Retail news. Semester 1 of 2014 table of contents

Private labels investing in quality, growth. By: Michael van Wyk. 4 Jul 2012

Consumers seeking to save some money in tough economic times are fuelling the current growth in private label brands, forcing retailers to rethink how they promote their in-house and own-name brands. The conundrum is: do they increase the number of products they offer or only the perceived quality and value of the existing product line-up?

Retailers are also starting to understand the power of knowing and controlling their own private label products and are becoming more agile in responding to the ever changing needs of the modern day consumer. Customers are giving retailers the permission to grow their private label brands by exercising their right of choice. They are telling the retailers what they want and the retailers are responding and, in the process, building brand loyalty and equity.

However, the real question is: Will retailers grow private label brand value or simply add more private label products to their existing range? In this age of booming private label brands, the trend for retailers to grow their own product ranges is causing national consumer product goods brand managers added anxiety. It also presents some relationship challenges for retailers who want to grow value and trust for private labels with their customers.

National brands losing their grip, South Africa room for growth

There is mounting evidence (Deloitte Review: The Battle for Brands in a World of Private Labels), which suggests national brands are losing their hold on the consumer, as there is a degree of separation between consumers and national brands, as compared to private labels. Consumers are more willing to try new and different private label brands; the perception exists that there is more value in these brands. This perceived value can be in the form of price, trust or even the ability to interact with the owners of these brands. Although private label sales are growing as the economy weakens, the industry needs to understand there are important lessons to be learned from past recessions if the current market share gains are to become long-lasting.

It should also be noted, that in comparison to Europe or other developed markets, private label penetration levels in South Africa are relatively low, especially when looking at the independent trade segment which accounts for more than half of national grocery retailing. Planet Retail, a leading information provider to the retail industry, estimates that private labels now account for 9.3% of domestic consumer spending on groceries, as well as 24.7% of spending in modern grocery retail channels. The 9.3% share, however, pales in comparison to the just over 40% in the UK, which has the highest private label presence in Europe.

Compared with other key emerging markets such as Mexico, China and Russia, Planet Retail estimates that South Africa still has the highest private label share of consumer spending on groceries within this group of countries. Nonetheless, figures from Europe show that the forecast 11.3% share in 2016 for South Africa's private labels is relatively low in absolute terms and leaves a lot of scope for growth and opportunity.

Attaching value

This begs an important question for consumer product companies: "How do you attach value and quality to a private brand to ensure it becomes a destination brand."

Retailers are realising there are several benefits in developing and marketing private label products. Among them are:

1. 
   increased profitability through cost saving and increased margins;
   
2. 
   increased store loyalty and creation of a distinct corporate identity;
   
3. 
   opportunities to seize new market ventures;
   
4. 
   increased bargaining leverage with suppliers; and the
   
5. 
   ability to control the product and communicate directly with consumers - empowering of consumers.
   

The first relates to potential increases in profitability, which stems from the higher average price margins private label brands generate for retailers. The better price margins could be attributed to the fact that private label brands require minimal advertising expenditure; lower research and development costs; and, usually, reduced packaging costs.

Private label brands can assist in developing loyalty to a retailer and in creating a distinct corporate identity for a business. Retailers however must ensure careful managerial practices are implemented for these brands in order to maintain retailer brand equity. Research indicates that consumers who purchase private label brands regularly do not only become loyal to that particular brand but also to the retailer through which it is sold.

Private labels have become omnipresent and have achieved enormous success, thus providing a base for the improvement in branding activities. A Deloitte global private label report indicates consumer perceptions and attitudes toward private label brands are changing significantly. The report offers insight into the notion that spending less for private label brands does not necessarily mean consumers are settling for less. I believe private labels have changed from inferior generics to brands in their own right with value beyond functional attributes.

Consumer knowledge critical

Crucial to creating value and quality in private label products is understanding the wants and needs of the consumer. Consumers are becoming more discerning and want to understand the emotional as well as economic value of their purchases. This can be achieved by effectively telling the story of the private label brand in marketing, effective use of social media, in-store communications and through packaging. Using loyalty programmes is yet another way to track consumer spend and determine what it is they want and need. By creating an emotional link to the journey of the product or brand, retailers are able to appeal to customers on a personal level.

Innovation is another key driver in creating a successful private label and retailers are taking product and brand building innovation to heart. Driving innovation within private label brand-driven retailers can be more nimble than national consumer product brands. Developing a private label brand can therefore be more efficient and be done in much less time. Depending on their business model, private brands do not necessarily have to make the same long-term capital investments in product development, manufacturing and other quantitative research methods to gain the assurance that their value proposition is relevant and the long-term investment warranted.

UK model

Stefano Pessina, executive chairman of Alliance Boots, a leading international, pharmacy-led health and beauty group which operates the UK high street pharmacy, Boots, was quoted last year as saying that they are looking to build Alliance Boots' private labels into a third core area for the business by distributing them through third party retailers.

"The brand will be something that is really important over a long period. It will lead to a new dimension. We said that we wanted to invest in our brand and we also said that we wanted to elevate the status of the brand from being a part of one of our two core businesses, retail and wholesale, to be a third leg, something that has its own life and this is what we will do," he said. Carrefour and Alliance Boots have entered into a 10-year co-operation agreement that will see cosmetics made by Boots sold under the Carrefour brand in some European countries.

Private labels could lead the way

Probably still some way off for the South African private labels, but this strategy may also open many opportunities for growing revenue and market share.

Private label brands will start to lead the way for South African retailers. It's probably safe to conclude the next generation of super successful brands will not come from the name brands, but from more private label brand-focused retailers. It is therefore important retailers consider private labels with a clear strategy and show the value attached to their products.

Consumers seeking to save some money in tough times may be fuelling the current growth in private label brands, however progressive retailers will continue to innovate and leverage the immediate access they have to their customers to the fullest advantage.