Devangshu Dutta
January 5, 2010
If we were to look at phrases that have cropped up during the recent recessionary times in the consumer goods sector, “private label” has to be among those at the top of the list.
From clothing to cereals, toothpaste to televisions, there is hardly a category that has not seen retailers trying their hand at creating own labelled products.
The first motivation for most retailers to move into private label is margin. On first analysis, it appears that the branded suppliers are making tons of extra money by being out there in front of the consumer with a specific named product. The retailer finds that creating an alternative product under its own label allows it to capture extra gross margin. Typically the product category picked at the earliest stage of private label development would be one for which several generic or commodity suppliers are available.
At this early stage, the retailer is aiming for a relatively predictable, stable-demand and easily available product whose sales would be driven by the footfall that is already attracted into the store. A powerful bait to attract the customer is the visible reduction in price, as compared to a similar branded product. If the product can be compared like-for-like, customers would certainly convert to private label over time.
However, maintaining prices lower than brands can also be counter-productive. In many products, while customers might not be able to discern any qualitative difference, they may suspect that they are not getting a product comparable to one from a national or international brand. And while private label can drive off-take, the price differential can also erode gross margin which was the reason that the retailer may have got into private label in the first place. Over time, such a strategy can prove difficult to sustain, as costs of developing, sourcing and managing private label products move up.
The other strong reason a retailer chooses to have private label is to create a product offering that is differentiated from competitors who also offer brands that are similar or identical to the ones offered by the retailer. Department stores, supermarkets and hypermarkets around the world have all tried this approach – some have been more successful than others. The idea is to provide a customer strong reasons to visit their particular store, rather than any of the comparable competitors.
Of course, when differentiation is the operating factor, the products need more insight and development, and closer handling by the retailer at all stages. A price-driven private label line may be sourced from generic suppliers, but that approach isn’t good enough for a line driven by a differentiation strategy. In this case, costs of product development and management increase for the retailer. However, to compensate, the discount from a comparable national brand is not as high as generic nascent private label. In fact, some retailers have taken their private label to compete head on with national brands – they treat their private labels as respectfully as a national branded supplier would treat its brand.
So what does it take to go from a “copycat” to being a real brand?
Third Eyesight has evolved a Private Label Maturity Model (see the accompanying graphic) that can help retailers think through their approach to private label, whether their product offering is dominated by private label, or whether they have only just begun considering the possibility of including private label in their product range. The model sketches out a maturity path on five parameters that are affected by or influence the strength of a retailer’s private label offering:
In some cases, retailers may have multiple labels, some of which may be quite nascent while others might be highly evolved, clear and comparable to a national brand. This could be by default, because the labels have been launched at different times and have had more or less time to evolve. However, this can also be used as a conscious strategy to target various segments and competitive brands differently, depending on the strength of the competition and their relationship with the consumer.
The interesting thing is that size and scale do not offer any specific advantage to becoming a more sophisticated private label player. Some extremely large retailers continue to follow a discounted-price “me-too” private label strategy where even the packaging and colours of the product are copied from national brands, while much smaller players demonstrate capabilities to understand their specific consumers’ needs to design, source and promote proprietary products that compare with the best brands in the market.
For a moment, let’s also look at private labels from the suppliers’ point of view. As far as we can see, private label seems to be here to stay and grow. Suppliers can treat private labels as a threat, and figure out how to ensure that they retain a certain visibility and relationship with the consumer. On the other hand, interestingly, some suppliers are also looking at private label as an opportunity. They see the growth of private label as inevitable, and would much rather collaborate in the retailer’s private label development efforts. This way they can maintain some kind of influence on the product development, possibly avoid direct head-on conflict with their own star branded products and, if everything else fails, at least grab a share of the market that would have otherwise gone over to generic suppliers.
If you are retailer, I would suggest using the Private Label Maturity Model to clarify where you want to position yourself, and continue to use it as a guide as you develop and deliver your private label offering.
If you are a supplier concerned about private label, my suggestion would be to gauge how developed your customer is and is likely to become, and ensure that you are at least in step, if not a step ahead.
Of course, if you need support, we’ll only be too happy to help! (Contact Third Eyesight to discuss your private label needs.)
Devangshu Dutta
October 23, 2009
Trade, of course, has been global for millennia, so it seemed hardly unusual for retailers in the US, and in Europe to begin sourcing from distant countries in Asia where certain items were more readily available or significantly cheaper. Imports have also been encouraged as a political and developmental vehicle to aid friendly countries.
So, on the sourcing-end, large retailers have been comfortably operating beyond international borders for several decades even while the stores-end of their business was entirely domestic.
For most large modern retailers however, after the post-Second World War economic boom their core markets have grown relatively slowly (and rather predictably). While the sheer size of the US market kept American retailers busy domestically, planning and legal restrictions in terms of store size, locations, market share etc. limited manoeuvrability for retailers in Europe.
Among the current major retailers, the early retail explorer, Carrefour set out into neighbouring Spain in 1973 and then into distant Brazil in 1975. Soon after, Dutch retailer Ahold landed in the USA in 1977.
However, it took the opening up of East European economies in the 1990s to really prime the pump for growth of international retail. Suddenly, many more millions of consumers became available to European retailers close to their existing markets – both geographically and culturally – and western European retailers jumped at the opportunity.
At the same time, China seemed to have become steadily more open over the previous decade and in the early-1990s India looked accessible again. Some of the Latin American markets were also steaming up.
And, obviously, the prospect of 3-4 billion new consumers in emerging or developing markets was clearly not going to be ignored. In 2001, post dot-com, another inspiring idea hit the business world that was desperately looking for hope – the golden BRICs – the four countries focussed upon by Goldman Sachs as the biggest economies of the future: Brazil, Russia, India and China.
As incomes grew in these “developing” or “emerging markets”, the hypothesis was that consumer would want products and services similar to those in the more developed markets, creating the opportunity for retailers to cross borders. In the last 15 years or so, retail internationalization (and gradually “globalization”) has become an increasingly acceptable theme – in conceptual thinking, in retail boardrooms, in white papers, and finally in trade and mainstream media. The world has witnessed a network of retail subsidiaries, joint-ventures, franchise and other relationships spreading across continents.
Certainly, through the 1990s and 2000s, growing tele-connectivity, fashion, portable TV programming concepts, movies and print media seemed to give the impression that consumers around the world are becoming more similar, and can be reached by common formats and brands. Led by the FMCG companies on the one hand and fashion brands on the other, insights, concepts, products, formats, advertising campaigns are routinely extended across countries. (Unilever’s TV commercial for Close-Up in West Asia is a great example of this – an Anglo-Dutch company’s international brand of toothpaste, Indian models in Thailand, an Arabic voiceover and a Hindi song (“Paas Aao” – “Come Closer”) by Sona Mohapatra – surely you don’t get more global than that?)
But wait! Is the picture really as clear as that?
In 2006 Wal-Mart pulled the plug on its €2 billion German business that was a combination of German chains that it had acquired. In Russia it still has only a development presence since 2005, though it is reported to be looking at opening 10-15 stores in the following three years. According to Newsweek, Wal-Mart’s 13 year old Chinese business – even after an acquisition that is still to be approved – will have fewer stores than it would have opened in the US just in 2009. In the past it has struggled in Japan and Brazil.
In June 2009, Carrefour opened its first 86,000 sq. ft. hypermarket in Moscow, and a second one soon after that. In September, the company affirmed that the BRIC markets were its highest priority for international growth. However, in October it announced that it was pulling out of Russia. Within 4 months of the first store, Russia has gone from a market with “outstanding long term potential” to being a market to exit. In previous years the company has moved out of Japan, South Korea and Mexico. The Economist reports that significant Carrefour’s shareholders are forcing it to look at selling its Chinese business as well – obviously a move that would be politically very sensitive in China. The same shareholders are also reported to be urging a sale of its Latin American business. For now, the official statement from the company maintains an ongoing interest in all these markets.
Ikea has decided to freeze further investments in Russia, and has decided not to enter India until the Indian government allows 100 per cent foreign ownership of retail operations. It entered China in 1998, and has only 7 stores so far.
Even as Carrefour and Ikea announce plans to pull out of Russia, Russian retailers have pulled out from Ukraine, while Metro is cautious in its outlook about that country. French retailer Auchan has opened three stores in Ukraine since 2007, while the German retailer Rewe has opened all of nine since 2000.
Could the juggernaut of global retail be slowing, stopping or even – shock! – reversing? Are the BRICs and emerging markets falling out of favour?
Before we jump to conclusions, as they say in the television world: please don’t adjust your sets. As the French author Karr wrote: “plus ça change, plus c’est la même chose” (the more things change, the more they are the same).
It is a fact that, no matter how international or global a company becomes, when it gets to the business of retail, it needs to be intensely local. While elements of the business – concepts, products, people, money – can travel across borders, it is extremely difficult to take across an intact retail mix and expect to address a significant portion of the population in the new country. And given how important scale is to mass retailers, lack of localization would be a significant hurdle.
A company sourcing products from a developing country can fully expect his suppliers to adapt to his practices and customs. On the other hand, the same company entering that country as a retailer needs to do exactly that – adapt to the customers – rather than expecting them to fall in line because the “best practice” manual dictates certain processes or because central merchandising found some deals that were great for the home market which are totally irrelevant in the new market.
However, there are encouraging signs that retailers looking to grow internationally understand this more and more. Tesco, for one, has been following a localized approach in Thailand and South Korea, while Carrefour, Ikea, Wal-Mart have all steadily modified their approach in China and other markets. Wal-Mart’s cautious steps in India, including the stores opened by its joint-venture partner Bharti, are a complete contrast to the aggressive “plans” that were being reported in the press 2006-onwards. Recently Wal-Mart’s international chief C. Douglas McMillon was quoted by BusinessWeek as saying “we know you can’t run the world from one place”.
For the larger international retailers this means that, the benefits from international scale would be limited by the amount of localization that they carry out in their operations. For smaller and local competitors that are based in an emerging market this means a fighting chance to remain in business and even remain market leaders.
Lastly, as far as all the dark clouds gathered over international retailing and all the retreats being announced – stay tuned – this weather will change, too.
Devangshu Dutta
August 18, 2009
Four months ago in this column (“Organic – Hope or Hype?”) I wrote about the need for customers to make themselves aware of the true nature of organic products, and it is time to reopen that discussion.
Food is an emotive subject with us as consumers, food distribution and retail is big business with us as the trade, and agriculture is a sensitive area of governance.
On top of that, studies are seldom exhaustive enough in terms of sampling, duration of the study, establishment of controls etc., and for every study that proves the superiority of organics, you will be able to find counter-studies and opposing arguments.
In recent years brands have tended to make much of their organic certification. Marketers are known for overstatement anyway, and the promotional language used by some implies (or even explicitly states) that these products are superior to other alternatives. Surely, then, the consumer should be willing to pay higher prices for these “better” products?
If only, if only, facts were that straightforward.
In the earlier column I’d written: “We expect organic products to contain more nutrition and be better for our bodies. While this may be true of organic animal products compared to their inorganic counterparts, it has not been demonstrated for plant products, other than anecdotal experience of taste and appearance.” I had also raised the question: if organic foods are no better nutritionally than inorganic and could be as productive for the farmer, are many of the organic brands just skimming the gullible customer while the going is good?
Well, the debate just got messier. Recently a study sponsored by Britain’s Food Standards Agency last month (July 2009) really set the cat among the pigeons. The report was based on review of existing research papers to find out if organic products were nutritionally superior to inorganic products. And their conclusion was that the studies reviewed did not provide enough evidence that organic food is more nutritious.
Well, what the report really said was that on the basis of the limited number of studies that were deemed to be rigorous enough, there was not enough evidence to prove that organic food is more nutritious.
Okay.
Imagine an examiner saying that he does not have enough evidence to prove that a student who has passed did not cheat. Notice, he is not saying that the student actually cheated. But wouldn’t this statement alone raise suspicion in your mind about the student’s integrity?
Unfortunately, newspapers and electronic media sell headlines, and headlines need to be short and snappy. Here are a couple of examples about this study.
These clearly raise questions about any benefit at all from organics.
In the noise, the disclaimers by the team that prepared the report seem to have been ignored. For instance, this one: “It should be noted that this conclusion relates to the evidence base currently available on the nutrient content of foodstuffs, which contains limitations in the design and in the comparability of studies.” The report also states: “This review does not address contaminant content (such as herbicide, pesticide and fungicide residues) of organically and conventionally produced foodstuffs, or the environmental impacts of organic and conventional agricultural practices.”
Like any good research report, it admits that “it is important to recognise the potential limitations of the review process”. And the final line in the Conclusion section of the detailed report says: “Examination of this scattered evidence indicates a need for further high-quality research in this field.”
As a reader or TV viewer, how many of us would be motivated to go to the original source and read these disclaimers as well?
Promoters of organic farming, such as Britain’s Soil Association, of course, have trashed the study saying that it is too narrow having excluded most of the available research papers since they did not meet the review standards, and that it ignored the biggest long-term health impact – that of pesticides and other chemicals used in inorganic produce.
Their opponents, in turn have trashed defendants of organic farming by calling them unscientific and narrow-minded in their own right. They point out that high-output inorganic farming is far more useful to serving the exploding human population, than low-intensity organic farming.
One of the readers of the British newspaper Daily Mail was emphatic that she didn’t “eat organic stuff to get extra nutrition”, but was “happy to pay more to be free from additives”. Certainly that is a significant benefit that motivates most people who are well into organic products. In an unusual open letter, the Chief Executive of the Food Standards Agency clarified: “Pesticides were specifically excluded from the scope of this work. This is because our position on the safety of pesticides is already clear: pesticides are rigorously assessed and their residues are closely monitored. Because of this the use of pesticides in either organic or conventional food production does not pose an unacceptable risk to human health and helps to ensure a plentiful supply of food all year round.”
The other motivation for organics is our attitude towards the environment, which can either benefit us over the longer term or, if we are irresponsible, it could accumulate toxins which only show their impact over decades and generations. But, let’s be honest, are most consumers likely to buy products because of some distant benefit to the environment, or products that benefit themselves immediately?
Possibly the answer lies in the organic sector cleaning up its message.
Are consumers any wiser after this study and the debate? I’m not sure. For now, my take on this issue remains: be aware and make up your own mind about what you want to ingest, because this debate isn’t over yet.
Devangshu Dutta
May 9, 2009
Bernice Hurst, Contributing Editor, RetailWire mentioned the “Let Children Grow” campaign in the UK jointly promoted by The Independent on Sunday newspaper and the highly respected gardening charity, the Royal Horticultural Society (RHS). Launched in 2007, the RHS Campaign for School Gardening, sponsored by the food and grocery retailer Waitrose, is a nationwide scheme designed to encourage schools to create gardens and teach children the skills of growing plants.
It is described as “an ambitious initiative to encourage the nation’s children to grow their own fruit and vegetables”. The programme targets deprived areas, particularly those with combinations of poor health, low income and levels of aspiration. By working with young people, the idea is to improve their health while teaching them what to eat and where food comes from. RHS research suggests it can “help improve academic achievement, behavior and confidence among pupils”.
According to the Independent on Sunday, most of the children “are learning for the first time about gardening, and with it the enjoyment of fresh air, appreciation of the environment, healthy eating and in turn the prospect of a longer life.”
Bernice Hurst asks, “Can/should retailers encourage and sponsor such education programs to inspire consumer loyalty?”
As far as I can tell, if there is a country in love with its gardens, it is the UK, so this should be a hit with the parents and the teachers.
Pre-teens certainly don’t mind getting dirt under their fingernails, so it should appeal to them as well.
Whether this has any tangible impact on Waitrose’s image and business remains to be seen but, then, some things should simply be done because they are the right thing to do.
The RetailWire discussion is here: Looking at Literal as Well as Figurative Growth, and the Independent article is here: Digging for victory: Schools back gardens plan.
Devangshu Dutta
April 28, 2009
An article in Convenience Store Decisions wonders “Can Packaging Boost Sales?”
According to the article, in November 2008 McDonald’s reported that 82 percent of its packaging in its nine largest markets is now made from renewable materials. And “convenience store retailers are following Mickey D’s lead, seeking to capture a greater share of takeout sales as well as respect the earth with reliable, environmentally friendly packaging that won’t drive up the cost of takeout meals.”
The question is: how much of a selling point is green packaging at retail? Is the sales lift worth the investment in green packaging?
(At the risk of sounding naive,) I think well-conceived green packaging (starting with reduced packaging) would be a win-win-win: lower cost for the retailer, higher acceptability with the consumer, and better for the planet.
On a different note, we do conveniently ignore the true cost of the excessive throw-away packaging. If the cost of disposing that were added to the price of the product, the switch over to green packing might be faster.
I recall reading about a protest in the UK a couple of years ago by consumers who unwrapped excessive packaging at the cash-till and left it there – imagine that at your local supermarket on a Saturday!
The original article from Convenience Store Decisions is here: Can Packaging Boost Sales?
