Sustainable Sourcing: The Myths, Risks and Opportunities to Private Brands

This is the first segment in a four-part series on undertaking a sustainable-sourcing business approach to innovate private store brands. Upcoming sections will explore the Crawl-Walk-Run approach to sustainable sourcing.

If you are just beginning the journey into sustainable sourcing or are considering if it makes sense for your private brand, there are some things you should know and contemplate as you explore the idea.

According to the 2014 U.S. Store Brands State of the Industry research study, retailer and wholesaler respondents selected ‘differentiation’ and ‘building loyalty to their stores’ as the most important roles that private brands play, the same as in 2013.

As U.S. national brands continue to struggle with lower growth year-to-year, private brands’ sales in all major retail channels continue their upward trend, setting new records across the board for annual revenue, according to the Private Label Manufacturers Association (PLMA). In 2014, U.S. store brands accounted for nearly $3 billion in incremental sales overall, an increase of 2.5 percent over the previous year and more than twice the percentage gain that was recorded by national brands.

In the U.S., consumer awareness, the demand for more transparency, and continued compression on margins are providing an opportunity for private brand owners and the industry to look at value and innovation through a different lens. Sustainable sourcing, generally defined as using a resource so that it is not depleted or permanently damaged, is one way to differentiate your private brand from the others and also bring additional value to the consumer.

When developing your brand strategy, it is crucial that it be approachable, believable and doable. It is important that your brand is communicated properly to the customers in a manner that consistently meets expectations.

Shattering the myths

First, let’s dispel some of the myths regarding the cost of adding a sustainable sourcing strategy to your private brand. Are you thinking, this is going to drive up costs significantly, or I need to hire a team to manage it, or I need to have a comprehensive approach to even start including sustainability into my business model?

The reality is that 1) sustainable sourcing may not drive down costs; 2) you will need CEO support; and 3) your existing team needs to have the same sustainable sourcing goals. There are, however, things you can do today to embrace sustainability within your private brand program that add little-to-no cost, utilize your current staff resources, and put you on the path towards working more efficiently with your trading partners. In addition, taking steps towards sustainable sourcing wins praise from NGO activists.

Sustainable sourcing will strengthen your brand and build a sustainably-savvy customer base which is highly loyal to its value equation. Your goal is to earn the loyalty of these customers as they discover the values inherent in your sustainably-sourced private brand. So, in addition to being viewed as socially responsible, loyalty of the sustainably-savvy customer is the best reason to integrate sustainable sourcing into your private brand strategy.

Risks

Let’s consider the risks of sustainable sourcing for private brands. It is likely that you have heard the term ‘greenwashing’. It is the term used for over-promising and under-delivering on the sustainability attributes of a product or service.

The overuse of the word ‘natural’ on labeling is a good example. We have all heard the problems with putting the word ‘natural’ on your packaging. The USDA and FDA definitions are ambiguous at best, and every natural private brand has a different definition. Due to the lack of a clear definition, lawyers have focused on packaging that is considered to be misleading to consumers due to the loose definition of ‘natural’ and, if challenged, you are put in the position of having to stop selling the product or of redesigning the packaging to remove the wording.

You may have a natural private brand program, and it is fine to refer to it that way internally. I caution you, however, about using the word ‘natural’ on your packaging and, instead, use measurable, fact-based words in order to avoid risk.

A newer but similar risk in product labeling is known as ‘humane-washing.' The word ‘humane’ can be interpreted in different ways, resulting in lawsuits challenging labels showing ‘happy cows,' ‘humanely raised pigs’ or pictures of idyllic farms.

Understand the risks and use fact-based words in marketing, but don't avoid sustainable sourcing. It is newer, less charted territory where rules and regulations are still being developed, but the business opportunities are tremendous.

In 1989, a U.K.-based publisher coined the new term ‘ethical consumer’. This was done by creating and publishing ‘ratings tables’ that award companies negative scores based on these sustainability categories. Today, in the U.S., Bloomberg and Reuters provide environmental, social, and governance ratings directly to the financial data screens of hundreds of thousands of stock market traders.

Consumer and social media are focusing on sustainable sourcing issues such as the humane treatment of animals, farming practices, packaging and recycling, and how the product arrives at the store. It is clear that actionable ideas are key to starting to incorporate sustainable sourcing into your private brand strategy.

Target markets

There are two primary segments of the sustainably-savvy U.S. customer base: millennials and the more mature LOHAS (lifestyle of health and sustainability) demographic. In 2012, Forbes said that the LOHAS market segment is a growing into a $300 billion+ business opportunity.

LOHAS is comprised of upscale, belief-driven consumers who are committed to ethical spending on products meeting its value equation and who don't switch brands to save money. Sustainably-sourced private brand products will attract LOHAS dollars.

Millennials are the new majority demographic classification and soon to be the largest dollar. This segment is very aware and supportive of a sustainable lifestyle. They are not specifically loyal to national brands, but are fiercely loyal to brands that meet their value equation. It should be the goal of a private brand to have millennials and LOHAS becoming its customers for life.

When taking on a project of this magnitude, I recommend taking the Crawl-Walk-Run approach, which is featured in the next three posts in the series.

Portions of this were originally published in Henry Stewart Publications 2045-855X Journal of Brand Strategy VOL. 4, NO. 2, 000–000 Summer, 2015

Image credit: Flickr/Andrew 鐘