“Compare to Listerine brand mouthwash”
“Compare to Sudafed nasal decongestant”
“Compare to Coca Cola”
If you have noticed more and more exhortations like these on the products on the shelves of Wal-Mart, Target, grocery stores, and other retailers, you are not alone. And if you have bought these private label products—goods that are manufactured specifically by or for a given retailer—you are part of the explosive growth associated with such offerings globally.
|Richard Bode, Megan Kormi, and Jeffery Gill at Metro grocery retailer in Germany|
But did you know that Europe’s market for private label goods is the most developed and advanced in the world, with such products representing over 35 percent of grocery retail sales in countries like the UK and Germany? Not surprisingly, in recent years private label has seen faster growth than manufacturer-branded goods in these nations and others, with retailers’ private label strategies becoming increasingly sophisticated—and profitable.
This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the European private label goods market. To consider these trends more carefully, primary and secondary research, including interviews with several European grocery retailers, was conducted to evaluate current practices associated with private label products, identify growth opportunities in this specific market, and suggest marketing and other strategies for capturing these.
Private Label’s Role in Western Europe
“Private label,” also known as “store brands,” refers to goods manufactured by a retailer or by a third party for the retailer, and the retailer’s name is used as part of the products’ branding strategy. Though traditionally associated with lower price and quality, European private label goods now offer consumers much higher value than previously. As further clarification of terms, note that “traditional” grocery products are those considered standard in this channel (e.g., food, paper products), whereas “non-traditional” products are goods and services not typically associated with grocery stores (e.g., financial services, cell phones).
Private label strategies have become increasingly important: in 2005 global private label sales grew by 5 percent, more than double that of manufacturer brands; ACNielsen data reveal that 100 percent of households in most European countries have purchased private label goods within the last year. Thus grocery retailers can enhance their private label portfolios to drive profits through greater differentiation from rivals, including discount retailers. This is especially important because manufacturer brands, sold everywhere, offer no true competitive advantage, whereas private labels can incur switching costs, driving greater store loyalty.
While private label goods are generally held as more profitable than branded products, a Boston Consulting Group study suggests that private label profitability can differ “widely by category and item,” citing discrepant gross margins per square foot of store space for cereal (private label less profitable than branded) and diapers (private label more profitable).
European retailers have clearly bought into private label’s potential, with Tesco, Sainsbury, and Carrefour having developed private label goods into well-respected brands such as Tesco’s Finest
crisps, which outperform a PepsiCo offering. European private label has the greatest penetration in the food sector, with 27 percent of market sales in 2006. Overall, annual consumer spending on European private label goods has been estimated at over US$250 billion, with growth driven by (1) retailer consolidation (over 60 percent in many private label markets) and (2) increasingly fierce competition from hard discounters such as Aldi, which has forced national retailers to develop more and better products and strategies and introduce private label into more categories, including non-food.
Consider market characteristics and private label offerings in the three most influential European retail grocery markets: the UK, France, and Germany. Private label in the UK has a 40 percent share of grocery sales, making that market the largest in Europe for such offerings. Four retailers account for 75 percent of the total grocery market: Tesco (the leader, with 30 percent market share), ASDA (a Wal-Mart subsidiary), Sainsbury (a leader in private label innovation), and Wm Morrison (which recently acquired Safeway). France’s private label share is lower, at just over 25 percent of grocery sales, due in part to regulations protecting smaller stores. France’s main grocery competitors are Carrefour, ITM Enterprises—a consortium of independent merchants—and Auchan. The German market is uniquely characterized by the strong presence of hard discounters, which have about a 40 percent share of the grocery market. This has contributed to an overall private label share of 35 percent in that country. The primary German grocery retailers are Metro, Rewe, and Edeka. Current Private Label Strategies
Private label began in the 1970s as a low-price, low-quality alternative to branded products. Naturally, these products, while popular, were stigmatized by consumers. But today both retailers and private label suppliers are able to generate higher profits from private label goods for several reasons: access to technology and manufacturing; better pricing and margins; innovation; brand investment; consumer purchasing habits. As a result, retailers work quickly with suppliers to emerge with high-quality private label offerings almost as soon as new branded products hit their shelves. And the steady stream of moderate-to-high-quality private label goods from discounters has prompted even more activity in this area. In many cases, small private label suppliers are even leading the way in product innovation, based on their nimbleness relative to large branded companies with expansive product portfolios. For example, private label ice cream supplier Rosen Eiskrem in Germany has state-of-the-art innovative technology, a key competitive advantage for both the supplier and its retailer customers.
Private label packaging trends mirror those associated with technology and reflect consumers’ growing perception of private label value. In the past, manufacturers expended few resources on private label packaging, resulting in predictably generic and uninspiring packages; today, even at the price entry level, the packaging conveys a stronger sense of value, as illustrated by the more sophisticated look of Rewe’s ja!
brand. At higher price tiers, this trend is even more apparent. For example, Auchan recently conducted primary research to make its higher-tier private label packaging more appealing to customers, emerging with three separate packaging schemes—one for each price tier—for products such as bacon. Packaging trends for private label goods also include the presentation of more nutritional information, such as the nutrition wheel Sainsbury includes on many products. In some cases this information is supplemented with websites devoted to healthy lifestyle tips.
With regard to product development, private label has moved well beyond the mere imitation of branded products, with Sainsbury’s premium organic ready-to-eat meals, sauces, and dairy products as prime examples. Tesco is even extending this trend into non-traditional categories, leveraging consumers’ trust of its traditional goods to proffer financial services and cell phones. Speed remains the primary product development challenge, as grocery retailers rush to deliver innovative private label products that can drive loyalty.
Despite these general trends, research suggests key differences in private label strategies among the three major European markets. UK and French retailers focus on their “store brands,” which include the retailers’ names, while German retailers use “fantasy brands” unassociated with the store itself. For example, all private-label Carrefours food packaging touts the store name and/or logo, as does Tesco’s Tesco Organics
and Tesco Kids
lines, unlike German retailer Metro’s Grünes Land (Green Land) offerings. However, all markets are generally moving toward unified store brands.
As suggested earlier, while private label products continue to have a strong presence in the lowest price tiers, many offerings are available at multiple tiers, or what is known as the “Good, Better, Best” pricing strategy. This approach is increasingly common, even in Germany, where consumers are the most price-sensitive. Tesco is currently contemplating the introduction of a fourth price tier, or a “Good, Better, Even Better, Best” strategy. The implication of private label pricing tiers is clear: retailers do not have to compete with discounters and others solely on price, especially for non-commodity products. Strategies for Future Success
So what is the best private label strategy for retailers to follow? Consider four positioning strategies on the dimensions of pricing and level of product innovation, as part of an overall, quadrant-based “judo strategy,” where, as in the martial arts, a firm strives to position itself such that it is less appealing for an opponent to react aggressively (e.g., starting a price war), by signaling that it is incapable of stealing significant share or raising costs of competition. The strategy quadrants range from imitation (offering copies of branded products at low prices—e.g., Rewe’s ja!
) to developing new upscale lines (offering innovative products at premium prices—e.g., Auchan’s Mmm!
) to the relatively unexplored approach of offering new products at discount prices (e.g., Rosen’s “Nacho” ice cream).
To help select a private label strategy, retailers must identify likely competitor reactions, especially from branded manufacturers and discounters. For example, it is less feasible for retailers to attack discounters on mass-appeal products, as this would likely prompt a hard-to-win price war. Competing with branded manufacturers typically extends beyond price to quality and uniqueness. But here again retailers should select private label strategies with care: direct competition, for example on premium products, with branded manufacturers could lead to aggressive reactions ranging from branded line extensions to the manufacturers’ pulling branded products from retailers’ shelves.
Taking these factors into account, non-traditional private label offerings are viewed as the most attractive arena in which to compete, largely because branded manufacturers lack expertise in this domain and discounters’ business models typically don’t encompass many non-traditional offerings. Ethnic products represent another attractive private label expansion area, because discounters recognize the lower total profitability of this niche and branded products are associated with preconceived notions. In line with this thinking, Auchan has launched an Invitation au Voyage
line in this space and Metro offers Turkish food products in Germany. For generally the same reasons, organic foods represent similar private label expansion opportunity, as do super-premium meals and ingredients, though all of these are subject to potentially stiff competition from branded manufacturers.
In the context of the strategy framework above, note two implications for German grocery retailers with regard to private label offerings: (1) To match discounters’ buying structures, German retailers could dedicate buyers to a much smaller product assortment (e.g., chips)—as the retailers already do for branded products—allowing a more focused strategy. (2) The retailers could recruit more marketing managers (e.g., those with MBAs or marketing degrees) to handle their private label strategies; French retailer Auchan, for example, has a Director of Private Label Marketing with a dedicated budget. Beyond such recruitment, German retailers could implement a rotational training program, similar to those of top branded manufacturers, to ensure adequate preparation for the new managers. German retailers such as Metro and Rewe acknowledge these needs, and are making slow progress toward them, pointing out the need for culture change, with private label goods viewed as at least equally important as branded ones, as a top priority.
In general, private label can be expected to continue to exert a major effect on European grocery retail strategies. But the players in each major market face different challenges: while UK retailers consider a fourth pricing tier, their French and German counterparts seek to build greater store loyalty (with non-traditional and/or premium offerings) and consumer trust (with traditional goods), respectively. Regardless of the specific issues faced, grocery retailers in Europe and elsewhere must constantly reassess their private label strategies in the context of consumer preferences and competitor responses. In this way they will maximize their odds of achieving even greater success on their shelves.