Growing Brands Global Private Label

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Edgar Stokes
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1 Growing Brands Global Private Label AIM Seminar 12th June 2003

2 Recap on 20th March

3 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS EXPANSION STORE LOYALTY PROFITABILITY POWER SHIFT TO RETAILERS

4 PL Shares are High or Growing Germany UK France Spain USA

5 The growth and share of Private Labels differs significantly... PL share Austria between different countries Czech R. 3.7 France 23.0 Germany 22.9 Norway 2.9 Poland 2.7 Spain 14.3 Sweden 7.7 Turkey U.K USA Dairy Frozen Foods Bakery Canned Goods Packet & Other Foods Household Products Soft drinks Pet Foods Hot beverages Biscuits Haircare Oral Care Bathroom Toiletries Other Toiletries Healthcare Alcohol Savouries... between different categories Private Label share in the U.K. PL share 34.2 Mercadona... between different retail chains 8.7 Alcampo Caprabo Dia El Corte Ingles Eroski Hiper Carrefour Hipercor Lidl 82.4 Sabeco between different consumer segments Source: Europanel Private Label Age of Child 0-6 months 6-18 months months Status First-Born Not First-Born

6 Customers Categories The 4 C s of Countering the Private Label Challenge Countries Private Label Success Consumers

7 Private Label is not a Law of Nature The Manufacturer Holds Some Trump Cards Too The retailer cannot: Always obtain necessary critical mass in a category Always get the quality it wants Advertise specific functions of the brand As convincingly create image as against functional reassurance Give a sense of wide choice Invest in in-depth understanding of consumer attitudes and behavior in all product fields in which they operate Always achieve higher profit contributions on its private labels than on national brands

8 Innovation - An effective starting point to counter PLs? Belief that PLs are produced by NBs Price premium of brands Share of Budget Desire for variety Performance Risk Brand Trust Copycatting Advertising Intensity -Actual -Consumer perception Promotional Intensity -Actual -Consumer perception PL share/growth Involvement Quality Difference between NB and PL Value Difference between NB and PL Social Value Willingness to pay more for NBs Price-Quality Inference New Product Activity Brand Quality Positive effect Negative effect Effect to be studied

9 Innovation - an effective starting point to counter PLs? Belief that PLs are produced by NBs Price premium of brands Share of Budget Desire for variety Performance Risk Brand Trust Copycatting Advertising Intensity -Actual -Consumer perception Promotional Intensity -Actual -Consumer perception Willingness to pay more for NBs PL share/growth Price-Quality Inference Positive effect Negative effect New Product Activity Effect to be studied Brand Quality Involvement Quality Difference between NB and PL Value Difference between NB and PL Social Value

10 Innovation - an effective starting point to counter PLs? Innovation may be the most effective weapon in the fight against private labels due to the chain of reactions, all suitable to reduce PL attractiveness Major innovations should receive highest priority Innovation effectiveness increases when combined with persuasive advertising and precautions against copycatting

11 PL and the Effectiveness of Promotion and Advertising Trigger Promotions Category effect Brand effect Competitive reaction Trigger Advertising Brand effect Short Term Long Term PL Effect 58% 2% Not limited by PL size 64% 4% Limited by PL size 30% 5% Less reaction to PL promotion 20% 1% Probably effected by PL size Competitive reaction 14% 0%

12 PL and Trade Structure Development Discounter share growth is universal Private Label growth is being driven by Discounters Indications on Discounters that: Size and growth and factors vary by country Not just store numbers, more shoppers spending more Germany not necessarily a role model eg Mercadona and in GB, where Discounter growth has been contained Time poor & price conscious consumers are key Discounter growth appears set to continue The project will study the role of Discounters in PL

13 Feedback from 20th March

14 20 th March Meeting Group Feedback Case Studies NBs countering PL size/growth Future Saturation level? German model elsewhere? Portfolio Value Flanker/portfolio Strategy Discounters PL users switch to discounters? Drivers of Discounter Shopping Budget PL fights Discounters? In Store Complexity vs simplicity within category Decision-making at the shelf - PLs vs NBs PL Types Segmented PL impact Line Extension and Major Innovations on PL Best Practices vs Hard Discounters Effect of global brands, global retailers PL in more segmented categories Retailer promotion vs discounter growth Philosophy of hard discounting Attitudinal issues on Discounters Compete with PLs IN store eg. assortment Segmenting PL, NB, Mixed buyers Success of PLs (other financials not profit)

15 20 th March Meeting Group Feedback Innovation Ineffective supply chain, supports PL growth? Innovation in difficult categories Pricing PL pricing vs A vs B brands and pack sizes Advertising/Promotions - function vs emotion Retailers Use of non-mainstream channels eg. Confectionery Internal retailer processes on PL decisions Profit Benchmarks on financials The Project More on 4Cs: country, category to plan, predict Attributes of successful PL Other How do NBs organize internally to fight PL? Role of PL production for NB manufacturers Line extension vs major innovation EDLP vs Hi Lo Promotions vs Discounters Germany hi-quality, lo-price elsewhere? How to work with high PL retailers Profit vs margin model Alert signals (eg low risk) Testing Institutes - how to work with?

16 20 th March Meeting Group Feedback Today s Meeting Case Studies NBs countering PL size/growth Future Saturation level? German model elsewhere? Portfolio Value Flanker/portfolio Strategy Discounters PL users switch to discounters? Drivers of Discounter Shopping Budget PL fights Discounters? In Store Complexity vs simplicity within category Decision-making at the shelf - PLs vs NBs PL Types Segmented PL impact Line Extension and Major Innovations on PL Best Practices vs Hard Discounters Effect of global brands, global retailers PL in more segmented categories Retailer promotion vs discounter growth Philosophy of hard discounting Attitudinal issues on Discounters Compete with PLs IN store eg. assortment Segmenting PL, NB, Mixed buyers Success of PLs (other financials not profit)

17 20 th March Meeting Group Feedback Today s Meeting Innovation Ineffective supply chain, supports PL growth? Innovation in difficult categories Pricing PL pricing vs A vs B brands and pack sizes Advertising/Promotions - function vs emotion Retailers Use of non-mainstream channels eg. Confectionery Internal retailer processes on PL decisions Profit Benchmarks on financials The Project More on 4Cs: country, category to plan, predict Attributes of successful PL Other How do NBs organize internally to fight PL? Role of PL production for NB manufacturers Line extension vs major innovation EDLP vs Hi Lo Promotions vs Discounters Germany hi-quality, lo-price elsewhere? How to work with high PL retailers Profit vs margin model Alert signals (eg low risk) Testing Institutes - how to work with?

18 The Project in more detail

19 The Global Private Label Project What are we trying to achieve? What drives Private Label size and growth Development of Counter strategies Project outline 35+ countries, 60+ categories Panel and consumer perception inputs AIM industry report in Spring 2004 Client specific detailed international and local projects

20 Inputs By Category by Country Volume, Value Price Involvement Performance Risk Brands bought Fascias used Penetration Loyalty Frequency Demographics Total Brands Total PL Brands 1-5 Key Retailers Retailer PLs Promo, Ad & NPD intensity Price-qual link Willingness to pay Quality, Value Trust, loyalty Lookalikes Manufacturing Adspend Promotion Need for variety Social value

21 Understanding PL Key Drivers: The Global Private Label Project AIM, International, Local Guide the project Common insight Industry analysis Stimulate mindset Drivers of PL Foods vs Household vs Global, Region, Total country Same everywhere? Or not? Array of proven PL drivers: perceptions, behaviour trade, marketing,.. Many categories and countries Brand strategy vs. PL Drivers of PL in your categories Differs by region/country? How your categories/brands perform? Benchmarks vs. Many categories/top 5 brands Many countries Link to country implementation Multi-function process Local strategy/tactics vs. PL Drivers of PL in your categories How your categories/brands perform? Local benchmarks vs. Many categories/top 5 brands Region Opportunities/threats in local retailer environment Retailer-specific tactics Best Practices to counter PL: Extensive scan of AiMark and client network General Toolbox Category/Brand Toolbox Local Toolbox

22 Output examples

23 PL Market Share (volume) 55% What went wrong? Evaluating Country Performance: The Country Favorability Grid CH Private Label Paradise Very high Uncertainty Avoidance B GB 15% MEX RCH National Brand Paradise RA P BR E GR F ZA CDN AUS IRE I SF J NL D USA N A S NZ DK Low Power Distance High Individualism Future Threat Low Country favorability to PL* High * Favorability is the combination of culture, socio-economics, and retail concentration

24 PL Market Share (volume) Evaluating Category Private Label The Category Favorability Grid Example for Country A What went wrong? D W D e t e r g Private Label Paradise B l e a c h 6 0 k i t c h e n r o l l T o i l e t Tissue H D W p r o d F a b r D e t e r g F a b r S o f t e n e r H H c l e a n e r s High NB quality, value, adspend Low involvement and risk Unwilling to pay T o i l e t R e f resh National Brand Paradise Category favorability to PL* Future Threat * Favorability is a combination of key drivers such as performance risk, quality differential, advertising intensity and willingness to pay for brands

25 PL Market Share (volume) Evaluating Category Performance The Category Favorability Grid Example Category A What went wrong? CH Private Label Paradise B GB NL DK 4 0 F A National Brand Paradise H POL Category favorability to PL* E D I Future Threat Note: Data shown is illustrative

26 Understanding Category Performance : Category Driver Grid Food Rank of Importance* Price Diff Value Diff Prom Int Perf Risk Canned Veg Dry Pasta Yoghurt Inn Adv Int Drivers Beverages Still Min Water Sparkling Min Water Household Care Kitchen Roll Toilet refresher Toilet Paper Personal Care Soapbars Tooth Brush Razor Blade Note: Data shown is illustrative

27 Understanding Category Performance : Category Driver Grid Rank of Importance* Price Diff Value Diff Prom Int Perf Risk Yogurt France Germany Italy Netherlands Spain UK Belgium Inn Adv Int Drivers Total W. Europe Note: Data shown is illustrative

28 Predicting Retailer Strategy Category Appeal Grid Variation in PL share across retailers Low High Low Shampoo Deodorant Tooth Brush Detergent Razor Blade Avg PL share across retailers Facial Tissue Shaving cream Grid can be for all or selected categories - for single countries - for regions - globally High Soap Bars Toilet Paper Kitchen Roll Bleach Adapted from Dhar and Hoch, 1997 Management Science Note: Data shown is illustrative

29 Private Label is not always effective for a Retailer The Retailer Grid for a Category Retailer Private Label Share PL focus ineffective Ret. 1 Ret. 2 PL focus effective Ret. 6 Ret. 4 Ret. 5 Fair Share Ret. 3 Ret. 7 Ret. 8 Ret. 9 Ret. 10 NB focus ineffective NB focus effective Loyalty to the Retailer Fair Share over all categories = Private Label Share in the Market Fair share in a specific category = Average PL share of the retailer

30 Private Label is not always effective for a Retailer The Retailer Grid By Category Retailer Private Label Share PL focus ineffective Cat. 1 Cat. 2 PL focus effective Cat. 6 Cat. 4 Cat. 5 Fair Share Cat. 3 Cat. 7 Cat. 8 Cat. 9 Cat. 10 NB focus ineffective NB focus effective Loyalty to the Retailer Fair Share over all categories = Private Label Share in the Market Fair share in a specific category = Average PL share of the retailer

31 Evaluating Private Label Performance The Retailer Grid By Category PL Share 70 PL focus ineffective PL focus effective Example of A few categories In Tesco UK 10 0 NB focus ineffective NB focus effective Loyalty to the Retailer

32 Evaluating Brand Performance Brand Assessment Grid High Willingness to pay over PL price/ Actual price difference B2 B5 B3 B4 Zero B1 Low Brand Quality High Circle Size shows market share. Circle Position indicates willingness to pay relative to PLs. Note: Data shown is illustrative Arrow origins from actual price difference between brand and PL.

33 Developing Company-Specific Strategies and Tactics: The Issues and Guidelines Grid PL Drivers in Category 1 Driver Perceived Quality Difference Willingness to pay for brands Low degree of innovation Packaging Advertising Intensity Willingness to pay for brands Perceived Value Difference Packaging Involvement Performance Risk Emotionality Copycatting Share of Budget Qual Diff betw PL and your brand Qual Diff betw PL and competitor A Qual Diff betw PL and competitor B Qual Diff betw PL and competitor C Willingness of Premium for your brand Willingness of Premium for competitor A Willingness of Premium for competitor B Willingness of Premium for competitor C Sociodemographics No pattern Customer Factors Two chains drive PL share High degree of copycatting Rank % 12% 1% 10% Communicate persuasive benefits Decrease price premiums Increase price promotions Increase innovation effort Invest in R&D Communicate innovation Invest in R&D Decrease price premiums Increase price promotions Communicate persuasive benefits Communicate persuasive benefits Communicate emotional benefits Understand these retailers and their PL drivers Work with affected rivals Develop strategies to reduce temptation of imitation Lobby in the AIM context Do not share latest technology

34 The 5 Menaces to Growing your Brand Other National Brands Standard Private Label Premium/segmented Private Label Discounter Private Label Mindset

35 The 5 Menaces to Growing your Brand Mindset Are PLs on your company s agenda? Is PL a Customer Relations issue only? Or is Marketing, R&D, Finance,...involved? Are you benchmarking on Private Labels? Are you looking at the long-term rather than sound bites? Do you know the financials of your brands and of PLs? The PL onslaught is NOT a law of nature Your success stories are needed to help change the mindset in FMCG

Understanding and Countering the Private Label Challenge Prof. dr. Jan-Benedict E.M. Steenkamp Tilburg University

Understanding and Countering the Private Label Challenge Prof. dr. Jan-Benedict E.M. Steenkamp Tilburg University Zaventem (Brussels), March 20, 2003 Why Are Retailers Developing Private Labels? To create