Private Labels Challenge for CPG Industry – Compete or Collaborate (Part I)
By Rrituraj Sharma and Mahesh Bukkapatna
During one hectic day’s afternoon coffee break, I and Mahesh were reminiscing our childhood days of watching movies in the theatre. We were discussing on how, apart from the main movie, another exciting attraction for us were the 10 minutes of ad-films of some of the then popular brands projected on the big screen. This was in the eighties. This was when organized retail was yet to become a force to reckon with.
CPG companies have always made concerted efforts on creating brands out of the products that they have produced and promoted. However, with the advent, growth and maturity of the retail industry, private labels have come to take a significant share of the consumer’s wallet. This has made the CPG companies to introspect and revisit their market strategies in order to continue with a robust bottom line and top line growth despite falling margins because of higher production cost, advertising expenditure, intense competition and increasing distribution channel expectations.
Prevalence & Growth of Private Labels
Private labels have evolved from the retail industry and have managed to garner sufficient consumer attention over period of time. It started off with providing consumers cheaper option, but now private labels play much wider role in retail strategy. Private labels are leveraged to drive consumer traffic, improved margins and store differentiation.
The prevalence of private label changes with market. The highest being Western Europe followed by North America. Great Britain is regarded as flagship market of private labels with leading retailers coming out with innovative strategies to increase their category share. Current decade has seen spectacular growth of private labels in US with a CAGR of 6.3% while national brands have grown at less than half of that rate. US market’s private labels achieved a sales of 73 billion dollars in year ending March 2008. The average penetration of private labels is about 15% across categories with higher penetration in fresh products. For e.g. penetration in dairy category is at around 38%. The dollar share of private labels is relatively higher in food categories compared to non-food products. Milk is having the highest share of private labels with 61% followed by Fresh eggs. A McKinsey report suggests that by the year 2016, private label can go up to 24% of the dollar share from current share of around 16%.
In US market, companies like Target Corp., Costco Wholesale group and Wal-Mart Stores Inc. have focused on private labels as one of their important categories. European retailers also realized in the early 90s the impact of private labels on their business. Leading retailers in the Europe like Tesco Plc have already set precedence of significant growth in their market share through private labels. In the Indian context, leading retailers like Future group and Reliance have laid a lot of emphasis in promoting their privately owned brands.
Private labels are here to stay. The retailers can create a brand out of them. Apart from differentiating them from competitors, private labels also provide the consumer with more choices and hence evolving the retail outlet into a destination store. A recent survey showed that 80% of consumers have positive attitude towards private labels. That clearly establishes upside potential of private labels.
Though private labels started as cheap product options, over a period of time retailers have changed their private label strategies.
Retailer strategies
Differentiation – Retailers are moving out of umbrella or cross category branding to distinct brands to serve different target segments. Thus clearly differentiating value proposition of each of their brands. For e.g. Kroger is having three tiers in branding. Kroger Value, Kroger & Private Selection. Private Selection is a premium brand while Kroger Value is a lower tier brand targeting mainly at cost conscious segments. Tesco Finest Line is another example of a premier brand.
Sourcing – Better sourcing strategies of retailers have resulted in expansion of product range as well as achievement of price competitiveness. Retailers are successful in identifying and roping in low cost manufacturers to produce their brands. State of the art supply chain infrastructure also helped them in keeping logistics cost at low level.
Innovation – Understanding consumer behavior is no more a sole domain of manufacturers. Retailers started studying consumer’s purchase behavior to come out with suitable products that meet any existing gaps. Retailers are focusing even on niche segments like organic and wellness products. In US private labels have a share of 17% in organic product sales.
Promotions – Some of the private Labels score much better in in-store merchandising, promotions and features in many categories. Retailers are aggressive in promoting their brands to maintain mind share of consumers. For e.g. Entire range of Wild Harvest brand products of Supervalue is merchandised together to create powerful brand banner effect in store.
In our next post on this topic, we will discuss more on the strategy options for CPG companies and whether they should compete or collaborate with the retailers for greater sustenance in the long run.
Click here to go to the second post on this topic :
http://www.infosysblogs.com/retail-cpg/2009/11/private_labels_challenge_for_c_1.html#more
