As retailers improve their range of private label offerings, and subsequently their share of category, it is only natural for manufacturers to do their utmost to protect their brands. So how best can manufacturers defend against this seemingly endless rise of private label products?
A pan-European analysis
There are a number of key factors affecting the performance of private label.
1. Retailer concentration
Retailer concentration refers to the share of market based on the leading retailers. For example, in the UK, the six leading grocers and pharmacies represent 86% of all sales. As indicated by the chart below (fig. 1), the higher this level is, the higher private label share tends to be.
Fig.1 Retailer concentration by country
Retailer concentration | Average share in categories surveyed |
| Non-grocery | Household | Health & Beauty | Grocery |
UK | 86 | 31 | 14 | 23 |
Spain | 63 | 33 | 9 | 30 |
Germany | 73 | 16 | 6 | 25 |
France | 70 | 10 | 10 | 19 |
Italy | 40 | 13 | 6 | 9 |
Poland | 21 | 4 | 1 | 2 |
Poland is the lowest by some margin, caused in part by the government’s attempt to limit the amount of own label product sold in stores to 20%. This could be an attempt to increase sales and boost the economy but as Tesco (who have a growing number of stores there) points out, this simply restricts choice for the consumer.
This inevitable trend towards retailer concentration can probably not be halted but manufacturers can at least be prepared for it. To help guard against it, manufacturers can ensure that they have as strong a relationship as possible with the retailers. In addition, preventing gaps in the market from appearing can be crucial. Private label has flourished in chilled ready meals partly because there is so little no branded competition.
2. Media
In categories where media spend as a share of category value is high, private label share tends to be low and vice versa. This could indicate that where brands are dominant, they spend more to compete with each other, leading to private label products doing less well. Or, it could mean that precisely because they spend so much, the brands become dominant, with the same result for private label.
Conversely, where there is little media spend, private label tends to thrive, which does seem to signify the importance of media spend of branded products.
Advertising remains a critical investment in brands and measuring the return on investment of the campaigns is equally crucial. IRI provides modelling solutions that help to optimise the efficiency and profitability of media advertising. The insights developed from the models enable advertisers to significantly improve the efficiency of their media plans through more effective media deployment.
3. Price and promotion
At a very topline level, the growth of private label is markedly slower when the levels of promotion amongst branded products are higher. However, this does not necessarily mean that brands grow faster, just that private label growth slows down.
Interestingly, the impact of multibuy promotions on private label sales in the UK is negligible, while price cuts do have a noticeable effect. This is because more investment is required in a multibuy, whereas with a price cut, the saving is more immediate. It is logical to assume that if the consumer is shopping within private label, instant savings are often likely to be the reason.
For branded products, short term price cuts can lead to short term share gains but in the longer term, deep cuts are probably not the best strategy.
Pricing of private label is closely linked to consumer perception of quality. The price gap with the brands is set for maximum sales impact and maintenance and setting of consumer quality perception. Pricing a private label product at too low a level could impact negatively on quality perception.
Where private label has a high share of category, the quality and equality of the private label offering is accepted by consumers. The difference in price is therefore not very large, which maximises private label returns and maintains quality perception. In these situations it is also possible for private label to offer a range of price and quality, further flattening the impact of pricing on private label share.
Long term private label pricing is not fixed and the optimum price gap can be maintained by private label, which has the opportunity to be more flexible. However, short term promotions impact this optimum positioning. Private label cannot cut its general price point without risk of damaging its quality perception, but brands can breach the gap in the short term, and steal share. The problem with this strategy is that if this becomes prevalent throughout the category consumers can become promiscuous as brand equity is traded off for the best deal. Another problem might be that promotional trial of branded offerings reinforces consumer perception of private label quality, for less.
4. NPD and ‘technical insulation’
One question worth considering is whether new product development by branded manufacturers has any affect on private label. Data across Europe seems to indicate that the number of new products launched has no significant effect on the share of private label in that category.
However, branded products have a distinct advantage in that there are a number of barriers to entry into many markets. Certain categories require millions of pounds of research and development, something retailers often cannot afford, or indeed have the technical expertise to achieve. This ‘insulation’ can be crucial, as proved in the case of the triple-bladed razors.
It also may not be in the interest of the retailer to launch into a market where innovative brands are doing well, as the private label products may damage the performance of the category. Branded NPD can positively affect a category by renewing interest and driving sales across the board.
The manufacturer perspective across Europe - country headlines
In the UK, private label has the highest share of all European countries. The highest figures are in the household and grocery sectors, despite the fact that share is declining in 90% of the categories.
After the UK, Spain has the highest private label in Europe. Growth was recorded in almost 90% of the categories and like Germany is a very fragmented market.
In two-thirds of the surveyed categories in France, private label is showing a decline in share. Private label is strongest in grocery with an average of 19% and is growing.
In Germany, private label is growing in all of the categories surveyed. This market is the most fragmented in Europe and private label appears to impact directly on the share of the top manufacturers.
Italy has the smallest private label share amongst the five major countries in Europe and is losing share in 80% of the categories after two years of growth. However, from a low base, private label is gaining share quickly in health and beauty.
Private label remains very small in Poland, although it is growing share and sales more than half of those categories surveyed with the arrival of Western retailers such as Tesco. However, private label is losing share in 45% of categories.