposed
to as a manufacturer’s brand. Moreover, it can be an attractive option for small and
medium-sized firms that lack the resources to compete globally (Timmor and Zif,
2005) and also for big firms that focus more on their local markets and are less known
by foreign customers.
The latter consideration leads us to another important finding: manufacturers for
overseas private labels believe more than brand exporters that this is a preferable
strategy if customers are familiar with the retailer. Hence, retailers that invest in
building their reputations and contacts with their clients may find it easier to get
international manufacturers to agree to produce private labels. Though the actual
firms’ sizes were found to be similar, when examining their perceptions support was
found for the proposition that when managers believe manufacturing for overseas
private labels better suits small firms, they will opt to avoid doing so. The rationale
can be better understood by looking at the reactions of managers in the first set of
personal interviews. The managers, in spite of the good points they found in being
involved with private labels overseas, tried somewhat to justify this strategy and
thought it is less appropriate for big firms. They associated it more with small firms,
firms that are more oriented to domestic markets and those that view the international
markets as an option for using up excess capacity. Hence, it appears that there is a gap
between firms’ actual behaviour and their perceptions regarding manufacturing for
overseas private labels. The quantitative study also showed that as managers
perceived manufacturing for overseas private labels to be appropriate for the short
term only, they tend to avoid it. It may be that it is perceived more as a tactical action
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or that manufacturers are less engaged or aware of long-term agreements for
manufacturing of overseas private labels.
It was hypothesized that there is an advantage in being involved with
manufacturing for overseas private labels because it allows quick penetration of the
market. In the empirical examination, all interviewees agreed strongly with this
statement. Further, there were no significant differences between those manufacturing
for overseas private labels and those that do not. It appears that this feature—quicker
launching—is more essential for “pioneers” and products with a relatively short life
cycle. As the private label phenomenon is now moving beyond its traditional
industries (see below), new firms may now be more motivated to enter into overseas
private label agreements.
Most studies of private labels have been conducted among the more traditional
industries and product categories such as food, hygiene and textiles (Cheng Wu and
Jen Wang 2005; Heraud et al., 2006; Obina et al., 2006). Though private labels have
increased their market shares in many other industries e.g., computers,
communication, electronics and home appliances (Timmor and Zif, 2005), it appears
that they are still associated mainly with the older industries. Supporting the study
proposition, it was found that manufactures who exported their own brand perceived
private labels as suitable for grocery items more than those who are already engaged
in manufacturing for overseas private labels. This study also supports earlier studies
regarding the popularity of private labels in the more traditional industries.
Nevertheless, this study found private label ventures in various and newer industries
such as communication, plastics and electronics. Hence, it seems that there is a
perception gap and perhaps if manufacturers were more familiar with private labels’
new categories and developments they would consider the private label option more
seriously.
Managerial Implications
Private labels are a growing business that is permeated, as shown in theory and
practice, with continuous friction between producers and distributors—mainly
retailers. Many of the confrontations and dilemmas derive from the very fact that the
retailers, which are the manufacturers’ clients, after developing and selling their
private labels, become their competitors. Manufacturers, though they wish to keep on
good terms with retailers, are afraid of losing market share, increasing their
dependency on retailers, losing customer loyalty and damaging their own brands.
More retailers, on the other hand, seeing the potential of private labels, are looking for
reliable manufacturing sources and at the same time trying to avoid clashes with
brand manufacturers. This study suggests that having agreements between
manufacturers and retailers from different markets/countries may solve or mitigate
some of the problems and serve the interest of both parties. The study found that
different sized manufacturers, some of whom are market leaders, are already partners
in agreements to produce private labels for overseas retailers.
The study revealed several factors that enhance/reduce producers’ willingness to
cooperate with overseas private label retailers. Following this study’s findings,
retailers should be aware that their reputation, trust and familiarity among consumers
are strong motivators behind manufacturers’ readiness to sign private label
agreements. While domestic manufacturers of private labels are highly concerned
with lower mark-ups, overseas producers see the lower costs as one of the main
advantages in exporting their own brands. Quicker penetration of new markets is
15
another positive feature that is repeatedly cited by overseas manufacturers. Hence
substantial orders in due time may encourage overseas agreements.
This study found that the dominant perceived drawbacks for private label agreements
are their apparent short-term lifecycles, appropriate mainly for grocery items, and the
fact that they increase dependency on retailers. Some private label manufacturers also
felt uneasy with their production strategy and tried to justify it using different
excuses. It seems that retailers can benefit greatly if they increase manufacturers’ trust
for the medium and long terms. This can be done by purchasing commitments, longer
term contracts and cooperation in developing private label variety and categories.
Demonstrating to private label manufacturers that market shares of traditional
industries have grown steadily, and that private labels have entered new categories,
may reinforce their willingness to cooperate with the retailers’ private labels.
Limitations and future research
This study is a pioneer in empirically testing the subject of private label
manufacturing agreements in the international context. As such, it is difficult to
compare it to other studies on the subject. The study discusses the strategic dilemmas
and implications both for manufacturers and for retailers. The empirical study focuses
on the international producers—their behaviour and perceptions. Thus, an
examination of retailers’ views of international agreements could add important input
to the topic. Since the study was conducted in one country, testing of its findings to
other regions should be conducted. Replicating the study in other countries and
regions would enrich the discussion as well as the theoretical and practical
implications. The sampling cannot be considered random, since the interviews were
conducted with managers who a priori agreed to participate in the research.
This study tested a particular set of variables derived from the theoretical
discussion and qualitative analysis. Other factors, such as firms’ global orientation
and goals, and retailers’ concerns for continuous supply and control, may affect
overseas private label agreements. Future research can also concentrate on different
industries and include factors that are more industry specific such as guidance
qualifications that are needed to promote technological items.
16
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19
Appendix
Table 1 – Manufacturers’ Perceptions of “Manufacturing for Overseas
Private Labels”—Means and S.D. scaling from 1 “disagree” to 4 “agree”
The Measured Statements (Variables)
Perception
N=101
Manufacturing for overseas private labels means lower
2.62 (1.19)
costs than exporting the firm’s own brand.
Manufacturing for overseas private labels increases
3.30 (.99)
dependence on the overseas retailer
Manufacturing for…is sometimes the only way to enter
3.04 (.96)
the exported market
Is preferable if the consumers know the retailer
3.14 (1.00)
Is a strategy that suits the short and medium terms
2.05 (1.20)
Is a strategy that is imposed by the retailers
2.44 (1.12)
Is a strategy that mainly suits grocery products
1.93 (1.16)
Is a strategy mainly for small and medium-sized firms
1.96 (1.08)
When manufacturing for overseas private labels launching
3.11 (.93)
to the markets is quicker
For small/medium-sized firms chances of succeeding
3.02 (.99)
overseas are greater when manufacturing for private labels
Decreases the chances for lawsuits due to the product
1.69 (.96)
20
Table 2: Logistic Binominal Regression Results
Categorical Dependent Variable = Manufacturing for Overseas Private
Label vs. Exporting Manufacturer’s Brand
Predictor Variables (Statements)
Unstandardized
Coefficient
Constant
-2.546
Lower Costs
.633b
Increased dependence on overseas retailer
-.084
Sometimes the only way to enter the target export market
-.089
Preferable if the consumers know the retailer
1.1590a
A strategy that suits the short and medium terms
.524b
A strategy that is imposed by the retailers
-.143
A strategy that mainly suits grocery products
-.633b
A strategy mainly for small and medium-sized firms
-1.249a
Launching in overseas markets is quicker
-.242
Greater chances of succeeding for small/medium-sized
.453
firms
Decreases the chances for lawsuits due to the product
Note: coefficient signs are for manufacturing for overseas
a - P < .01, b – P< .05
Model Statistics
-2 log of the likelihood function = 79.647
Chi square (11 d. f.) 36.039 (P . 01)
Correct classification = 77.4%
.317
private labels
21
Table 3: Spearman’s Correlation Coefficients
Lower
Costs
Tested variable
Lower costs
Increased dependence
The only way to enter
If consumers know the retailer
For short/medium terms
Imposed by the retailers
Mainly for grocery items
For small/medium-sized firms
Launching is quicker
Greater chances for success
Lower chances of lawsuits
Increases
dependence
1.000
.237*
-.091
.002
.090
-.033
.103
-.012
.200*
.124
.055
Only
way
to
enter
If
consumers
know the
retailer
1.000
-.086 1.000
.029 .292*
.237* .078
.196* .198*
.260* -.166
.159 .233*
.094
.064
.156
.094
.083 -.056
1.000
-.316*
.292*
-.141
.088
.167
.482*
.131
For short
/medium
terms
Imposed
by the
retailers
1.000
.134
.376*
.249*
.003
.025
-.024
1.000
.178
.031
.079
.315*
-.048
Correlation Coefficient (continue)
Tested variable
Mainly for grocery items
For small/medium-sized firms
Launching is quicker
Greater chances for success
Lower chances of lawsuits
Mainly for
grocery
items
1.000
-.020
.055
.092
.153
For small/
medium
size firms
1.000
-.134
.168
.020
Launching
is quicker
1.000
.292*
.232*
Greater
chances for
success
1.000
-.027
*Correlation is significant at p < .05
Table 4: Annual Sales in Millions of Dollars and manufactures strategies
Range
% of firms within
% of firms within
manufacturing for exporting under
overseas private firms'\brand
labels
Total
1 - 10
13.2
20.8
16.8
11 - 30
37.7
29.2
33.7
31 - 100
18.9
25.1
21.7
101 - 300
20.8
10.4
15.8
301+
9.1
14.6
11.9
100.0
100
100
Total
Chi Square = 4.116, 4 df, non significant.
Lower
chances of
lawsuits
1.000
22
Table 5: Distribution of Firms by Industry According to Manufacturing for Overseas
Private Labels (in numbers) and Percent of Firms by Industry
Industry
Exporting
Manufacturing
Percent of
Row
under
for Overseas
Manufacturing for
Total
firms'\brand
Private Labels
Overseas Private
Labels (row %)
Food and beverage
3
11
78.6%
14
Jewellery
1
2
66.7%
3
Medical equipment
5
0
0
5
Rubber and plastic products
4
8
66.7%
12
Chemical and petroleum
6
6
50%
12
Metals and metal products
7
5
42%
12
Machinery
4
1
20%
5
Electronic and electrical
6
5
45.5%
11
Textiles and clothing
2
11
84.6%
13
Optical instruments
3
0
0
3
Computers and software
4
1
20%
5
Communication and
3
3
50%
6
48
53
/measuring instruments
products
equipment
telecommunications
Column total
101