The Do-Nothing Brand

Welcome to the latest installment of Understanding the Consumer Products Industry, where I'm attempting to level the informational playing field between consumers and the companies that sell us stuff.
A thorough conversation about consumer brands could theoretically go on for several weeks over several posts... until I singlehandedly kill my readers with boredom. So in today's post, I'm just going to talk about one well-known food company that embraced an unusual business decision--a decision that should make consumers forever reconsider the real value of branding.

Exhibit A: Sara Lee
Have you ever bought a Sara Lee pastry or dessert? Back in the late 1990s, the Sara Lee company did something seemingly irrational: it sold off all of its factories and bakeries. That's right: Sara Lee doesn't actually make its own pies, cakes and desserts any more. Instead, it contracts the work out to other companies.

Believe it or not, there are legitimate reasons why Sara Lee might do something like this. For one thing, it saves money, because Sara Lee can hire the lowest bidder to make its products--while still maintaining reasonable quality standards, obviously. It also spares the company from many of the problems common to asset-heavy manufacturers, like the impossibility of matching a relatively fixed factory capacity to the constantly fluctuating demands of customers.

All of this explains why Sara Lee's stock price went up materially the day this new strategy was announced. But what does a decision like this mean for consumers, especially consumers loyal to Sara Lee products?

Unfortunately, the implications are deeply disturbing. Because in a way, this particular business decision, which has been copied and imitated to varying degrees across many segments of the consumer products industry, changes everything about how we perceive brands.

So, with that as a backdrop, let's ask a simple question. What value do you receive when you pay a price premium for Sara Lee brand desserts?

The cynic's answer: you get a sticker.

That's right. A sticker. Somebody else made that crumb cake you just bought. They then slapped Sara Lee's label on the box. Sure, it might be Sara Lee's recipe, but it is quite obviously not their product.

Sara Lee assumes you trust their brand. They believe you'll overlook (or remain blissfully ignorant of) the somewhat inconvenient truth that Sara Lee doesn't actually make its own stuff. Ask around: you'll find that most consumers have no idea that Sara Lee sells products under these conditions.

Surprisingly common
The thing is, this happens more often than you'd think with the products we buy. Dell Computer, for example, contracts out its customer service functions, as well as the manufacture of most of its PCs. For many years, General Electric contracted out the manufacture of GE-branded TV sets to Asian assemblers. Technology companies like Cisco and Juniper make almost none of their own products, preferring to use contract manufacturers exclusively. And yet we still "trust" these brands.

Now, let's take things one step further. Let's think about the third-party contractors who win the business to manufacture products on behalf of Sara Lee or other companies. What of them?

Typically, they'll manufacture products for more than one company. Take pasta, or jarred pasta sauce, both of which are commonly outsourced food products. A regional food producer might have a contract to make linguine for Ronzoni and then another contract to make store-brand pasta for two or three different grocery chains (you'll often hear the term "private label" used in these instances). Another food contractor might manufacture jarred pasta sauce for Ragu as well as for Shop-Rite's in-house brand.

This happens with a surprising number of food products, including pasta, pasta sauces, frozen juices, canned or frozen fruits and vegetables, and many other prepared foods. Even consumer products such as sunblock, facial tissues, band-aids and shampoo come to mind as obvious and likely products to be contracted out to third party manufacturers.

The exact same factory
Sure, there might be differences in the recipes or formulations used, but not always. In any event, the key fundamental concept is this: the generic product and the branded product sitting side by side on the store shelf are often made at the very same factory by the very same manufacturer. And the more expensive branded product quite often isn't even made by the company that owns the brand.

Roll that over in your mind for a few minutes. If you are at all pro-consumer, I hope by now you are beginning to question whether branded products are always worth a premium price.

However, if you've read this far and truly grasp the concepts of this post, and yet you still mindlessly prefer branded products and consider it beneath you or "cheap" to think otherwise, please listen carefully to that buzzing noise in the back of your brain. That is the sound of rationalization.

Related Posts:
Brand Disloyalty
Why Spices Are a Complete Rip-Off and What You Can Do About It
The Worst Lie of the Food Blogosphere
The "It's Too Expensive to Eat Healthy Food" Debate

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kasey said...

I fully grasp it, and although I have known this for years I still generally do not like store brand products, with the exception of Whole Foods and Trader Joes. If you could tell me that Safeway pasta sauce = Ragu, and Giant pasta sauce = Bertolli, then we are getting somewhere. If I have no way of knowing, then I am left buying store brand after store brand and hoping to like it, while ignoring a choice I know I do like. That's not a good use of resources to me. Obviously I have done it before, but only because I have come to trust the store brands I mentioned above, and have had limited but not good experience with others.

I don't eat Sara Lee, but I eat Breyers ice cream, and maybe they don't make it themselves, but I know that I like it and to that end I guess I don't care if they physically make the product.

For essentially fungible staples like sugar or baking powder, I think store brands make a lot of sense. And I think store brands are worth trying if you consume enough of one item that it makes sense to give another brand (a store brand) a try. But I think that's a decision to make based upon whether it makes sense on its own, and not just because of branding.

This comes from the perspective of one person feeding one person, so I buy an awful lot less, so from one perspective (percentage of total consumption- wise) this would matter more and from another would matter less (the total dollar cost differential is not great).

Daniel said...

Kasey, thanks for your comment, and indeed you do grasp what I'm saying. For example, how did you come to trust the store brands that you mentioned? Because you actually thought about, tried and in some cases used non-branded products where you prefer them. You thought about what exactly was the value of that brand--to you--and spent your money accordingly.

Don't take this to mean that I'm forbidding the use of all non-branded items. If it is worth the premium to you, by all means pay it. If not, don't.

What I appreciate is the fact that you considered the question in the first place. That's an act of consumer empowerment. Many (if not most) consumers consistently fail to do this.


Anonymous said...

Apple hasn't made a single one of their products for years. Sure they design them, but they have other people make things.

It's an exceptionally common practice that allows you to take advantage of economies of scale even without the scale.

Daniel said...

Anon: agreed. And Apple's products are either unique or superior, and (with the possible exception of their PCs) they are also usually worth the premium price.

You can't say the same thing about many of the branded products on our grocery store shelves however. Some of them, yes. Not all.

Regarding how common this practice is, yes it absolutely is common. When I was a tech analyst on Wall Street, literally everybody was outsourcing. It makes sense in technology, where the product's value and intellectual property is captured in the design and/or software, rather than the physial hardware.

However, the consumer products world is a more "physical" world, and it begs the question: what value, exactly, does the consumer get when paying a premium price for a branded product--especially when there is an equivalent and less-expensive non-branded product available?


Melissa said...

You are part of the reason I never get sucked into buying name brand anything any more, Dan. Not for a good year or more now. Thanks for that. ;)

figleaf said...

Further complicating matters:

An extraordinary number of canned goods from vegetables to, especially, salmon and tuna, are initially packed in unlabeled "brite stacks" in canneries. These generic cans are then labeled with different labels (e.g. Safeway, Ragu) as orders come in.

Given that except for the label these items can be literally the same commodity product the price differences can infuriate.

I don't know if it's still true but years ago Consumer Reports reviews often ranked regional store brand versions of canned and jarred foods higher than national brands not only for price but occasionally for quality as well. Just because something says "premium" on the label doesn't necessarily mean it was purchased from the most reliable brite-stack packers.


Products like Sara Lee or Apple phones that are manufactured to designer/engineer's specifications don't bother me at all. Ok, manufactured foods are a little eye-raising compared to manufactured consumer devices but the principle itself is sound: whether a mom and pop birthday-cake bakery or Nissan Heavy Industry, a make-to-order shop that's selected for a specific purpose is probably going to average fewer cut corners and have higher overall quality for lower cost than a make-do-with-what-we've-got production mill.


Eleonora said...

This is one of the biggest differences I have noticed in American grocery store aisles, besides pounds instead of grams, of course!
In Italy, all goods on sale must report the factory/plant where they were produced. That is, name of the company and address. This is also valid for fresh produce (origin only) and meat/fish/dairy, although these use codes instead of the whole label.
I find this really convenient: a quick look at the label can make you realize that the store brand product and the top brand one are made exactly in the same factory. And of course, the store brand is usually cheaper. In my opinion, that really enables consumer to choose.

Ally said...

My father used to work for a large pharmaceutical company doing research and development, and would tell me the same thing about name brand over the counter medications, that often they are made in the same place as the generics, and often contain the same active ingredients. Although there is also the placebo effect to consider, which I am sure is why many people would stick to name brands.

chacha1 said...

The Italian system sounds great to me, Eleonora!

I've been a happy store-brand buyer for years. The products I get that are branded, I don't particularly care where they are made - like kasey, I just like the product. To me, S&W chili beans are the best ones on the shelf, so I wait until they are 4 for $5.

But "Ralphs" brand granola and "Private Selection" tomato paste are perfectly fine, so why pay extra for Kashi or Contadina?

Dan ... the buzzing sound of rationalization ... LOL!

Jo said...

I live in NZ where the market is a duopoly of Foodstuffs and Progressive Enterprises. There is one supermarket for each chain where I live, Pak N Save and Fresh Choice, respectively. I shop at the cheapest supermarket, Pak N Save, because, well, why wouldn't you?, and I buy their house brand, Pams. The house brand for Fresh Choice is called Signature Range. Last September, I read in the paper that "Cuisine Resources are recalling some of their Pams and Signature Range stock products due to possible bacterial contamination." source:
Kind of gave the game away that it is all coming from the same place. It also explained why a local consumer tv show which pits different brands against each other, never pits Pams against Signature Range (and here I thought they were giving equal broadcasting time to both chains...)

Katie said...

The funny part is, until I started working for a store brand private label manufacturer, I would have never even looked twice at a store brand product. It had the stigma of "generic" and "inferior" in my eyes. Now that I'm on the inside, I know that in many cases (not ALL cases) the store brand product is equal to and sometimes better than the branded product.

It really all comes down to the specific store/company and how willing they are to stand behind the quality of the product. While some stores/companies just want the cheapest product possible, a lot of the companies I work with want the absolute best quality and hold us to a higher standard than they do to the branded guys.

While contract manufacturing is all the rage in the food industry right now, the consumer really has to be careful about their beloved brands. Pay particular attention to the country of origin or "made in" country. You'll be surprised at what you find!

Daniel said...

These are extremely insightful comments! Once again, thank you to readers for sharing.

Melissa, I'm so happy to hear it. It's funny: for me it all started with store brand pasta sauce. I saw it at something like half the cost of Ragu and actually liked it more. I've never looked back.

Figleaf: Thanks for your insights, you make an excellent point. In many cases the product is exactly the same, and yes, it is infuriating to be charged extra for no appreciable reason.

Regarding your thoughts on Sara Lee, I hear where you're coming from. But even if the specific example I give doesn't resonate with you (and that's totally okay), it's clear you agree with the broader point.

Eleonora: Thanks for highlighting yet another reason why I have to visit Italy. Here in the USA we only recently passed "Country of Origin" labelling requirements. As to the factory of origin, well, not yet. :)

Ally, I am next to totally ignorant about the pharma industry, but thanks for giving me extra justification to avoid brand name over-the-counter meds too. I am in your debt!

Chacha, thanks for your comment. I think you, Kasey and I all agree that the key point is to decide which branded products are actually worth it to you--and spend accordingly. Those are the actions of an empowered consumer.


Daniel said...

Jo, thank you for sharing that anecdote, it's an interesting one--and it shows that it is not in the interest of food companies to be transparent about outsourcing the making of their food products. Whenever there's a lack of transparency like this, consumers should always sit up and take notice.

Katie, thank you for being yet another reader who has moved beyond the so-called stigma surrounding non-branded products. You're right, it totally depends on the situation, but clearly branded products do not have a monopoly on higher quality.

Readers, what other thoughts do you have?


kasey said...

It's funny, and I probably shouldn't admit it, but one day I tried the 365 brand from Whole Foods without actually realizing it was a store brand. And once I found out it was, I didn't care, and I slowly started trying that brand for a whole bunch of different products and now I often look for that brand first.

I think one reason is that I am more comfortable with Whole Foods, and to an extent Trader Joes, overall than I am a WalMart or Safeway or Giant. Like Katie said, I feel some comfort that they will stand behind their products. So maybe I am looking at it as though store brand is really a brand itself, same as any of the others, and I was comfortable with the brand producing the sub-brand.

And I will never buy a brand name OTC medication (unless it's because I want a specific form, like I had to buy Advil for awhile so I could get liqui gels but I went right back to store brand once they got liqui gels). A doctor friend said always, always go generic on the OTCs!