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

Transcription

1 Understanding and Countering the Private Label Challenge Prof. dr. Jan-Benedict E.M. Steenkamp Tilburg University Zaventem (Brussels), March 20, 2003

2 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS STORE LOYALTY Tilburg University (2)

3 Store Loyalty and Private Label Share of Sales: Carrefour Store loyalty*) (2001) Chile Portugal Korea Italy Argentina France R = 0.73 PL share in Carrefour sales (2001) Here is what retailer CEOs say: Consumers loyalty is a fundamental reason for having own labels Private labels is what consumers want. It makes them loyal to the chain *) Share of a shopper s weekly food expenditure Tilburg University (3)

4 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS STORE LOYALTY POWER SHIFT TO RETAILERS Tilburg University (4)

5 Retailers Are Getting Bigger and Bigger Vis-à-Vis FMCG Manufacturers Global Top-10 Sales Retailers 2001 Rank in FMCGs $bn 1 Wa1-Mart Carrefour Royal Ahold Kroger Metro Albertson s Kmart Safeway Costco Tesco 38.1 Global Top-10 Sales Manufacturers 2001 Rank in FMCGs $bn 1 Philip Morris Nestlé Unilever P&G BAT Japan Tobacco ConAgra PepsiCo Sara Lee Diageo 16.4 Tilburg University (5)

6 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS STORE LOYALTY PROFITABILITY POWER SHIFT TO RETAILERS Tilburg University (6)

7 Profitability Analysis of Private Label versus National Brands: Retail Analysis of the Canadian Market A Study Commissioned by PepsiCo Gross margin Private label National brands for retailer 28.8% 11.6% Tilburg University (7)

8 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS EXPANSION STORE LOYALTY PROFITABILITY POWER SHIFT TO RETAILERS Tilburg University (8)

9 Retailers Are Becoming Global Players, Especially in FMCGs Top-20 retailers world-wide with at least some FMCG sales No. of countries with operations 35 Carrefour 30 Metro 25 Ahold Auchan Daiei Kmart Tengelmann Wal-Mart Costco ITO-Yokado Jusco Rewe Aldi Tesco ITM Enterprises Edeka Safeway (USA) Sainsbury Albertson s Kroger FMCG Sales (%) Tilburg University (9)

10 Why Are Retailers Developing Private Labels? To create a virtuous cycle! PRIVATE LABELS EXPANSION STORE LOYALTY PROFITABILITY POWER SHIFT TO RETAILERS Tilburg University (10)

11 Customers Categories The 4 C s of Countering the Private Label Challenge Countries Private Label Success Consumers Tilburg University (11) PL Geneva-04

12 Business Model: Factors Explaining PL Share and Growth Customers Consolidation/size Strategy Advertising for PL Chain name for PL Access to better products High traffic categories Margins/profitability Sales fundamentals Growth of discounters EDLP Countries National culture Socioeconomic structure Trade structure PL Market Share /Growth Consumers Socio-demographic profile of PL buyers Perceptions of PL buyers vs. brand buyers Store loyalty vs. Brand loyalty Categories Marketing factors Pace of innovation Advertising intensity Promotion intensity Price gap PL production by brand manufacturers PL-brands package similarity PL penetration Consumer factors Involvement Performance risk Social importance Brand trust Quality gap Brands-PLs Value gap Brands-PLs Price-quality inference Desire for variety in offering Willingness to pay for brands Share of budget Tilburg University (12)

13 choosing Customers Categories choosing Countering the Private Label Challenge Countries choosing Effective Marketing Strategy choosing Consumers Tilburg University (13)

14 Austria Czech R. France Germany Norway Poland Spain Sweden Turkey U.K. USA Choosing Countries Private labels are more successful in some countries PL share Why is this the case? Source: Europanel Private Label 2001 Tilburg University (14)

15 Differences in Private Label Share between Countries Are Due to Culture, Socioeconomics, and Retail Factors PL Share (%) Low High Uncert. Avoid. Small Large Size of country Low High Retail concentration Source: Own analyses (Private Label share based on volume) Tilburg University (15)

16 choosing Customers Categories choosing Countering the Private Label Challenge Countries choosing Effective Marketing Strategy choosing Consumers Tilburg University (16)

17 Choosing Categories Private Labels are more successful in some categories (example U.K.) Total Private Label Dairy Frozen Foods Bakery Canned Goods Packet & Other Foods Household Products Soft drinks Pet Foods Pickles, Sauces & Ketchups Hot beverages Biscuits Haircare Oral Care Bathroom Toiletries Other Toiletries Healthcare Alcohol Savouries Source: Europanel Private Label Why is this the case? Private Label share (%) Tilburg University (17)

18 Example of Effect of Advertising Intensity on Current PL Share (2001) and Growth in PL Share PL share (%) PL share index 39% % Low High Ad spend % NOS Decrease Increase Ad spend index Tilburg University (18)

19 Example of Effect of Perceived Quality Gap (NBs vs. PLs) on Current PL Share (2001) and Growth in PL Share PL share (%) 39% PL share index % Low High Quality gap Low High Quality gap Tilburg University (19)

20 New items (past five years) as % of total market 70 Frequent New Product Introductions Counter the Private Label Onslaught Detergents Dog Food Soup Soft drinks Cereals Canned Fish Coffee Nuts Shortening/ Oils Beans Jams, jellies Juices Natural Cheese PL share (%) Source: Boston Consulting Group Tilburg University (20)

21 choosing Customers Categories choosing Countering the Private Label Challenge Countries choosing Effective Marketing Strategy choosing Consumers Tilburg University (21)

22 Sociodemographic Profile of PL-Buyers Baby Category PL Index Mother Not employed 125 Baby age 0-6 months months months 126 Baby First-born 88 Not first-born 113 Social class Medium/low 110 Heaviest users of PL are low/medium class homemakers with their nonfirst-born baby after the first 18 months. The PL index for this group can be up to 200. Tilburg University (22)

23 Category Perceptions of PL-Buyers vs. NB-Buyers in a Category in Country A On several key aspects, PL-buyers differ in their category perceptions from NB-buyers. PL-buyers are characterized by (+ indicates generally large difference): Smaller quality gap between NBs and PLs (+) Less positive (typically negative!) value of NBs vis-à-vis PLs (+) Less quality variation in the category (also between NBs!) (+) Weaker price-quality association: you don t get what you pay for! (+) Lower category involvement Lower performance risk More convinced that PLs are produced by brand manufacturers Lower willingness to pay more for a NB compared to a PL Tilburg University (23)

24 choosing Customers Categories choosing Countering the Private Label Challenge Countries choosing Effective Marketing Strategy choosing Consumers Tilburg University (24)

25 FMCG Sales The Bigger the Retailer, the Larger the PL Share Risk as retailers expand across countries Individual Retailers excl Discounters FMCG Size 2001 vs Local FMCG PLShare r = PL FMCG Share France Germany Spain UK Tilburg University (25)

26 Retailer Image: France s Top 7 FMCG Retailers and Top 3 Drugstores in the Value Map Quality Superior value Lidl Leclerc Leader Price Intermarché Carrefour Champion Auchan Géant Système U Primo Inferior value Price Note: The correlation r between price and quality is.93 Tilburg University (26)

27 Quality Retailer Image: Germany s Top 7 FMCG Retailers and Top 3 Drugstores in the Value Map Superior value Aldi Schlecker Lidl Penny Real DM Rossmann Kaufland Edeka Minimal 1 0 Inferior value Price Note: The correlation r between price and quality is.15 Tilburg University (27)

28 choosing Customers Categories choosing Countering the Private Label Challenge Countries choosing Effective Marketing Strategy choosing Consumers Tilburg University (28)

29 The Manufacturer Holds Some Trump Cards Too The retailer cannot: Always obtain necessary critical mass in a category Tilburg University (29)

30 The Amassing of Critical Mass for the Retailers Contrasted to Manufacturers Femcare (Kotex) Detergents (Omo) Shampoo (Fructis) Babycare (Pampers) Retailer 1 Retailer 2 Retailers critical mass for umbrella brand Retailer 3 Retailer 1 s mass in femcare Manufacturer s critical mass for its brand Tilburg University (30)

31 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 Tilburg University (31)

32 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 Tilburg University (32)

33 Are Private Labels Really More Profitable? Retail Analysis of the Canadian Market Private label National brands % of sales % of sales Gross margin Adjusted gross margin a Store labor (9.8) (3.0) Store space / equipment (1.5) (1.5) Warehouse labor (4.9).0 Transportation (3.6).0 Invoice processing (.02) (.03) Returnable cost (.41) (.12) Profit contribution a Net of dealbacks Source: Corstjens and Lal (2000) Tilburg University (33)

34 Power Struggle The critical role of the consumer s reaction to out of stock Brand power: Seek missing SKU at another store Store power: Purchase 1) another SKU of same brand (weak store power) or 2) another brand at current store (strong store power) Stand-off: Defer purchase until current store restocks The tension between Cost of brand switching (CBS) Cost of store switching (CSS) Tilburg University (34)

35 Example of Action Taken When Preferred Brand in Category A is Out of Stock % of respondents PL buyers NB buyers 10 0 Brand power: Buy item at another store Weak store power: Buy other SKU of same brand at same store Hard store power: Buy another brand at same store Stand off: Return to store another day to purchase desired item Stand off: Buy nothing Tilburg University (35)

36 These Scenarios Underline the Importance of Increasing Cost of Brand Switching through... Building/maintaining brand loyalty Innovation and differentiation Communication Managing the price gap In-depth knowledge of the consumers Actions against patent infringement and copy-catting Can you also team up with some customers? Tilburg University (36)

37 Team Up with Customers (1) Supplying Private Labels: An Alternative Strategy? YES: NO: Utilizes spare capacity Conflicts with own production needs if own demand picks up Increases profitability Often illusionary as full costs are not calculated Strengthens relationship with Really? Is it lasting? At what cost? retailers Increases control over retailers Brand power = market power and you build PL brand power Allows to manage private label Private label sets criteria and puts pressure quality on you to share latest technology Private labels hurt your Private labels hurt your own brands competitors It gives a boost to business It is addictive: short-run gain is long-run pain PL production typically results in reduced focus on own brands Tilburg University (37)

38 Team Up with Customers (2): Inform them: Is an emphasis on PLs more profitable? To generate high margins, Retailer PL strategy has to be consistent with overall business model (e.g ALDI)? Tilburg University (38)

39 Market Share (%) 18 Team Up with Customers (3): Fight the Common Enemy Market Share Evolution for Discounters in Germany Aldi Other Discounters Tilburg University (39)

40 A Challenge for Brands and Mainstream Retailers Alike: The Growth of Hard Discounters: The German Case Market Share (%) Aldi Share ALDI growth in Q1 waves 8 Q4 '99 Q1 '00 Q2 '00 Q3 '00 Q4 '00 Q1 '01 Q2 '01 Q3 '01 Q4 '01 Q1 '02 Q2 '02 Q3 '02 Tilburg University (40)