During economic downturns, consumers usually pay more attention to price than to quality. Tightened purses and wallets also make it harder for retailers to turn a profit during lean times. But this is exactly the time when store brands gain their popularity and create a win-win situation for both retailer and consumer.
Store brands started appearing on the shelves in the late 1970s. In those days store brands typically were of simple design and low price, targeting a group of cost-conscious consumers. This was also a period when consumers were able to spend big and stay loyal to big brands – store brands did not feature very prominently.
Meteoric rise of house brands
In the 2000s, however, things began to change. Families were generally enjoying less disposable income despite economic growth, and this situation drove them toward cheaper alternatives. Store brands, particularly in the food industry, become consumers’ first choice ahead of better-known national brands.
Giant retailers such as Walmart and Target joined the store-brand pool at the beginning of the millennium. Their house brands took up 22% of the grocery market in 2005, a figure which increased to 27% in 2009, according to Arlington, Va.-based Food Marketing Institute.
Ever since then, store brands have been on a rising curve, in terms of product types and number of players, as well as sales volume.
As noted in a white paper entitled “U.S. Private Label: Growth In A Shifting Retail Landscape” released in 2012, U.S. store brands recorded sales growth of 3.9% in 2011, while national brands managed only 0.6%. In this battle, retailers, on top of those already in the market, like majors Walmart and Target, plus Costco, Kroger, Safeway, Walgreens and CVS Pharmacy, gave long-standing national brands, including Coca Cola, PepsiCo, Procter and Gamble, Kraft Foods, Nestle, Kimberly-Clark and Unilever, etc., a dose of severe competition. There is study saying that every percentage point in the food and beverage market represents $5.5 billion of sales; so this situation is truly alarming for these veteran players.
A similar situation is also seen in Australia. National market researcher IBISWorld recently released an astonishing forecast: that the market share of store brands sales will climb from 13.5% in 2007/08 to 25.2% in 2012/13. They also made an even bolder guess that store brands share will reach 33% in 2017/18, accounting for A$31.8 billion.
When it comes to the sluggish European market, store brands are even more popular. In 2010 they occupied a share by volume of over 30% in major Western European countries, such as Switzerland, UK, Spain, Belgium, France, Germany and Austria, according to the 2011 PLMA (Private Label Manufacturers Association) International Private Label Yearbook.
Step by step
To consumers, store brands offer the same quality options but at lower cost, and no doubt store brands have achieved significant growth in times of economic downturn. In a report ‘Private Label Outlook’ by Nielsen in early 2012, 65% and 38% of respondents picked “as good as” and “some higher quality” when comparing store brands against national counterparts. The market is obviously there, but how to capture extra share requires much more than manufacturing and loading products on to shelves.
7-Eleven, the worldwide convenience-store operator, launched its first-ever store brand 7-Select in 2008 as a strategic move and response to market conditions. As Joe DePinto, president and CEO of 7-Eleven Inc., explained in an interview with an industry journal: “At the time, consumers were shifting away from major brands. There was a need for a private-label offerings with high quality, strong appeal for consumers, and a sharper retail price point.”
7-Eleven started off with 7-Select snacks and expanded into non-food offerings such as health, beauty and garment products –reasonable evidence of the success of this strategy when no sales or revenue data is provided by the company. On top of adding new product lines, the company expressed their greater confidence in their house brand by investing in a 7-Select packaging re-design in 2011, thus upgrading the brand image and making it more appealing to customers.
Other major steps taken by 7-Eleven were the formation of marketing teams especially for this line, working through in-store and digital channels to ensure smooth operations and strong growth across its 46,000+ stores. As DePinto noted in the same interview mentioned above: “As we go forward, we’ll continue to expand the line in response to what our guests tell us they want.”
The triumph of 7-Eleven highlighted two elements which private labels owners ought to take note of: marketing plus designing and packaging. Nor should we ignore the fact that players should emphasize aspects of sourcing and customer engagement.
Full speed required
In 2011 global management consultants Accenture published a report entitled: “The waiting is over: Why retailers have to get better at private label now”, which was based on interviews with retail-brand management and global-sourcing executives of major retailers all over the world. According to this report, only 27% of interviewed companies go direct to raw-materials suppliers, while almost half of them were still working with product suppliers. Herein, therefore, lies a very big opportunity for lower first costs and higher margins.
Any new sourcing strategy should be integrated and supported by the entire supply-chain management steps– from finding new and reliable suppliers to operations technologies and manpower, and logistics and storage arrangements. Having failures or breakages at any point will probably lead to something national brands have always tried to avoid but need to handle occasionally – product recalls and damage to brand reputation and, at worst, litigation.
In retailing, dealing with customers directly is a very tricky matter. Customers are probably the most honest segment of people in the world. They pay for what they like, and walk away from things they don’t like. National brands have expended a lot of effort on analyzing customer segments, preferences, perceptions and trends. Figuring out how to make customers happy and what they are willing to pay for is a lesson to learn for those eyeing this big pie. Quoting the Nielsen report again, for example, store brands might like to know that, among all U.S. customer segments, Gen X spends most on store brands while Gen Y possesses the most positive attitudes toward store brands.
New mountains to be climbed
To end on a positive note, let’s look at the findings of another Nielsen survey carried out in 2010. Among the 27,000 respondents from 53 countries, a global average of 91% of them said that they would continue to purchase private labels even when the economy improves. This will definitely be encouraging for industry players.