My face wash goes by many names. About a decade ago, I started using a product under the brand name Cetaphil, because, as best as I can remember, a dermatologist recommended it to me. At some point not too long afterward I elected to save a couple bucks by switching to a similar-looking product, one with a CVS logo, that sat next to Cetaphil on the shelf. I’ve stayed more or less loyal to that Cetaphil lookalike ever since, and in the intervening years grew accustomed to the texture and odor of this particular translucent goop, as well as its price points: $13.49 for Cetaphil and $10.99 for the store brand when I last checked at a CVS.
But recently I came across another Cetaphil clone (this one with the brand name Mountain Falls) on Amazon, listed at the almost unbelievably low price of $4.00. I soon found another, with four bottles selling for $19.60, from an Amazon-owned brand called Solimo. Here was the off-white bottle and blue cap that had become a fixture in my shower, priced at roughly a third of what I’d been trained as a consumer to expect.
I had questions. How could Mountain Falls and Amazon afford to sell this face wash at such low prices? Are their products worse than Cetaphil? Are they the exact same? Does Cetaphil (or the company that makes it, Galderma Laboratories) know about this? Do they care? How much does my face wash even cost to make? And what have I been paying for all these years? These questions presented a 21st-century skincare mystery, the pursuit of which led me to two of the most mysterious (to consumers, at least) words in retail: “private label.”
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“Private label” is a designation that would seem to be reserved for products of true refinement and distinction, but in fact it is what the consumer-product industry calls goods that retailers produce themselves. Private-label products are not a recent innovation—stores have been developing and selling their own products since the 19th century—but their resemblance to various brand-name consumer staples raises the question of what, exactly, is the point of brands. These days, as cheaper substitutes proliferate online and retailers curate their private-label portfolios based on ever more granular sales data, it’s getting harder and harder to tell.
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Back when I switched from Cetaphil to CVS’s house brand, I didn’t notice any drop-off in quality. The same was true when I switched from CVS’s house brand to Mountain Falls. I wondered if perhaps I was just not a face-wash connoisseur, but when I consulted half a dozen experts (including chemists and skincare marketers), I heard basically the same verdict: The face washes aren’t technically identical, but they are very similar—to the degree that, to the typical face, they’re probably indistinguishable.
Most face washes are made in basically the same way, said Mike Wint, a senior principal engineer at the consumer-product marketing company Amway: “You put water in a tank. You stir the stuff in[to] the tank.” Indeed, the list of ingredients on the four bottles I looked at all start with water and end with the preservative methylparaben (except for Solimo’s, which ends in sodium benzoate, also a preservative).
In between are, among other things, surfactants (which get rid of oil on the skin), humectants (which keep skin moist), and “fragrance,” which Wint told me is there to cover up the “objectionable” Crisco-like smell of the fats that soaps and surfactants are derived from.
Chemically speaking, my face wash is a bit boring. “These are very inexpensive ingredients—it doesn’t mean they’re not good—but they’re very inexpensive commodity ingredients,” said Karen Young, the CEO and founder of The Young Group, a beauty-product marketing company. “There's nothing fancy or sophisticated, which is why people love Cetaphil … and that’s why it is knocked off [so often].”
Just how inexpensive these ingredients are is a little hard to state precisely, because manufacturers can get much better prices if they buy in bulk—and this applies to purchasing bottles and caps as well. With this caveat in mind, the experts I consulted helped me ballpark what it costs to make the plastic bottle and labeling, the plastic pump cap, and, as one consultant put it, “the juice” inside. The bottle, they agreed, was simple and cheap—probably less than 50 cents. Estimates for the cap fell in a similar range. As for the actual face wash, my experts figured the bill for the ingredients would be about $1 to $1.50 per bottle.
All told, the product I’d been spending $10.99 on likely costs about $2, plus or minus 50 cents, to make. (None of the face-wash brands mentioned in this article would comment on their costs or production methods.) If that’s what it costs to make a bottle my face wash, I wondered, where had my money been going? Let’s start with Cetaphil. Sixteen ounces of the stuff sells for $13.49 at my local CVS. The marketers I consulted said that margins can vary greatly from product to product, but that a good rough guess is that CVS pays Cetaphil half of the sticker price of each bottle. For simplicity, let’s call that cost $6.50.
This is not a bad deal for Galderma: It made a thing for probably not more than $2.50, and sold the thing for $6.50. And it’s not a bad deal for CVS, either: It bought a thing for $6.50, and sold the thing for twice that. Both companies use that money to cover their many costs—for Cetaphil, that likely includes marketing and research and development, and for CVS, that likely includes rent and labor.
The economics get more interesting with CVS’s private-label face wash. In this scenario, CVS charges customers $2.50 less than it does for Cetaphil, but, because it’s buying from a manufacturer instead of a brand, gets to acquire the product for probably not more than $2.50 (instead of $6.50), so it comes away with a bigger margin.
Christopher Durham, the president of the consultancy My Private Brand, explained the cost of buying a brand-name product this way: “What you’re paying for is science and innovation and marketing and the brand on the front of it and the distribution, and then they have television commercials. There’s a lot more than just the cost of goods.” A company like CVS that orders up a private-label version of a product, Durham told me, “can get away with reducing all that.”
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Amazon contorts these cost structures even further. While it does have some physical stores, it has far fewer than CVS does, so CVS’s costs for rent and labor are likely much higher. Given that, and many other efficiencies working in Amazon’s favor, Amazon can still make money by selling its products at lower prices, even though it has overhead costs of its own, like shipping and warehousing. For instance, the per-bottle price of Cetaphil on Amazon right now is about $9.50 (though you have to buy two at a time).
The combination of Amazon and private-label production is what can make the economics of face wash get truly bonkers. Mountain Falls is a lot like a private-label brand: Its bottles closely resemble Cetaphil’s, and while it isn’t owned by Amazon, it does sell exclusively to Amazon.
Imran Karim, the founder and CEO of Trophy Skin, which sells skincare tools, said that Amazon, like CVS, might buy health-and-beauty products at a price of about 50 percent of what they sell to customers for. If that’s the case, Amazon pays about $2 for a bottle of Mountain Falls face wash that sells for $4. Its margins are probably much lower than CVS’s, but it and Mountain Falls probably are each coming away making a profit anyway. (Vi-Jon, which manufactures Mountain Falls products, didn’t respond to my requests for comment.)
The Solimo face wash, then, is the final iteration: It’s a private-label version of Cetaphil made by a brand Amazon itself owns. Right now, 16-ounce bottles of it are only available in packs of four, for under $5 a bottle.
You may be curious at this point, as I was, about how Galderma feels about all this. It spent money developing and advertising a product, and arrived at mutually agreeable deals with CVS and Amazon to sell that product. And then CVS and Amazon started selling obvious imitations of that product alongside it, at lower (sometimes far lower) prices.
“I don’t know for a fact, but I would guess that they are extremely unhappy about that,” said Karim. Most of the other experts I talked to assumed the same; Galderma did not respond to my questions.
Galderma’s feelings, sadly, don’t matter much: Private-label imitations are standard practice in this industry and others, and there’s rarely anything that the original brand can do about them. “I could reverse-engineer a face cream without even needing the formula, just based on industry know-how,” said one consultant who asked not to be named because it might hurt her business. “Getting pretty darn close—there’s nothing wrong with that.”
CVS and Amazon wouldn’t tell me how they decided to produce an imitation of Cetaphil, but Karen Young, the marketer, suspects that at some point, the retailers saw in their own sales data that Cetaphil was selling really well, and realized they could make a lot of money selling their own version. Then they probably asked a manufacturer, either explicitly or implicitly, to produce a nearly identical formulation.
I was delighted to learn that nothing is stopping me from going private-label myself: I could just bring a face wash to a producer, coyly ask them to replicate it, and stick on the resulting product a label bearing the text “Joe’s Face Wash” and a picture of my face. In fact, it’s even easier than that. Imran Karim said that some labs do the work of approximating various products and then actively try to sell those nameless liquids, gels, and creams to existing brands. “Joe’s Face Wash could turn around in a couple weeks even,” Karim told me. “They just have it ready to go and they’re going to print labels and put it on there.” (One expert I talked to even said it’s possible that Vi-Jon, which makes Mountain Falls, might be making face wash for other retailers, such as CVS, too.)
Young told me that brands can’t do much to halt this private-label process. So much of their sales come from retailers like CVS that they can’t just take their business elsewhere. “If I’m Galderma … do I love sitting on the shelf next to the retailer's private-label version?,” Young said. “No, but if I walk around the store, they’re doing it with every other major brand. … It’s a fact of life. It's just that these retailers are so big, and so powerful, that if I want to stay in there, welcome aboard."
The only public hints of any hard feelings (aside, of course, from lawsuits) are the disclaimers written on the products themselves, which read like passive-aggressive messages from one company’s legal team to the other’s. “The makers of Cetaphil do not manufacture store brands,” the Cetaphil label helpfully reminds shoppers. “Compare to Cetaphil,” mockingly responds the front of the bottle of CVS’s face wash, with an asterisk that leads to a back-of-the-bottle clarification that “This product is not manufactured or distributed by Galderma Laboratories, Inc., distributor of Cetaphil.”
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Retailers’ aisles have long been stocked with private-label products, but consumers seem particularly open to them now. Various market-research firms have in recent years sketched a picture of what they call “agnostic shoppers”—informed, savvy consumers who are less loyal to specific brands and stores than to getting a good deal, whether that deal is considered good because of low prices, high quality, or both.
Private-label products seem a perfect fit for this trend, being both cheaper than brand-name products and comparable to them in quality. Indeed, a report last year from Gartner, a research and consulting firm, found that roughly half of Millennial shoppers said that they were indifferent to whether a product is brand-name or private-label, and said that they’d buy more private-label goods if the market provided them.
Retailers like private-label products too—they often have higher profit margins for stores than brand-name goods do. The national grocery chain Kroger has taken a particular liking to them. According to an article from Reuters earlier this year, Kroger has a team of 400 employees who develop its private-label products, poring over sales data to pounce on new trends. Each Kroger store, on average, has more than 15,000 house-brand products, and, the company told me, the sales of these products accounted for about 27 percent of the chain’s grocery sales last year. (CVS, for its part, told me it stocks about 1,500 “national brand equivalent products.”)
Private-label products currently account for much larger shares of sales for brick-and-mortar stores than they do for online retailers. According to the market-research firm Nielsen, $17 out of every $100 spent in American brick-and-mortar stores goes to private-label brands, while online, private-label products only make up 3 percent of sales of packaged goods. But private-label’s share of online spending has been on the rise, more than doubling in the past two years.
A spokesperson for Amazon told me that its private-label products “only account for about 1% of our total retail sales.” The company does sell a range of products under Amazon-owned brands, but lately it has been focusing on assembling an arsenal of goods that are made by other companies but can’t be purchased anywhere but on Amazon. “Forming exclusive brand partnerships allows Amazon to add unique products and plug assortment gaps in high-demand categories without having to spend the resources to develop, manufacture and sell them,” observes a Gartner report from this spring. Hence Mountain Falls.
The market-research firm IRI has found that the prices of private-label products are on average 20 percent lower than those of brand-name products, but there’s apparently such a thing as too good of a deal. Christopher Durham, the private-label consultant, told me a story about working with a retailer on a pack of private-label batteries. Their price was about 60 percent cheaper than what the brand-name version was selling for, but even though Durham said they were of comparable quality, sales were “very, very slow on them.” He and his team experimented with different prices, and arrived at a somewhat amazing conclusion: “We could move the price up to about 25 percent less than the national brand, and the [sales] volume went up about seven times. Which is crazy, right? But [the customer was thinking], ‘These are so cheap—I don’t trust them.’”
Clearly, the low price of Mountain Falls didn’t deter me. But I still wondered whether I was in any way worse off buying private-label face wash. “Do they do the same thing?,” said David Steinberg, the president of Steinberg & Associates, a company that advises clients on the chemistry and regulation of cosmetics and topical pharmaceuticals. “That’s up to you to decide whether they function the same way.” (And it's not always the case that private-label products are indistinguishable from brand-name ones. Karen Young told me that going with brand-name versions of more sophisticated products with higher-quality ingredients might be wise for skincare aficionados.)
But was there some downside that was not on the radar of these skincare experts? Was supporting Amazon somehow worse than supporting CVS?
Stacy Mitchell, who researches corporate concentration at the nonprofit Institute for Local Self-Reliance, shut down that thought. “I don’t think you should go out of your way and pay more to support CVS,” she wrote to me in an email. “If you were talking about a local store that provides valuable services in your neighborhood—a place that you and your neighbors rely on for certain things, a place that you like going to, that adds life to the neighborhood, that’s owned and run by someone who is part of the community—then yeah, that might well be worth it.”
And what about buying private-label products in general—if my money isn’t going to the research-and-development departments of big brands, then eventually won’t there be fewer innovative products for private-label makers to knock off in the first place? When I raised this point, Durham noted that retailers are increasingly using private-label products not just to imitate others, but to differentiate themselves, developing their own unique offerings in order to attract and retain shoppers.
Ultimately, I found few good reasons to return to using Cetaphil, and indeed, Young said that brand loyalty is hard to cultivate in her line of work—the consumers she courts are very price-sensitive, and might switch to another brand if an enticing deal comes up. The end result of this, she said, is that brands pour resources into marketing. “The personal-care and beauty industry spends a lot of money trying to hang on to customers,” she said.
So after all my sleuthing, I came to think of some brand-name consumer products as things that people pay extra for so that the companies that make them can spend that extra money on getting people to buy more of those products in the future. In other words, consumers are picking up the tab for the advertising they themselves get bombarded with. I’ll take the private-label stuff, thanks.
from Technology | The Atlantic https://ift.tt/315UZKQ