The mysterious companies behind Costco’s Kirkland Signature and Trader Joe’s O’s

Although store brands ostensibly compete with manufacturers’ national brands, manufacturers often have excess capacity on their production lines. To generate additional profit, some will use that extra capacity to make private labels.

Other brand manufacturers will produce private labels as an incentive for retailers, hoping they’ll be rewarded with better shelf space and placement for their own national labels.

“Most manufacturers aren’t open about it,” said Jan-Benedict E.M. Steenkamp, a marketing professor at the University of North Carolina who studies private labels and branding. “Manufacturers don’t want it to be known because it undermines the power of their own brands.”

Eight O’Clock Coffee and Kenmore

Macy’s sold stoneware whiskey jugs under its own name. Customers could bring back the jugs for refills, according to Christopher Durham, the president of the Velocity Institute, a trade association for private brands.

Montgomery Ward developed its own line of aspirin in wooden containers, while the Great Atlantic & Pacific Tea Co. (aka A&P) sold branded spices with the slogan “Take the Grandmother’s Advice, Use A&P Spices.” A&P later developed Eight O’Clock Coffee, one of the most famous private labels of the period.

In 1925, Sears created the Allstate brand for car tires. A few years later, Sears launched its first Craftsman wrench, according to Durham. Its Kenmore line, which started as a sewing machine brand in 1913 before branching into vacuums and other home appliances, became the leading home appliance brand in the United States.

These private labels were the exception, however.

Most customers were fiercely loyal to specific brands, not retailers. A store that didn’t carry major labels would likely get crushed, which gave manufacturers immense leverage.

Additionally, many store brands were also considered dull, cheap knockoffs of national brands.

The low point of private label came during the 1970s, Durham said, when stores seeking to cut costs and rolled out generics with basic white backgrounds and black letters identifying the product — beer, soap, cola, beans and other staples.

Shopper loyalty

Retailers make private label brands for a variety of reasons, including to boost profitability and sometimes as a negotiating tool against brands.

Private brands often carry profit margins that are 20% to 40% higher than national brands because stores don’t have to pay the advertising, distribution or other markup costs that are embedded in major brands’ prices.

In the mid-20th century, many retailers started to develop their own labels to claw back bargaining power from dominant suppliers and keep their prices in check. As the US retail industry has consolidated in recent decades, the power dynamic between retailers and suppliers reversed. Now, stores have more leverage to introduce their own labels — whether name brands like it or not.

“Forty years ago, Walmart pissing off P&G would be a risky situation. Now, Walmart is much bigger than P&G,” said Steenkamp, the marketing professor.

Today, stores’ private brand operations are more sophisticated than ever and a much bigger focus for chains.

Stores are likelier these days to develop a distinctive private brand or product to stand out against competitors and create shopper loyalty, said Krishnakumar Davey, the president of client engagement at IRI.