In recent years, the appeal of private label products has grown to such an extent that few consumer goods manufacturers, brand leaders included, can afford to ignore them. Even companies that carefully consider whether they themselves should manufacture private label goods often underestimate the long-term implications for such key drivers of performance as pricing, innovation, category growth, and channel management. Based on a McKinsey analysis of private label developments in Europe, this article offers practical guidelines to help brand leaders make a genuinely informed decision about whether—and on what terms—to proceed.

Given the current size and growth rate of the private label segment—in some categories and countries, at least—there are many appealing arguments for jumping in. The prospect of generating immediate additional volume is high on the list.¹ There is also, of course, the perennial and worn-out, "If we don’t do it, our competitors will." Less threadbare are the opportunities to "improve our relationship" with the distributor for which the private label will be produced, to cut costs through higher capacity utilization, and to develop a better understanding of the consumers who are regular users of private label.

Even...