During the past few years, private label goods have enjoyed steady growth in an increasing number of food and non-food categories. Many suppliers outside the ranks of the first-tier branders have exploited this growth to achieve significant volumes. Conversely, the share and price premium of traditional brand leaders has been eroded. Many of them are now faced, as Exhibit 1 suggests, with a crucial strategic issue: should they—or should they not—begin to produce private label products themselves for their large trade clients?

However pressing now, this issue can only intensify during the next few years. Leading producers of fast-moving consumer products will be unable to avoid it; they will have to make a choice. How can they best weigh up all the facets of the question? And how can they look beyond short-term considerations of marginal cost and marginal volume, reject simplistic gaming behavior ("if we don't do it, our competitors will"), and make a reliable decision based on a long-term vision of product category evolution?

Here, we lay out an approach, based on a McKinsey study of private label experience in Europe, that may help brand leaders...