Private label - Private audience

SPC examines the global forces driving an increase in private label products and a shift in their manufacturing

There has been significant increase in the market share of private label brands in recent years. In Europe, private label now account for about 45% of products sold in supermarkets, and it is now increasingly making inroads into emerging markets including Eastern Europe and Asia. Historically, private labels were seen as low priced, low quality products. Today, with the rise of global retailers, companies have started using private labels to market higher quality items that will increase in presence at the expense of established brands.

Private label products have traditionally relied on considerable price differentials for sales against established international brands. This has particularly been the case with cosmetics and personal care products where the brands often have a strong and long-standing image associated with them. Jean-Jacques Vandenheede, ACNielsen retail insights director, comments: “Cosmetics and personal care products are one of the sectors where private label has traditionally had least impact. This is due to the brand loyalty generated by the effective marketing and long-standing nature of the major cosmetics companies. The industry has some strong brands and consumers aspire to the values that they represent. To a degree this is inherent in the cosmetics business; if a consumer is buying what is essentially a luxury product it is harder for private label to replicate that feeling of luxury. To get sales in the cosmetics business private label relies on massive price differentiation to attract consumer.”

Retail trends show private label products are generally gaining ground on their more glamorous rivals. Brian Sharoff, president of the Private Label Manufacturers Association (PLMA), says: “The basic appeal of private label is based on a good price compared to well known brands and the presence of trusted retailers like Boots or The Body Shop. Such retailers take the place of the brands in the eyes of the consumer. Key advantages of private label products are immediate access to retailers’ shelves and the guarantee of good in-store marketing and positioning.”

Manufacturing issues

The general shift in manufacturing from the developed world to locations in Eastern Europe and Asia has been reflected in private label. “There is a shift in manufacturing from the West to the East,” confirms Vandenheede. “However, this is an ongoing reality across all business sectors and services and is by no means limited to private label. For companies it is a question of balancing factors such as quality, logistics and production methods. Easily transportable products are better disposed towards being located further from markets. Business is always driven by economic gain, so manufacturing will always locate to the most economically advantageous area”. The area with the lowest production costs may not be the most profitable location as issues of quality may damage the business.

“I feel that today you can place a production machine anywhere on the globe in terms of setting up business,” continues Vandenheede. “The variance in work force in terms of skills and education can generally be overcome as a limiting factor if the economic factors behind the choice of location are sound. Location is dependent on companies’ overall strategy and business model. This is true whether it is an American company choosing states in the US or a company taking its first steps into China picking a city or region.”

The choice of locating a manufacturing site is subject to myriad factors and requires a complex set of trade-offs to be evaluated including cost savings versus growth, speed and expense versus quality of production, organisational cohesion versus knowledge and innovation. The forces of globalisation mean that the issue of reduced quality in locating to cheaper manufacturing locations is increasingly less significant than in the past. Advances in global communications, the spread of knowledge and global free trade agreements have all played a part in this.

Political changes can also affect manufacturing location, with traditional borders, having previously acted as barriers, increasingly opening to trade. An example of this is the expansion of the EU, which has been a factor in the manufacturing shift to Eastern Europe as hindrances to businesses were removed. Increasingly over time the geographical dimension is diminishing in importance. As private label is driven by highly advanced retailers like Tesco using their global structure, private label manufacturing is often very advanced in terms of chains of supply and outsourcing. With key players enjoying advantages of global reach and influence, private label cosmetic and personal care products will be aiming to make further gains against brands in the future.

Retail therapy

The emergence and continuation of these powerful global retailers has effects felt through the global economy. “As the big get bigger and their market penetration increases around the globe, competition among the major players is having a significant macro-economic impact,” says the report. “Intensifying competition is exerting downward pressure on prices. In addition, these companies are reinvesting the cost savings resulting from increased scale and efficiency improvements to reduce retail prices. The decline in overall consumer prices means a substantial increase in consumer buying power. Continued expansion by the leading global retailers is also having a big impact on the supplier base. Suppliers are being forced to consolidate and rationalise their brand portfolios in an effort to operate more efficiently.”

The report saw UK heavyweight Tesco move up one spot to fifth place, with US giant Wal-Mart retaining the top spot, based on revenue. France’s Carrefour was second with Home Depot (US) and Germany’s Metro AG in third and fourth respectively.

The development and health of these retail giants is directly linked to the performance of the private label markets as Sharoff notes: “The general boom in private label products is due to retailers emerging as significant players in the global economy. The consolidation of retailers concentrates the remaining player’s power and ability to be competitive against brands.”

So how is private label doing in terms of retail? A report from ACNielsen entitled The Power of Private Label evaluates retail measurement data and consumer data related to private label from 38 countries around the world from April 2004 to April 2005.

The report found that Europe remains the region with the highest share of private label, with Switzerland maintaining its position as the market leader with the largest share of private label value sales at 45%. Globally private label products are priced, on average, a third lower than manufacturer brands, whilst the growth of hard discounters will continue to influence the development of private label. Generally private label share is higher among larger families and those with lower incomes whilst the introduction of more premium lines has changed both the shape and perception of what a store brand can be.

Personal care and cosmetics are two of the three product areas studied with the lowest level of private label development. Despite personal care private label products being available in most countries, share is still only 5% of value sales. For example, shampoo private label products were available in 37 of the 38 countries measured, but private label market share in this category was limited to 3%.

For Cosmetics availability of private label products did limit the value share. Lipstick/gloss and eyeshadow private label brands were only available in half of the countries measured. Eyeshadow, ranked 69th in private label share, but was the fastest growing category, growing by 34%.

Looking at the pricing trends across the product areas included in the study, personal care products had the widest differential between private label and corresponding manufacturer brands. Private label products in this product area were, on average, priced 45% lower than manufacturer brands. Private label products within the categories of after-shave preps and shampoo were both priced at less than half the price of the manufacturer brands on a global basis; a differential of over 50%. One reason given for this large difference is that the type of private label products available in personal care are of the more basic variety with few added features or benefits.

Emerging markets

The emerging markets for private label are Asia, Eastern Europe and Latin America, says Sharoff. “Growth has not taken place as yet as retailers have not reached the required level of power. Private label growth reflects a move to a more systematic system of retailing.”

Developing markets have a lesser degree of retail sophistication than the private label stronghold of Europe, as Vandenheede points out: “Private label is limited in emerging markets. This is because the retail environments and business structures underlying them need advancement before private label becomes more viable. Also in emerging markets beauty brands can represent an idealised version of western values so people are keen to buy into the dream even at great proportional expense.”

Retail evolution

Two key trends are identified by Vandenheede. “The first is the evolution of the retail environment which is part of the wider economic advance. Any sector or service has a concentration of power and companies. The second trend is inconsistency of the private labels performance compared to brand names. This varies across geographies and categories.”

Also noted is a trend for the continual expansion if the US drugstore concept to places it was previously unknown, including France and Germany. Trends for developed markets include retailers consolidating into two or three large retail chains and the teen market increasingly being seen as key.

The ever increasing need for economic efficiency is driving retailers to look for financial benefits in all aspects of sourcing. An example is Marks & Spencer, which recently reviewed its sourcing for colour cosmetics, coming to the decision that switching to a single supplier would allow the company to raise productivity levels.

The continued success of hard discounters like Aldi and Lidl is set to challenge the dominance of retailers like Wal-Mart and Tesco. Hard discounters generally sell many fewer products than standard retailers, meaning their control over the supply line is even greater. This approach may see cosmetics sold in a less aspirational fashion in the future, with the emphasis on functionality and price. This would be less in competition with the brands than opening up an entirely new marketing approach to cosmetics.

Concurrently many private label retailers are striving to take on the brands in terms of quality and marketing appeal. Vandenheede says the “level of professionalism in private label manufacturing is rising very fast and is as advanced as brand manufacturing”. And Sharoff feels that “retailers have invested and can challenge brands in the future on all aspects of quality”.

Sharoff says he is very optimistic about the growth registered in Europe, US and Canada. “The track of growth in emerging markets is good for business in that the retailers are determined to become global players. All depends on issues of quality. The level of quality can be boosted if the retailer has a high degree of high quality control. High level quality will only be achievable through the the multinational and powerful retailer via scales of economy. The future of private label is down to the retailers.”