Why Generic Products Lead To More Profits

Subject: Marketing
Pages: 15
Words: 4022
Reading time:
14 min
Study level: PhD

Generic Makers and Retailers

The main reason why stores and companies make generics is that they are more profitable in the long run. This happens in many and diverse ways. There used to be a notion that generic products are of low quality and that they cannot compare with the mainline brands. That notion has long gone and consumers have realized that the line brands and the generics are similar in both quality and end usage capacity. This change in the psychology set up of the mind of consumers has served to enhance the need for companies to make more and more parallel products and private labels.

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Customer loyalty is a great source of continual profits for companies. Loyalty can be generated using various means but the single most significant one is the need to maintain product quality and to be consistent. A satisfied customer has a very high chance of making a repeat purchase. Private labeling or the making of generic products has that effect in the most significant way. The realization that the generic products have the same effect as the line and mainstream brands makes the customers loyal to a particular outlet. The products in this research were found to have that kind of customer and consumer orientation. These include CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, CareOne toothbrushes, and Family Dollar window cleaner.

The products that were the subject of this research are family daily products that are needed for everyday use in the family. This means that they always feature in the family budgets and that is the case for all generics. This fact makes consumers want to buy them at the lowest prices possible. Hence when they find alternatives that have the same usage and quality at the same time, they make purchases. This is especially true for products like bread, toothbrushes, and detergents. Although most of them may be sold at lower prices to keep the flow of customers in a particular store constant, it eventually impacts customers in that kind of way. For example, CareOne Toothbrushes sold at the Publix Supermarkets serve the same purpose as the other brands such as Reach found in the same stores. Family usage for toothbrushes is frequent as their lifetime usage is approximately two months. This makes them profitable to the outlet that is dealing in and making them. This is also very true for products such as bread, cookies, and juices. It is however a different case when it comes to drugs as people tend to be reluctant towards generics. This is bound to change as insurance companies, having realized no difference between them and line brands, are reverting to the use of generics unless specifically stated by a doctor (O’Malley et al. 2006).

The other reason that consumers prefer generics is because they are cheap and quite affordable. This means that they save money. However, this is happening to be the main reason why some companies do not engage in the production of generics. Stores interested in generic storage of products may employ the different avenues available to them. They may use national brand manufacturers who are interested in making generics to make them generics at a cost. Another one is the use of exclusive generic production companies. If the outlet is big enough it may resort to the use of its production capacity to produce those private labels. Whichever avenue the store facility employs to make its generic product, the bottom line is that it is a costly affair. If it is self-production, it means that they conduct research. This is costly and it becomes a sunk cost if the product does not become successful and the company resorts to the withdrawal of that product from the market.

A company that is interested in making a generic product may have various reasons for that. It may be to grow the generic product into a premium brand. It also may be the need to attract and retain customers by offering cheap products. Retaining customers has an unseen dimension because it means that once the consumer is in a particular outlet he is bound to make other purchases. Therefore a company spreads the costs that it incurred in making the generics and attracts the customers into the retail outlet. This is a two-pronged approach that always works for companies that make generics. Publix supermarkets are a perfect example with their host of generics. CareOne Toothbrushes (which is a subject for this research), slices of bread, cookies, and juices were some of the products that were highly visible in the retail chain.

This study found that the marketing costs associated with generics were significantly small compared to line brands. For the case of all the products: CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, CareOne toothbrushes, and Family Dollar window cleaner, there was very minimal marketing (if any) that was done to make consumers associate with them for purchase. The main cost that makes line brands expensive is the flamboyant packaging and the intense marketing done on the products to make them saleable. This is also true if retail outlets are to stock them. This marketing is done in television advertising, space soliciting in supermarkets trade discounts among others. On the contrary, there is no marketing initiative adopted by generic production companies or retailers. This is especially because it is a word-of-mouth affair. When one customer suggests that the product is equally good, he spreads the rumor to another, and buzz marketing takes its course. This is especially true for products that may be harmful to human health and hence it makes trying them out a tricky affair e.g. CVS Skin Relief Body Wash and Sun’s OxyMagic all-purpose detergent according to (O’Malley et al. 2006). This fact makes them more profitable than other mainstream products. This coupled with the fact that they do not require any special packaging to be recognizable on shelves of supermarkets makes them very profitable. Family Dollar window cleaner is packaged almost similar to its mainstream brand. This is a special case where a product must be packaged. However many retailers and manufacturers of generics employ conventional packaging and largely concentrate on quality. This quality must be the same as the mainstream brands’ quality and if possible surpass it. Hence the customer will not care that it is not beautifully packaged as long as it meets the standards that he expects of it. This was highly true for products such as bread and cookies which are just removed from ovens and packed as the customer waits (Azzato, 2009).

Store brands have been hailed by many retailers and manufacturers. They have the effect of creating a uniqueness associated with particular stores. This point of difference is quite essential especially with the many brands that are in the market and the competition that it has brought. If the quality of the store brands is the same as is the case of CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, CareOne toothbrushes, and Family Dollar window cleaner, the customer loyalty is unlikely to change or to switch back to mainstream brands. Studies have shown that three-quarters of people would not switch back to national brands given an opportunity if they are satisfied with the store brands. This is impressive to retailers who get the chance to create premium brands in the long run. It is also quite good in the long run for the companies and retailers involved as it means that it cuts a niche in marketing that cannot be overturned by competitors. The bottom line is that they enjoy profits for quite a long time.

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Putting into consideration all the above factors, the generic products that were involved in this research were found to have more profits compared to national brands. Companies are found to be heading towards making their brands all over the world. The trend was set off by small products like bread and other disposable but it has now grown to very major brands in the market. If every outlet were to create its generic brand and the uptake remains constant, then it follows that in the long run store brands and private labeling would be the next battle zone for market competition (Harrison, 2009).

Long Term Implications

Brand makers are at crossroads as pertains to the continued favor been extended by consumers towards generic products. It continues to be an affair that is hard to grapple with. The current economic crisis that has engulfed the world and many an institution around the world serves to ring bad bells to brand makers. When the above-mentioned products are put into consideration, it paints not a very pleasing picture to brand makers. They are facing increasing costs in terms of marketing and brand maintenance. They also face the challenge of shrinking consumer pockets as a result of the economic downturn. These are just but a few and the following is the detailed outlook (Harrison, 2009).

Less Disposable Incomes

Consumer spending around the world and in any particular economy is determined by the amount of disposable income that they generate. Disposable income is the income that is left after all the deductions have been made from a consumer’s salary. The aim of many governments when it comes to stimulating an economy is to increase the disposable incomes of citizens. The disposable incomes, on the other hand, inspire or bring a propensity in consumers to spend. In economic terms is that it increase their purchasing power (Harrison, 2009).

During the current situation, which was triggered by a lack of liquidity in American banks in late 2008 after arbitrary borrowing, the purchasing power of individuals has greatly been reduced. This has seen the economy slacken in a very sharp way and consumers shy away from luxury spending. It has also impacted badly on their budgets and they are left with no option other than to reduce their purchases on things termed as luxury. This is where they end up choosing generic brands against brand names in the market. They are considered pocket-friendly in these times and they impact well or at least reduce the pain that has been brought about by lack of liquidity. This increased value for less means that consumers do not shy away from spending collectively

As mentioned earlier, customers tend to continue using a particular product especially after getting over the initial uncertainty that surrounded its usage. Therefore it follows that many consumers are highly less likely to revert to using brand names especially after realizing that the same purpose is served by generics. This reality which has a long-term orientation is a reason for worry from the brand makers. This is because it means they will have used so much money to convince the consumers to use their products or they reduce prices to the level of generics. This brings me to the second impact as noted by Harrison (2009).

Overhead Costs

For a brand name to continue being relevant in the market it has to attract certain costs that are not associated with generics or private labels. Because consumers have shifted and continue shifting to pocket-friendly generic products it leaves a very bleak situation to brand makers. In their quest to want to remain visible n the market they have to either cut down their prices or spend much money to convince customers to buy their products. This marketing and advertising is generally aimed at convincing prospective consumers of the availability of such products in the market and coercing them to buy (Harrison, 2009).

Putting into consideration the ever-increasing cost of raw materials and other direct costs associated with a single product it follows that it is virtually impossible to cut prices. The increasing costs are not made easier because of the spiraling inflation the world over with the recent victim being China which its inflation almost double in less than two years. The need to remunerate employees comfortably has never been relevant as of now. This is because the unions that represent the employees have a unified mind towards making sure that employees are well paid. This is coupled with the governments’ minimal salary sets that have to be complied with. All these factors considered it is therefore impossible to cut costs and reduce prices, especially direct costs.

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The only avenue that can provide a reprieve to the brand makers is cutting down their overheads. However, this is hard in the view that they have to do some intense marketing to remain afloat in a market that is going generic. They also have to engage in other visibility endeavors such as advertising, shelf space buying in popular stores, and eye-catching packaging to capture the eyes of consumers whose pockets have been dealt a blow by the current economic situation (Harrison, 2009).

Effect on Sales

The above factors are making the interest of the brand makers a hard affair to deal with. The only answer lies in loyal customers who will go back after the economic situation has lessened. However this is a very unlikely scenario and much observation will be directed to the dynamics of the users of CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, CareOne toothbrushes, Family Dollar window cleaner, and other generic products to see whether they will go back to the original brands after the financial crisis (Food Marketing Institute, 2009).

As the situation stands now it is greatly in favor of generics which have recorded increased sales and greater customer numbers and loyalty. This number of customers continues to burgeon and it remains to be seen whether it will remain that way. Therefore in the past two years, the sale for renowned big brands have continued to plummet and they have been on the news with the ever-increasing need to lay off workers to be able to operate in that harsh environment.

Since these companies and manufacturers that make brands are multinationals, they can flex their muscles and win back their market. This is an argument that has been furthered by many observers and it remains to be seen how true it is. However, another school of thought points out that loyalty once built is hard to take away. Since consumers were allowed to shift loyalties by the economic crisis, it is only a matter of getting what they always wanted and they will stick to the newfound darling in generics.

Studies have shown that consumers are constantly in favor of generics with over 70% of American consumers saying that once they use generics they don’t shift. Over half of the sampled said that they now use generics and another quarter said they use a mixture of brands and generics. Only a single quarter of the sampled said they have stuck to using brands.

The above facts paint a very bleak future in terms of profitability and increase of sales when brands are considered. Although some of the companies are generic makers themselves as they continue having their parallel brands, their original brands continue to suffer in the current economic downturn. Although it is mostly middle income and little income earners that are mainly using store brands it is also common to the high-income earners who are after premium and quality. These two features are the main drivers of consumers towards the use of private labels (Food Marketing Institute, 2009).

Trend watchers and observers are saying that the economic crisis has brought a dynamic demographic shift in consumer behaviors. They are also quick to warn that it is less likely that the shift will change after the improvement of the economic situation. This is a no so appealing case study to brand makers who see themselves being robbed of market share. It is also bad for their financial statements which are bound to continue shrinking according to the trend. Therefore, overall it paints a very bleak picture of the long-term implications of the economic crisis in as much as brand makers are concerned.

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Financial Impact

Retailers will continue to have the greater task of being able to convince consumers to buy some products with the continued effect of the financial meltdown in its full swing. It is not basically because the consumers do not want to purchase but they are not in a position to make some purchases as they try to save in the current financial situation. Consumers have less disposable incomes and this has made them revert to the usage of cheaper products as they wait for the financial situation to improve. However, this has made them to greater value in generics although they were running away from a budget situation (Food Marketing Institute, 2009).

Generic Makers

As time goes on and the financial situation improves, the books of account of retailers that deal in generics and makers of generics continue to burgeon and show increased impressiveness. All the users of the private labels that are subject of this research: CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, CareOne toothbrushes, Family Dollar window cleaner, and other generic products will continue to use them even if the economy returns to normal. This is according to the studies conducted by other observers and independent observations I made in preparation for this paper.

According to the findings of this research that found that in the current situation some brand name makers are making losses. The same research found that generic makers were making a profit albeit a small profit. This serves as a very great pointer to the actual things that are anticipated to happen soon and in the long run. The makers of generics are bound to continue to make even more profits especially as consumer demographics and behavior lean in their favor. On the other hand, the brand maker will have a hard time trying to survive a market that is in favor of the generic makers. Therefore the generic makers mentioned above are looking at a good future laden with competition and market positioning and effective targeting.

The most generic maker has to do independent research to ascertain the viability of the products that they intend to throw into the market. This initial setback in capital input will be reversed with the advent of the above-mentioned factors working in their favor. Once that happens then the retailers will continue to sell the products at an even lower rate than the other industrial players. This is the case for CVS Skin Relief Body Wash, Sun’s OxyMagic all-purpose detergent, and Family Dollar window cleaner. As for CareOne toothbrushes that have already covered its initial capital costs, the long-run implication is building a strong brand that will reliably compete with other mainstream brands. This premium brand will have an even greater following in the long run if the supermarket chain (Publix Supermarkets) continues to widen its influence in America and other countries like Africa and Asia.

CVS Skin Relief Body Wash has a tricky situation as it seeks to associate itself with the quality expected of it from the competition base that is already there. Neutrogena Body Wash and the parent company that supplies it has cut itself a very strong market share that may prove unshakeable. However, with the help of buzz marketing that involves word of mouth and referrals coupled with the economic downturn, the product is likely to experience great growth in and outside America. This is however dependent upon the company’s short and long-run goals which should be to expand to realize the full potential of the product’s growth ability.

OxyMagic all-purpose detergent and Family Dollar window cleaner are two products that highly depend on the quality and customer’s temperaments. Having done away with the issue of initial costs that the company may have to transfer to the consumers, the financial inflow is likely to be impressive if the findings of this research are anything to buy. Some aspects of Publix supermarkets’ toilet paper will drive its continued success in the market. The main one is the quality of the paper and how well it compares with others especially Charmin and Scottie’s. The mainstream competitors have invariably covered for the initial setback of costs and it remains to be seen how well this will impact the generics. The private brand of toilet paper that Publix supermarkets offer is in the process of recovering its capital outlay and everything is pointing towards a more successful future considering its rating in this research. Azzato (2009) found that it was the most profitable as compared with other subjects of this research. That is a good pointer and the fact that the economic situation is improving after the company has cut itself a market share in the toiletry and hospitality department, where they get frequent supply contracts, is a long-run indication of future success.

Therefore the generic makers mentioned above are looking at a good future laden with competition and market positioning and effective targeting. The competitors from the mainstream brands are less likely to take this with a pinch of salt and are likely to wage a very hard war in the market field as they try to regain the lost ground. Therefore the makers of these products, who happen to be retailers themselves, have to think of making their products premium brands. This will be a good long-run goal for the respective companies. They should also consider expansion although that will be hard enough on the grounds of marketing only one product. For example, Publix Supermarkets cannot open new branches based on selling more of its tissue. It must, first of all, develop strategies that will favor the intended expansion. The company is going to be at a greater advantage if they develop other products that are privately labeled to complement the effort made so far. When that happens it will have more sensible ground to expand based on reaching out to other markets.

Retailers and Consumers

The financial impact on the consumers as well as retailers will be the same. They will enjoy the good tidings that will come with the success of the generics. Many retailers happen to be the makers of the generics. For example, Publix supermarkets are the ones who produce their line of toilet paper. Family Dollar window cleaner is also supplied and produced by the same company. This is a strategic move as the company can set its prices based on the cost associated with a product.

It is also a brilliant move to make generics on your own as other strategies can be pushed by the same. The example can push for greater customer loyalty through the cheap sale of generics. This will greatly push for overall sales in the retail outlet and will increase profits according to (Azzato, 2009).

Consumers of the products will have a very great financial dimension with the usage of private labels. These store brands firstly have the same quality as the line brands. For the lesser cost, the consumer will have the same usage and matching quality as the line brands which are expensive most of the time. The financial impact, in this case, will be positive and the consumer will have better reasons to use the product. In the long run, it is going to have great results for the two: consumers will save and the retailers will make more profits and increase customer loyalty and sales.

Overall Economy

The use of generic brands has a great effect on the economy. Firstly, it creates consumer confidence in times of crisis as it brings alternatives to the use of expensive line brands. This increased value for less means that consumers do not shy away from spending collectively. Consumer spending is good for the economy as it stimulates more company output. The need for more output in turn means that companies look for more people to work to meet the demand as noted by (Azzato, 2009). This creates direct employment for many people. The employment created in turn leads to more spending and the economy grows. This also increases the gross domestic product of companies which is measured by spending or amount of output (Azzato, 2009).

References

Azzato, M. (2009). National Brands Prepare For War With Store Brands. Web.

Azzato, M. (2009). Store Brands Drive Differentiation and Profits. Web.

Food Marketing Institute. (2009). The Food Retailing Industry Speaks. Web.

Harrison, N. (2009). Consumer Loyalty to Own Brand Products Here To Stay.

O’Malley, A. et al. (2006). Impact of Alternative Interventions on Changes in Generic Dispensing Rates. Health Services Research, 41(5):1876-1894.