The Global Private Label Challenge

Trade Marketing Association, Netherlands

Rhenen

February 15, 2005

Why Are Retailers Developing Private Labels?

To create a virtuous cycle!

PRIVATE

LABELS

STORE LOYALTY

POWER SHIFT TO RETAILERSPROFITABILITY

EXPANSION

What is a Private Label?

A label unique to (a) specific retailer(s). These labels can be divided into ...

Store brands

The retailer‘s name is

very evident on the

packaging.

Individual brands

Name used in one

category, either to

promote a ‘real’

discount product line

or to promote ‘added

value’ products within

the category.

Umbrella brands

A generic brand

independent from the

name of the retailer

used in different

product categories.

Tesco’s multi level Private Label strategy

Volume+

+

Pri

ce a

nd

Qu

ality

O

Cheap White

Label

Commodity level Quality

Special Private Label

Organic etc

Premium QualityPremium QualityTesco Finest

Tesco Value

Tesco Standard

Private label value shares per type of FMCG

(Fast Moving Consumer Goods) in different world regions

PrivateLabel Share

26,4

22,8

2,9

17,3

2,3

0,2

29,8

23,6

2,1

7,6

2,9

1

13,612,4

1,2

11,8

10,1

0

5

10

15

20

25

30

35

Western

Europe "Big 5"

Other Western

Europe

Central/Eastern

Europe

U.S. Asia-Pacific China

Food&Beverage Household Care Personal Care

Value share is percentage of sales (not percentage of

volume) - given the price premium of National Brands,

volume share will be considerably higher

Growth in Private label shares per type of FMCG in different

world regions 2000-2002

Private

Label

Share

Growth

12,77,2

105

6,6

52,3

14,2 11,1

226

18,3

38,9

15,2

1,8

297

14,9

51,3

0

50

100

150

200

250

300

Western Europe

"Big 5"

Other Western

Europe

Central/Eastern

Europe

U.S. Asia-Pacific

Food&Beverage Household Care Personal Care

The growth and share of Private Labels differs significantly ....

... between different countries

Austr

iaCz

ech

R.Fr

ance

Germ

any

Norw

ayNet

herl

ands

Pola

nd

Spai

nSw

eden

U.K.

USA

Private Label

share

Savouries

Alcohol

Healthcare

Other Toiletries

Bathroom Toiletries

Oral Care

Haircare

Biscuits

Hot beverages

Pet Foods

Soft drinks

Household Products

Packet & Other Foods

Canned Goods

Bakery

Frozen Foods

Dairy

... between different categories

Private

Label share

in the U.K.

... between different retail chains

Mer

cado

na

Alc

ampo

Cap

rabo Dia

El C

orte

Ingl

es

Eros

ki

Hip

er C

arre

four

Hip

erco

r

Lidl

Sabe

co

Private Label

share

Age of Child

Status

0

50

100

150

First-Born Not First-Born

... between different consumer segments

0

50

100

150

0-6 months 6-18

months

18-36

months

Conceptual framework

Understanding the Private Label Challenge

Source:

Prof. Steenkamp

Dr. Geyskens

2002

Countries

Consumers

Cu

sto

mers

Cate

go

ries

Private

Label

Success

Factors explaining Private Label share and growth

Customer Factors• Size

• Store Loyalty vs Brand Loyalty

•Shopper Perceptions

Country FactorsNational Culture

• Power Distance

• Uncertainty Avoidance

Economic-Institutional Environment

• National Competitiveness

• Socioeconomic Modernity

Retailscape

• Retail Concentration

• Number of International Retailers

• Presence of Hard Discounters

Category FactorsPrice-Quality Considerations

• Quality gap Brands-Private Labels

• Value gap Brands-Private Labels

• Price-quality inference

Importance of Category

• Involvement

• Performance risk

• Social Symbol

Brand Trust

• Trust gap Brands-Private Labels

• Manufacturer Brand Trust

Consumer Buying Process

• Desire for variety

• Share of Budget

• Impulse Buying

Marketing activities

• Perceived advertising intensity

• Brands’ innovation activity

• Perceived promotional intensity

Production Issues

• PL -Brand packaging similarity

• Difficulty of making category

• PLproduction by brand manufacturers

Private Label

SUCCESS

Consumer

Factors

• Age

• Gender

• Household Size

• Social Class

• Education

•Household Income

• Region

• Urbanization

• Main Shopping Destination

PrivateLabelValueShare

2003F

ran

ce

Ge

rma

ny

Ita

ly

Sp

ain

U.K

.

Au

str

ia

Be

lgiu

m

Ire

lan

d

Ne

the

rla

nd

s

No

rwa

y

Po

rtu

ga

l

Sw

ed

en

Sw

itze

rla

nd

Cro

atia

Cze

ch

Re

pu

blic

Hu

ng

ary

Po

lan

d

Ro

ma

nia

Ru

ss

ia

Slo

vakia

U.S

.

Ja

pa

n

Ta

iwa

n

Th

aila

nd

Ch

ina

Western Europe Western Europe

‘‘Big-5Big-5’’

Other Western EuropeOther Western Europe Central/Eastern EuropeCentral/Eastern Europe Asia-PacificAsia-PacificU.S. ChinaChina

De

nm

ark

Ukra

ine

Ho

ng

Ko

ng

Ko

rea

Ma

lays

ia

Arg

en

tin

a

Bra

zil

Ch

ile

Latin Latin

AmericaAmerica

Variation in Private Label Shares Across Countries

What drives Private Label share across countries?

Country Drivers (1)

Power Distance:

Extent to which the less powerful in a society accept and

expect that power is distributed unequally.

Uncertainty Avoidance:

Society's tolerance for uncertainty and ambiguity.

Hypothesized

and Uncovered

Relationship to

Private Label

Share

Socio-economic Modernity:Index of

Life expectation at birth, mortality rate for adult females and adult

males, GDP per capita in PPP, number of mobile phones per 1000

people, number of pc’s per 1000 people, fixed line and mobile phone

subscribers, Electric Power consumption, Urban Population

Competitive Environment:Measure for competitiveness among countries using 300 criteria in

the fields of economic performance, government efficiency, business

efficiency and infrastructure (IMD World Competitiveness Yearbook).

Index of

Private Label Share

(Average =100)

6978

73

129121

126

0

20

40

60

80

100

120

140

Retail Concentration Number of Int'l Retailers Hard Discounter

Presence

Low High

Country Drivers (2): The retail environment

No Yes

Retail environment has an impact!

High retail concentration: +87%;

Large presence of international retailers: +55%

Presence of hard discounters: +73%

We ranked all countries

according to these criteria,

split them in two groups of

equal size and then

calculated average private

label shares for each group.

Significant category by category variation in Private Label levels

Netherlands:

Exemplary

Private Label

value shares

2003

How may these differences be explained?

Category Drivers (1): Consumer perceptions with

regard to certain category characteristics

Price-Quality Relationship:

• Quality Gap: Quality Difference Brands vs. Private Labels

• Value Gap: Value Difference Brands vs. Private Labels

• PQ inference: Degree to which price signals quality

Each of these constructs was

measured using validated scales.

Importance of the Category:

•Involvement: Importance of category to consumer

•Social Symbolic Value: Degree to which brand purchased in category says

something about purchaser

•Performance Risk: Risk (Financial, Social, Functional) associated with purchasing

the category

Trust:

•Manufacturer Brand Trust: Degree to which brands deliver what they promise

•Trust Gap: Trust Difference Brands vs Private Labels

Purchasing Behavior:

Impulse Buying: Degree to which products in category are purchased unplanned

Share of Budget: Part of total budget spent on purchases in category

Need for Variety: Extent to which consumer values variety in category

Marketing Activities:

Promotional Intensity: Perception of promotional intensity in category

Advertising Intensity: Perception of advertising intensity in category

New Product Activity: Perception of new product introduction activities in category

Marketing/Production Issues:

Package Similarity: Similarity in look of Brands vs. Private Labels

PL Production by NB Man’s: Belief that Private Labels are produced by Brand

Manufacturers

Difficulty of making category: Belief that good quality is difficult to produce in category

Category Drivers (2): Consumer perceptions with

regard to certain category characteristics

Each of these constructs was

measured using validated scales.

Global drivers of Private Label success across categories*

Key drivers (>50%)

Low advertising intensity NationalBrands

Small value gap National Brands vsPrivate Labels

Small trust gap National Brands vsPrivate Labels

Low new product activity NationalBrands

Highly similar packaging NationalBrands vs Private Labels

Small quality gap National Brands vsPrivate Labels

Secondary drivers (40-50%)

Weak social-emotional bond with brands

Low promotional intensity

Strong belief that brandmanufacturers produce Private Labels

Low National Brand trust

Small performance risk

*Note: Within group ordered in order of importance

Index of

Private Label Share

(Average =100)138 134

807886

124

0

20

40

60

80

100

120

140

160

Advertising Intensity New Product Activity Packaging Similarity

Low High

Marketing activities as drivers of private label share

Market activities have an impact!

High package similarity National Brands and Private Labels: +55%

Low advertising intensity by National Brands: +77%;

Low new product introduction activity by National Brands: +56%

We ranked all categories

according to these criteria,

split them in two groups of

equal size and then

calculated average private

label shares for each group.

200 g selling at 45c

The Private Label

Category Drivers illustrated (1)

150 g selling at 50c

The Branded Product

Identical

Ingredients and

Manufacturing

address

Category Drivers illustrated (2)

National Brand selling at 9,99

Private Label selling at 2,99

Category Drivers illustrated (3)

Category Drivers illustrated (4)

The Category Private Label Attractiveness Index

Summary measure

combining consumers’

perceptions of a

category on the 10

most important Private

Label drivers.

A low value signals that the category is perceived as unattractive for Private Label (e.g. high

performance risk, high quality difference, little packaging similarity, etc.).

A high value signals that the category is perceived as attractive for Private Label (e.g. low

performance risk, little quality difference, little trust in manufacturers, etc.)

Private Label Share

Private Label Attractiveness

High

Low

Low High

Brand Brand

Opportunity Hell

Brand Brand

Heaven Threat

Private Label Attractiveness Matrix: Netherlands

Brand Opportunity Brand Hell

Brand Threat

Brand Heaven

PL Value

Share 2003

PL Category Attractiveness

In summary:

A virtuous circle of Private Label Success

Low innovation

& advertising by

National Brands

Low National

Brand trust advantage

Look-alikes

Private Label

production

by National

- BrandsIncreasedPrivate Label

Share

Lowwillingnessto pay price

premiumfor NBs

Growth of (hard)

discounters