Consumer Goods Council of South Africa

Private Label: How both retailers and brand manufacturers can seize the opportunity
Presentation Johannesburg, October 10, 2012

Bart van Dijk

Some quick facts about A.T. Kearney

Management consultancy firm, founded in 1926 by Tom Kearney 57 Offices in 39 countries (including Johannesburg, South Africa) Serves all major industry segments and large accounts within Consumer Goods & Retail is a key focus area and accounts for >25% of our global revenue Our clients recognize us for being collaborative, authentic and forward thinking

Our success as consultants will depend upon the essential rightness of the advice we give and our capacity for convincing those in authority that it is good.
Andrew Thomas Kearney (1892-1962)

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Agenda

What is happening on the shelf? Is South Africa following this trend? How to go from here?

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Traditionally Private Label was meant to be aggressive on price

UK Example

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Now Private Label is conquering the prime spots on the shelves

UK Example

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Private Label is conquering the prime spots on the shelves

Dutch Example

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Private Label is started to use packaging as a differentiator

Dutch Example

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Private Label is becoming more exclusive, also in price

Dutch Example

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Private Label is becoming more exclusive, also in price

Dutch Example

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Now retailers go beyond packaging design and move into special interest as well

Healthy
Serves One Allergic

Kids

Organics Low emission Country specific

Source: A.T. Kearney research and analysis

Fairtrade
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Clearly Private Label penetration levels differ between categories but growth is observed in almost all of them
Private label penetration per category, 2010-2011
(%)
65 63 59 58

German example Annual Share Growth +2% +2%

Paper Hygiene Cheese

Milk

50 49 49 46

+3%

Dish-wash

+6%

Personal Care Beer 2011 2010

Source: Nielsen Markettrack (Informa)

18 18 11 11

+1% -2%

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Private Label can be found in all tiers of the assortment and expected to grow, especially in the higher value segments
% of total Private Label sales
Illustrative PL brands are shedding their image as cheap imitations, 29% of consumers worldwide believe that private label brands are as good quality as

Premium

15%

branded goods

Private label brands are becoming a Basic

70%

differentiator itself, increasing customer loyalty to the (retailer) brand

In Western Europe and the US PL products

accounted for nearly all of the growth in

Value
15%

packaged food, beauty and personal-care, and home-care categories from 2000 to 2010

Source: A.T. Kearney research and analysis, previous projects

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Agenda

What is happening on the shelf? Is South Africa following this trend? How to go from here?

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Private label penetration in food retailers in South Africa is much lower than Europe and half of the global average
Private label share of market share by value (2012 estimate)
Switzerland UK France Canada Hungary India South Africa
11 7 5 4 13 13 26 29 41 47

Brazil
China Russia

World Average = 22%

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Source: Planet Retail, A.T. Kearney Analysis

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Private Label has the highest penetration in highly concentrated markets, South Africa still seems to have a gap to fill
Market share of top 5 retailers vs. private label penetration
50 45 40

Switzerland UK Germany Spain US Italy Japan UAE Brazil Russia Mexico Kuwait
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

PL market share

35 30 25 20 15 10 5 0

France Canada

Belgium Australia New Zealand

India

South Africa

China
0 5 10 15

Market share of top 5 retailers1

What is the reason for the below fair share of private label in South Africa?
1. Collective market share in US $ value (adjusted for PPP) of the largest 5 retailers in each country Source: Planet Retail, Nielsens, Havard Business Review, Private Label Magazine, A.T. Kearney Analysis A.T. Kearney 82/09.2012/27970

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Especially the large low income segment is loyal to brands

Monthly Income distribution (% of population)
High income > 20000 rand 5% 17 25 29

Levels of brand loyalty relative to income (2010)1 Low High

Low income 40% <3000 rand

83

75

71

55%

Middle Income ,3000 - 20000 rand

Low Income (< 3,000)

Middle Income (3,001-20000)

High Income (>20,000)

However, income levels in South Africa are expected to increase

1. Monthly income of individuals in South African Rands Source: African Journal of Business Management, Nielsen, A.T. Kearney Analysis A.T. Kearney 82/09.2012/27970

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Whilst the appetite for Private Label has grown stronger, local suppliers seem to miss capabilities to fulfill the needs
South African retailer quotes illustrating issues with PL supply
Currently, local manufacturers are unable to supply in sufficient quantity for private labels and therefore we are looking for opportunities to source offshore

We give our SA suppliers the first right of refusal to produce a private label product and will even assist them to bring their costs down, but if they can't get the price right we will go the import route

The food catalogue was made up primarily of our private label goods, the advantages of which were brand integrity as the company worked directly with suppliers and jointly assumed responsibility for product development, production, marketing and distribution. However, not all suppliers are able to deliver on this from the start

But suppliers will start developing these capabilities

Source: A.T. Kearney Analysis A.T. Kearney 82/09.2012/27970

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The retail market has grown significantly across categories in recent years
CAGR Sales last 4 years (in %) in main retail segments
Hardware General Retailers Pharmacy & Drug stores Fashion Specialised food retailers Household & -2,9% Furniture
6,6% 12,7% 12,3% 11,1% 10,2%

Sales growth in selected categories (10-11)

Maize
Cooking Oil Dressings Sauces Soups Canned Fish
9,7% 5% 10% 8% 14% 20%

4%
4%

Overall

Pasta

Possible price wars and stagnating category growth could change this picture in the future Totalnear General Retailers Segment size in 2009: 206 R bn
Source: A.T. Kearney Analysis, A.T. Kearney 82/09.2012/27970

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Agenda

What is happening on the shelves? Is South Africa following this trend? How to go from here?

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Four Strategic Business Segments

Differentiated Product Offering

True ABrands

Retail specificBrands

Mainstream Product Offering

Mainstream Brands

MainstreamPrivate Labels

Source: A.T. Kearney

Multi-Retailer Labels

Retailer Specific Labels

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with clear historic domains

Differentiated Product Offering

Brand Manufacturers
Mainstream Product Offering

Private Label

Source: A.T. Kearney

Multi-Retailer Labels

Retailer Specific Labels

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Retail consolidation and increasing Quality image fuel Private Label growth
Differentiated Product Offering

Brand Manufacturers
Mainstream Product Offering

Private Label

Retail consolidation Improved quality image Discount channel increase

Source: A.T. Kearney

Multi-Retailer Labels

Retailer Specific Labels

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which in turn exposes a part of the branded manufacturers businesses

Differentiated Product Offering

Brand Manufacturers
Brand equity no longer sufficient Scale and operational excellence required

Private Label

Source: A.T. Kearney

Multi-Retailer Labels

Retailer Specific Labels

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Private Label also attacks the core domain of the A branders

Retailer marketing Innovation capability Supplier development

Differentiated Product Offering

Brand Manufacturers
Mainstream Product Offering

Private Label

Source: A.T. Kearney

Multi-Retailer Labels

Retailer Specific Labels

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What to do: Branded manufacturers need to be creative and focus on new sources of true innovation

!
Branded Manufacturers must tap into new sources of innovation

Brand Manufacturers

What can we expect: Mainstream Product

Offering Focus on real innovation A clear split between innovation and mainstream roles Supplier Value Creation Extended Co-branding
Source: A.T. Kearney A.T. Kearney 82/09.2012/27970

Private Label

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What to do: Further scale and operational excellence creation are key for branded manufacturers
What can we expect:
Internal Shared Services

Supply Chain Pooling

Outsourcing and off-shoring Entering Private Label manufacturing

Brand Manufacturers

Branded Manufacturers must tap into new sources of scale and operational excellence

Private Label

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What to do: Retailers will be moving into new areas and segments with their Private Label proposition

!
Brand Manufacturers

Retailers will have to leverage PL offering with innovation and differentiation

What can we expect:

Penetration in more categories Introduction of more exclusive private labels

Private Label

More retail driven innovation

Supplier value creation New formats
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What to do: Retailers and Manufacturers should look into extensive collaboration opportunities

!
Brand Manufacturers

Retailers and Manufacturers must explore joint innovation with tailored innovations and services

What can we expect:

Retail exclusive product launches

Private Label

Joint shopper insight development Tailored promotional support Shelf consumer testing Customized supply chains
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Collaboration today only scratches the surface a broader, more strategic approach is required
Collaboration today game changing collaboration

Partners selected from existing suppliers/customers based on established relationships, large spends

Partners selected based on capabilities and resources suppliers, customers, peers, competitors Objectives directly support each partners objectives growth, risk management, capital productivity and cost / structural advantage Collaboration is focused on increasing the value created by partners
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Objectives are narrowly defined and address tactical cost requirements

Collaboration becomes an exercise to re-distribute value between partners
Source: A.T. Kearney

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In the most advanced level, collaboration reflects the notion of a joint value chain what if we were one company
Manufacturer
New Product Development

How could we jointly

Leverage joint insights and resources as part of a retail category strategy that results in breakthrough innovation Collaborative Business Planning (CBP) to link strategic business planning with execution across both organizations Pool resources and share best practices to improve procurement processes, and apply excess manufacturing capacity and streamline production planning to reduce total product cost Optimize the assets throughout our distribution network warehouse/transportation) to reduce total delivered cost Collaborative in-store execution to reduce out-of-stocks and drive improvement in merchandizing programs/new launches

Planning

Supply/ Manufacturing

Distribution

Merchandizing / Store Operations

Retailer
Source: A.T. Kearney A.T. Kearney 82/09.2012/27970

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Besides this short presentation, we have additional reading that covers Private Label related topics

visit www.atkearney.com or contact our Consumer Industries and Retail experts

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A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients.
Since 1926, we have been trusted advisors on CEO-agenda issues to the worlds leading organizations across all major industries and sectors. A.T. Kearneys offices are located in major business centers in 39 countries.
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Europe

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