My 3 Cents: The House Brand Trap

 

There is a trend going on in the electronics industry that troubles me; the increasing ┬ápervasiveness of big box house brands. It isn’t just that it works against what I do for a living, though I am sure that plays a part in it. House brands have spread into every aisle and shelf in your average big box store.

Acquiring product and slapping your name on it isn’t anything new. Department stores have been doing it for years. But house brands have always been firmly planted in bland categories like socks and pot noodles. Now virtually any product is up for grabs. Some retailers don’t hide this fact, labelling them after themselves or simply “No name”. Then trend now has been to choose a more “brand” sounding name in an attempt to blend in more naturally with surrounding products. Best Buy even has multiple house brands (which they cheekily refer to as “Exclusive Brands”) hiding under aliases like Rocketfish, Insignia and Dynex.

“So what’s the big deal?” You might ask. Retailers are just providing additional options at competitive prices. There is no harm in that right? Well if that was the whole of what they are doing then you would be correct. However, the reality of what they are doing is a little more complex and a lot more insidious, especially when viewed in the long term.

Let’s get right down to exactly how they are hurting not just the market and branded products, but even themselves;

OEM doesn’t Innovate, They Replicate

When you go down the road of OEM, you are essentially buying second-hand, what I call “Trickle Down”, tech. Many factories who do OEM exclusively grab anything and everything that isn’t nailed down with an iron clad patent. Indeed, much of the tech may even be patented, with the actual patent holders furiously playing Whack-a-mole with these copycats. Much like what is going on the entertainment industry with piracy, the support of these kinds of factories stifles the growth of companies who do the actual innovating.

Retailers are Stacking the Deck

Big box retail chains are already INFAMOUS for their one-sided contracts. Payment clauses such as “Pay per Scan”, where the manufacturer only gets paid for items that have been purchased, as high as 20% ┬áback-end rebates on the purchase price and numerous other draconian clauses make it a superhuman feat for a brand to be profitable. Of course none of this applies to the house brands. Even large brands like Samsung and Sony are feeling the sting as house brands quality inches closer to leading products. While no one would argue that Insignia would stand up against Sony, with a price point around 2 times that of Insignia, the house brand is going to dig into the market share of every consumer tribe save the most hard core Prosumers or videophiles. Normally I would end it here but I want to point out one VERY key detail; Sony is one of the 500 ton gorillas of the electronics jungle. What about everyone else, the up-and-coming brands, the ones trying to innovate their way into the hearts of consumers? Too bad, says the retailer, so long as they get their massive margins the house brands are here to stay. Which brings us to the last point…

The Emperor has No Clothes

Purchasers will swear up and down about the margins on house brand products. They will spout margins of 70% or more like they are gospel. Well when everything works right, they are absolutely right. From experience, however, “everything works right” is a fantasy island off the coast of Lollipop land. Launching product is a very complicated game, especially so in the fast paced world of electronics. Let’s assume that the 70% is the actual margin. Now you manufacture 20,000 pieces of a product and you sell 10,000 at full price. Because you did OEM the whole lot is final sale, you’re stuck with them sink or swim. You have 10,000 left. So you discount them, of course, probably 50% of the total margin. Now your margin is 70% on the front end and 35% on the back end. But wait, what about that last 1,000 pieces you can barely even give away? Well you probably sell those at cost, or even a loss just to be rid of them. Let’s do some basic math; the average margin on the whole lot is 52.5% IF you can sell the whole lot without ANY left overs or further reducing the sale price (which rarely happens). Now if you had purchased branded products you can call up the manufacturer and squeeze a discount, swap leftovers for new stock or any use number of other tactics to maintain your bottom line. House brands look great on paper for the bean counters but once you put the product into the wild it’s an entirely different matter.

Ultimately, however, house brands are going to continue growing so long as the house thinks their a good bet, Truth be told there may be some intrinsic benefit I am missing. I believe when used as a cheap alternative to more expensive options, house brands serve a great function picking up stragglers that may have otherwise avoided the purchase. But if retail chains start treading on the true brands’ customer base, it’s going to hurt everyone, retail included.

 

 

 

Advertisements