28/08/2018 – Trends In Trade / Private Label / Food Processing / FMCG
Tailored for a takeover
In many markets, private labels are taking FMCG market share from the world’s well-established big brands – and at a rapid rate. Helena Haimes examines the reasons behind this impressive rise of the discounters.
Years ago, many Western supermarkets had a single aisle dedicated to their store’s own ‘basic’ or ‘value’ ranges. Distinguished by utilitarian packaging, low prices and a distinct lack of branding gloss, these early private label products – from toilet roll and baby wipes to baked beans and tinned vegetables – were squarely and solely aimed at shoppers on a tight budget.
Fast forward a couple of decades, and the transformation is extraordinary: sea changes in consumer attitudes, preferences and shopping habits have led retailers to radically rethink the scale and potential reach of their own-branded product ranges. In 2018, FMCG retailers across the globe are producing ever more organic, value, premium, mid-tier and healthy lines that are presenting an unprecedented challenge to the major established national and multinational brands. Innovative private label products are now found throughout bricks and mortar supermarkets and e-commerce sites alike, enabling them to boost profits, improve consumer loyalty and differentiate themselves from their big name competitors.
Recent data from leading market research firm Nielsen shows just how seismic this private label takeover has become. The proportion of own brand market share grew in 12 out of the 19 countries the research firm examined in 2017, with private label today accounting for an unprecedented 30 per cent or more of the market in 17 of those. “Private label reached an all-time high in Europe’s largest retail market, Germany, with its market share there climbing to over 45 per cent for the first time,” observes the Private Label Manufacturers Association (PLMA) – a non-profit organisation founded in 1979 to promote private label and today representing more than 4,000 member companies around the globe. “Market share also increased to its highest levels ever in six other countries: The Netherlands, Belgium, Sweden, Norway, Hungary and Turkey. In the UK, where supermarkets are investing in their private label programmes to meet competition from the discounters, market share climbed to more than 46 per cent.”
While private label market share has long been reasonably substantial in wealthier European nations, with proportions in Germany and the UK having hovered around 40 per cent since the late 1990s, the ‘own brand effect’ is also beginning to unsettle big name companies that have dominated the steadfastly brand-centric US market for decades. While private label still accounts for a relatively modest 17 per cent of American market share, many private label CPGs are now starting to seek out a far larger slice of US grocery sales, much to the alarm of the country’s established big food brands. American retailers from Walmart to Amazon and its recently acquired business Wholefoods are investing heavily in their own labels, while giant European discounters Aldi and Lidl – who have long been able to offer low prices to European shoppers by bulk-buying just one version of a certain product directly from manufacturers – have both recently announced plans to expand aggressively into the US. Aldi announced its $5bn US expansion initiative in June 2017, closely following Lidl’s launch of six North Carolina stores a few days earlier – the first of 150 outlets slated to open by the end of this year.
What’s the appeal?
Market and consumer trend analysts have identified several factors behind the impressive recent performance of the private label segment across the world. The rise of the digital economy, for example, means increasingly connected consumers are more switched on than ever to the potential quality and value of store-branded products (especially premium lines), rather than simply trusting in more established – yet pricier, and possibly outdated – multinational brands.
As far as retailers are concerned, there are clear advantages and few drawbacks in developing or improving own-brand offerings: they get total control over production, product branding, profitability levels and price, as well as a far greater ability to bring goods to market in response to rising consumer demands. As long as retailers are able to partner with reliable manufacturers, while also generating enough footfall to their locations through effective store branding, private label development is a promising avenue that such player would be ill-advised to ignore.
Unsurprisingly, perceived value for money has apparently exerted a crucial influence on consumers’ initial decisions to select store-branded products over their more traditional counterparts. The most recent upswing in private label sales occurred during the global recession in the late 2000s, and it seems that buying habits forged during the downturn have stuck: rather than switching back to pricier but recognisable big name brands as economic conditions have improved, consumers are continuing to favour the more cost-effective, private label products they started purchasing when money was tighter. This phenomenon could spell huge opportunity for private label expansion beyond Western markets, notes a new report – ‘The rise and rise again of private label’ – from Nielsen. “Private label is also a new opportunity in developing countries, faster growing economies and countries recovering from economic decline or stagnation,” it observes. “Therefore, looking ahead, private label brands have several avenues for future growth around the globe.”
Retail loyalty over brand loyalty
There has also been a gradual but undeniable shift in the way shoppers connect with and select products – a change in consumer psychology that has significantly benefited private labelled goods over conventionally branded ones. According to luxury market expert Pamela Danziger, today’s consumers have very different priorities than their forebears – of those who choose to shop offline, she says most now favour the personalised, face-to-face experience that only bricks and mortar retailers can offer, and are far less connected to purchasing traditional brands there than they used to be. Retail loyalty, she claims, is now largely trumping brand loyalty – a shift that has caught many multinational marketeers off-guard and that retailers are using to successfully promote their own labels over branded rivals.
“The crux of the problem for traditional CPG marketing and branding is that the ‘4Ps’ of marketing that the marketers were trained in – Product, Price, Promotion, Placement – have been replaced by the ‘4Es’ – Experience, Exchange, Evangelism, Everywhere,” she explains. “CPG marketers can’t use old style 4P marketing in a world that has gone experiential. Today’s higher quality private label goods transform the ‘product-first’ model into an experience for the customer, with the private-label brand becoming indelibly linked to the shopping experience in the store.”
With their ability to provide a different, but potentially hugely enticing, shopping experience, e-commerce platforms are also offering notable opportunities for private labellers to compete with the big traditional brands, especially in the US whose online retail segment has seriously lagged behind the rest of the world until very recently. Online retail giant Amazon has been pouring investment into its Amazon Basics range, while also investing heavily in Wholefoods’ existing 365 range, with its emphasis on health and wellbeing. Nielsen also reports that Walmart has made recent acquisitions in preparation for a full-on assault of the country’s online retail space. Keen for its slice of the action, Silicon Valley recently launched an e-commerce site called Brandless, whose slogan is ‘Better everything. For Everyone, For $3’. In China meanwhile, big e-commerce players Alibaba Group and JD.com are all set to substantially boost their investment in the Chinese online grocery sector in the coming year.
Affordable premium products
Indeed, breadth as well as depth of market penetration has proved another crucial factor in the success of private label products in recent years. The Nielsen report notes a marked increase in the number of ‘premium’ private label products being brought to market, especially in the food space where global consumers are increasingly prioritising health, wellness and food safety, according to Nielsen’s EVP and Managing Director for Global Clients Strategy, Marie Lalleman. “In markets where legislation guarantees production processes and food origin, private label products granted with production origin labels (such as organic or locally produced labels) are responding to consumer demand with affordable premium products and are capturing a good part of these segments’ growth,” she informs.
For further evidence of the growing premiumisation and originality of own-branded products, one need only take a glance through the Private Label Manufacturers Association’s shortlist for its ‘Salute to Excellence Awards’, designed to honour the most forward-thinking private label products – in categories such as food and beverage, wine, home, household and health – from 20 countries. Award winners – including Aldi Süd, the French private label Auchan and Axfood from Sweden – have created original products, from veggie burgers and smoothies to wines from lesser-known growers and healthy ready meals, that acutely reflect modern consumers’ demands for health, convenience and interesting flavours. PLMA’s President, Brian Sharoff, was full of praise for the level of differentiation on display at the Association’s recent major event in Amsterdam. “When you look back and realise that private label in the past was often low-cost and low quality, but now represents innovation and the best quality, it is very gratifying to see how far retailers have come in establishing their own brands,” he enthused.
Other industry experts also emphasise the importance of genuine product innovation and differentiation for retailers who want to maintain strong private label growth. “‘You don’t differentiate yourself by selling the same things as everyone else is selling,” advises Matt Sargent, Senior Vice President of Retail at Frank N Magid Consultancy. “This growth will be driven less by demand than by the supply side need retailers have to differentiate themselves. I’m talking about premium products, aspirational private label brands. Any retailer that doesn’t have a premium private label is in danger going forward.”
Rise of the discounters
While some retailers may be relatively new to the art of successful private label innovation, there are two established big trailblazers who seem to have perfected it. German discounters Aldi and Lidl are both expanding aggressively in the US and Europe, having already acquired a significant share of the UK’s CPG market from the country’s ‘Big Four’ retailers: Tesco, Asda, Sainsbury’s and Morrisons.
A combination of lean, purely private label product selection, smaller stores and stringently limited store investments mean that both Aldi and Lidl are able to pass on sizeable discounts and convenience to their consumers. And the results speak for themselves, according to the Nielsen report: “In Europe, all discounters now generate 22 per cent of all FMCG sales – up from 17 per cent 10 years ago,” it maintains. “Put another way, hypermarkets and supermarkets have lost sales to the discounter channel and the majority has been due to the shoppers shifting spend away from brands to private-label products.”
Evolving retail space
As far as traditional brands are concerned, there are still certain markets where they maintain an overwhelmingly firm foothold. For example, Asia-Pacific consumers remain exceptionally brand loyal, and the rise of private labelled goods elsewhere is not expected to impact that sentiment in the near future. Meanwhile, low productive capacity in Latin America means that retailers there would struggle to find worthwhile partnerships with manufacturers.
Nonetheless, it would be foolish for established FMCG brands to underestimate private labels’ huge potential to further gnaw into their market shares across most of the world. Not only are volumes likely to fall as retailers make more shelf space for their own-branded offerings, retailers will also be able to bargain harder than ever by using their private label products as leverage to erode brands’ profit margins. Further economic downturns and recoveries also stand to primarily benefit private label producers, although Nielsen advises that established brands can stay competitive with responsive pricing and promotional initiatives during leaner periods.
The market research firm also predicts that the behaviour of consumers in the steadily expanding FMCG e-commerce sector is likely to mirror their decision-making in bricks and mortar supermarkets – i.e, an increasing preference for private label over big brands. While big brands can no longer count on first-mover advantage in fast growing product categories such as healthy foods and those with proven provenance, the report also emphasises that there is still ample opportunity for established brands to carve out their own differentiation based on brand longevity and equity.
All is not lost for traditional big brands, yet those established giants will certainly have to keep the keenest possible eye on ever-evolving consumer demands if they intend to maintain market share in the face of unprecedented competition from private labels. Interestingly, Tom Penninckx, Client Business Partner at Nielsen, says the gains by private label last year were especially impressive because they came at a time when consumer confidence across Europe was at its highest level in 17 years, demonstrating the growing popularity of private label in all economic conditions. Incontrovertibly then, the new retail revolution looks not only to be in full swing, but also here to stay.