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PRIVATE-LABEL SHARE DURING THE CURRENT ECONOMIC SLOWDOWN: INVESTIGATION FROM THE CZECH, SLOVAK, HUNGARIAN AND POLISH MARKETS
Tra, K., Karlek, M.

This paper investigates whether the current economic slowdown in four CEE countries was accompanied by strong growth of private-label share as theory suggests. Unexpectedly, based on the data of Nielsen Retail Measurement Service, we prove that the private-label share grew relatively slowly, although all four countries had a large potential for growth of this share. We demonstrate that the key reason behind this development was probably the massive in-store promotions that were decreasing the price gap between private labels and branded products. The managerial implications of these findings for both manufacturers and retailers within the region are discussed. JEL Classification: M31

Introduction

The popularity of private labels (or store brands) has been steadily rising over the past decades in the developed world (Lamey et al., 2007). In some European countries, such as Switzerland or the United Kingdom, the privatelabel share has even exceeded 40% recently (see figure 1). However, in CEE countries, the private-label share is still relatively low. In 2010, the share of private labels in Slovakia and Hungary reached 20.1%, in the Czech Republic 17.3% and in Poland 16.4%. All four CEE countries experienced very fast and dynamic development in the retail structure over the last two decades. The importance of Traditional Trade (stores with a selling area of less than 400sqm) declined whereas the Modern Trade (hypermarkets, supermarkets and discounters) grew significantly. During the last few years, the share of Modern Trade has become relatively stabilized in these countries. It counts for approximately 78% in the Czech Republic, 68% in the Slovak Republic, 62% in Hungary and 58% in Poland (Nielsen Retail Audit). Therefore the potential for growth of private-label share is large in all four markets. Another reason why private-label share should be increasing in all the markets in question is the home countries

Figure 1: Value Share of Private Labels in European Countries (in 2010)

Switzerland UK Spain Germany Portugal France Austria Belgium Netherlands Finland Denmark Sweden Norway Slovakia Hungary Italy Czech rep. Poland Greece Turkey

Source: Nielsen Retail Audit (all available FMCG categories)

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quality of private labels is typically lower than their real quality) and because purchasing private labels become habitual for them during the economic downturn.VOLUME 1, CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS
these retailers have their headquarters in the United that have very good experience with private labels.
NUMBER 1, JULY 2012

It has been retailers that are active in the region. Most of to private labelsprivate-label share is further of major suggested that the counter-cyclical development of more extensively during economic

Kingdom, by both the retailers and the manufacturers. subsequent the retailers support their strengthenedGermany, Austria or France, i.e. in countries brand in aIn general,economic upturn. Furthermore, the consumers switch to private labels is faster than the subsequent switch to manufacturers brands. Finally, private-label programs more intensively during economic downturns whereas they cut these The Cyclical Dependence of Private-Label Share some consumers keep buying private labels even when The success of private labels has been attributed to many the economic downturn is already gone because they programs back during economic others, an ongoing further supports the cyclicalquality exceeds their different factors. These are, among upturns, which experience that real private-label sensitivity of shift of the manufacturers from advertising to sales past perceptions (as the perceived quality of private promotions, the growing concentration 2012). Additionally, is typically lower than their real the private-label share (Lamey et al., of the retail sector, labels during economic downturns quality) and gradual improvement in the quality of private labels or because purchasing private labels become habitual for the increasing manufacturers efforts that retailers put in the private labels they cut promotions, advertising costs develocut their marketing expenses, i.e. them during the economic downturn. and (Lamey et al., 2007). However, many authors link private- It has been suggested that the counter-cyclical pment of private-label share is further strengthened by label success primarily with economic factors. innovations (Lamey et al., 2007, private-label share both the retailers and the manufacturers. In general, 2012). These adjustments again support the counter-cyclical The existing research suggests that depends, in a huge way, on business cycles. Consumers the retailers support their private-label programs more become more private-label share. development ofconcerned with price when their income intensively during economic downturns whereas they lowers (Wakefield and Inman, 1993). During economic cut these programs back during economic upturns, slowdowns they therefore switch to private labels because which further supports the cyclical sensitivity of privaprivate labels are, on average, about 40% cheaper than te-label share (Lamey et al., 2012). Additionally, during economic downturns the manufacturers cut their markemanufacturers brands (Dhar and Hoch, 1997). The For example, Quelch and Harding (1996) mention that ting expenses, i.e. they cut promotions, advertising Economic Slowdown in the CEE Markets during the 1981 and 1982 economic recession in the costs and innovations (Lamey et al., 2007, 2012). These adjustments again support the counter-cyclical developUnited States the private-label share have faced Since 2009 the four CEE countriesincreased signi-different market development than in the past. ficantly. Similarly, Lamey et al. (2007, 2012) proved, ment of private-label share. on data from the United States and Europe, that during With the exception of Poland, the overall economies were in economic in the CEE Markets downturn or economic downturns private-label share increased and The Economic Slowdown Since 2009 the four CEE countries have faced different shrank during good economic times. slowdown (see figure 2). also found certain asymmet- market development than in the past. With the excepHowever, these researchers ries in this counter-cyclical development of private-label tion of Poland, the overall economies were in economic share. According to their research, consumers switch downturn or slowdown (see figure 2).

downturns than they switch back to manufacturers

Figure 2: GDP Development in the Czech Republic, Hungary, Poland and Slovakia

Figure 2: GDP Development in the Czech Republic, Hungary, Poland and Slovakia
GDP development - Eurostat

12 10 8 6 4 2 0 -2 -4 -6 -8 2004
Source: Eurostat

Czech Republic Hungary Poland Slovakia

2005

2006

2007

2008

2009

2010

2011

2012*

2013*

28

Source: Eurostat

from this micro-region).

CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS VOLUME 1, NUMBER 1, JULY 2012

Figure3: FMCG Development Drivers in the Czech Republic,Czech Republic,Slovakia 3: FMCG Development Drivers in the Hungary, Poland and Hungary, Poland and Slovakia Figure
18% 14% 10% 6% 2% -2% -6% 2007 2008 2009 2010 2011 Nominal Value chg
Source: Nielsen Retail Audit (all monitored FMCG categories)

CEE FMCG Development Drivers

CZ HU PL SK

2007 2008 2009 2010 2011 Volume chg

2007 2008 2009 2010 2011 Unit Value chg

Source: Nielsen Retail Audit (all monitored FMCG categories)

during the current economic slowdown, i.e. whether the private-label share in those countries increased significantly within the timeframe, as the theory suggests. We used data of Nielsen Retail Measurement Service (Nielsen RMS), which measures the market development and details on sales generated in retail stores. Nielsen RMS is focused on reporting FMCG categories in the market channels that are important in the respective country, covering usually food & mixed stores, drug stores, tobacco stores, petrol stations and special stores for categories where relevant (as sweet shops, delicatessen, pharmacies etc.). The most important facts measured by Nielsen RMS are sales in value, volume (kg/l), items, prices and distributions for total category including split to particular segments and items. Key sources of the data are cooperating chains, providing scanning data (exact sales that goes through cashiers) and manual audit.
Findings

Also, within the FMCG industry, it was no longer sufficient for the manufacturers and retailers to keep the trend of the category or market to generate growth (see figure 3). From all four countries, only Poland remained positive in value development, but also dropped from rocket growth in 2007 and 2008 to almost stagnation in the past two years. Czech and Slovak FMCG markets faced the biggest decline during 2009 driven by volume declines which were not compensated by unit value growth. The situation in Slovakia was also significantly influenced by introduction of the Euro in 2009, which (supported by the current disadvantageous exchange rate) lead to cross-country shopping. This phenomenon deepened the decline, especially in the border area and in the bigger formats of stores. On the other hand, the very deep decline in 2009 helped Slovakia to have more positive development the year after. In Hungary, the volume sales have been declining over the long-term and the positive value growth was pulled only by price level (also, in Hungary, inflation reached the highest level from this micro-region). Under these circumstances, many experts expected strong growth of private-label share within the CEE region. However, has the development of private-label share been really as dynamic as both the theory and intuition suggest? In this paper, we will try to validate or reject this hypothesis.
Research Questions and Methodology

Our research question is whether the private-label share in the four CEE countries developed counter-cyclically

When we analyzed the development of private-label share in the CEE countries within the last three years; we found stagnation or only a very slow increase (up to 1pp per year). This development was opposite of the expectations, theoretical assumptions and experience from Western countries (see figure 4). The only exception was Poland where private-label share grew faster, supported by the concentration and increasing importance of Modern Trade. 29

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Price index Private branded Figure 4: Basket Share of of PL to Labels in the Selected BasketPrice the Selected Basket Value Value Share of PL - Selected Products in index of PL to branded
70% 25%

Figure 4: Value Share of Private Labels in the Selected

Figure 5: Price Index of Private Labels to Branded

products - Selected basket* basket*

19,7%

25%

Value Share of PL - Selected basket*

64,0% 19,7% 18,3% 63,2% 18,3% 60,0% 14,4% 59,7% 14,4% 12,0%
12,0%

70%

products - Selected basket*

25%

Value Share of PL - Selected basket*

64,0% 19,7% 63,2% 18,3% 60,0% 59,7%
14,4% 12,0%

20% 65% 15%

18,5%
20% 18,5% 18,5%

CZ
CZ

65%

20%

61,3% 18,5%

60% 15% 60,9% 13,2% 10% 58,5% 13,2%

10% 9,2% 57,1% 9,2% 55%

HU PL SK

61,3% 18,5% 60% 15% 60,9% 58,5% 13,2%

10%

18,5%

CZ HU PL SK

HU PL SK

5%

55%
5%

57,1%

9,2%

5%

0% 50%

0%

2009 2009 2009

2010 2010 2010

2011 2011 2011

50%

0%

2009 2009

2010 2010

2011 2011

Value index Price share Value share

Source: Nielsen Retail Audit1

Price index Value share

Source: Nielsen Retail Audit1

To better understand the reasons behind this unexpected We hypothesized that the main reason behind the dimidevelopment, we further analyzed the price index of private nished price gap between the private labels and branded labels to branded products. We found that this price index products was in-store promotions like temporary price increased during the last three years in all four countries reductions or special promo packs (overfills, bonus or y could have two reasons: Itthis unexpected tendencylaunched new premium It could be that the retailers launched new premium could be This development, have two analyzed the the stand the reasons behind means thatthat priceretailers could webanded reasons: These tools represent an extremely furtherpacks). (see figure 5). This the gap between the private labels and branded products decreased. powerful tool, which helps manufacturers fighting e labels as is typical in Western countries (i.e. that the relativeas is typical in Western countries (i.e. that the relative prices of priva lines of private labels prices of private This tendency could have two reasons: It could be price index increased rivate labels to branded products. We found that thisthat private labels during economic slowdown (Lamey et al., the retailers launched new premium lines of private 2012). ed), or that the relative pricesin Western labels increased), or that the relative prices of branded products decreased. of branded products decreased. labels as is typical countries This means For the price gap hree years in all four countries (see figure 5).(i.e. that the that promotional analysis, Nielsen ScanTrack service relative prices of private labels increased), or that the was used; it is based on weekly scanning data from s question, we compared the developmentdecreased.levels within private labels the development of price levels within private labels To of price this question, we compared answer relative prices of branded products vate labels and branded products decreased. development cooperating chains and it differentiates promotional and To answer this question, we compared the non-promotional sales. The following are considered anded products. Inlevels within private labels and within branded faster growth of food and drug categories we found faster growth of the top food and drug categoriesbranded products. In the top and within we found of price promotion: temporary price reductions, leaflets and products. In the top food and drug categories we found promotional packs. private labels than withinprices within private For example, in labels than within branded products. For example, in the Czech branded products. labels than within the Czech prices within private faster growth of When we compared the basket of the most important Index of Private Labels to Branded Products in the Selected Basket categories across the four countries, we branded products. For example, in the Czech Republic, food and drug price level of price level of private labels Republic, the grew by the price level of in this basket grew by 9.7% while the price level private labels in this basket grewbasket price level of private labels by 9.7% while the in this found that with the exception of Poland, almost half of 9.7% while the price level of branded products grew only the sales was done with promotional support during the ucts grew only by 5.5%. In the Slovak Republic it was 6.8% vs.only byThese In the Slovak Republic it was 6.8% vs. 4.6%. These by 5.5%. In the Slovak Republicbranded products grew last three5.5%. (see figure 6). Moreover, the promotional it was 6.8% vs. 4.6%. 4.6%. years These findings suggest that the increase of the price support was est that the increase ofhave price index could haveby a relative the increaseby growing during the last three years (again primarily by a findings been caused the index could the been caused primarily suggest that primarily of a price index could have been caused with the exception of Poland). decrease of branded products prices. Therefore it seems that ase of branded products prices. relative decrease of branded products prices. the main reason why private labels did not strengthen their position significantly in 1 Selected basket of the following categories: Beer, Chocolate the four countries during the economic slowdown was zed the the main reason behind Beer, & Margarines, Confectionery, Cheese, Butters the diminished price gap between the private We hypothesized t of that following categories: the diminished price gap that the mainprivatepromotional pressure. It can be expected Confectionery, Cheese, Butters Chocolate Sweet between the reason behind most probably Biscuits & Wafers, Waters, Yogurts, Coffee, Milk, Wine, Soft Drinks, Juices, Vodka, nded Biscuits & Wafers, promotions labels and branded reductionsSoft in-store Waters, Yogurts, Coffee, Milk, Wine, pressure was slowing downtemporary price reductions or like temporary price that this in-store promotions like the relative price Sweetproducts was Diapers, Baby Food, Pet Food, Detergents, Toilet products wasor Drinks, level increase of branded products which may have Paper, Deodorants, Face Care, Toothpastes, Sanitary Protection, Shower Gels, Shampoo, packs (overfills, bonus or banded packs). These tools packs (overfills, bonus or banded packs). These tools represent an extremely special promo representresulted in lower demand for private labels. an extremely

Source: Nielsen Retail Audit1 1 Source: Nielsen Retail Audit

Source: Nielsen Retail Audit1

Household Toilet Pet Food, Detergents,Cleaners. Paper, Diapers, Baby Food, Deodorants, Face

30 es, Sanitary Protection, Shower Gels, Shampoo, Household Cleaners.

support was growing during the last three years (again with the exception of Poland).
CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS VOLUME 1, NUMBER 1, JULY 2012

Figure 6: Percentage of Sales Figure 6: Percentage of Sales Supported by Promotions

60% 55% 50% 45% 40% 35% 30% 25% 20% y2009 y2010 y2011 43,6% 34,1% 33,9% 46,4% 49,3% 48,4% 47,2%

Supported by Promotions

% of Sales supported by promotions - Selected basket*

54,8% 52,5% 50,6%

51,3%

CZ HU PL SK

47,2% 38,3% 38,3%

y2009

y2010

y2011

% Value Sold on promo

Source: Nielsen Retail Audit ScanTrack

% Volume Sold on promo

for the manufacturers. However, at the same time, it is Private labels are often presented as a threat for connected with high risks. manufacturers brands, especially during an economic Though the high intensity of promotions helps fight downturn. However, it seems that on some markets, private labels and it significantly boost sales (the 2 Selected basket of the following categories: Beer, Chocolate Confectionery, Butters &during the situation is not as alarming as on other markets. Nielsen data show that it is not an exception that In the Czech Republic, Slovakia, Poland and Hungary one 2-week promotion the sales overachieve standard the private-label growth was slow during the economic Margarines, Waters, Coffee, Soft Drinks, Juices,non-promo sales done Paper, months), this strategy Detergents, Toilet in six Deodorants, may be myopic. From the perspective of one year, it slowdown, despite the high potential private labels had can support the results and increase the volumes sold. on these four Toothpastes, markets. Gels, Shampoo. Shower Contrary to current research (e.g. Lamey et al., 2012), However, in the situation when the total market is flat, the intensity of manufacturer brands promotions incre- next year it is necessary to repeat the same aggressive ased in CEE countries during the economic slowdown. promotion to keep the sales on the same level as a year It seems that the manufacturers were involved within ago. Moreover, frequent price promotions raise price a price-promotion spiral which was decreasing the sensitivity of consumers and encourage brand switching relative prices of branded products to private labels. (Quelch and Harding, 1996). This tendency was preventing the private-label share Most manufacturers are not satisfied with the current to increase. However, further research is necessary to dependence on sales promotions; however, they are not able to stop the price-promotion spiral. Manufacturers support these findings conclusively. (and their stakeholders) who try to step off the moving train have to be prepared for a drop in sales. However, Managerial Implications Our paper uncovered that manufacturers in the four CEE from the longer perspective, stepping off can create countries are most probably involved within a price- a potential for increase in profitability. promotion spiral, which prevents private-label share In the near future, promotions will probably be growing from increasing. Such development may seem positive within the four CEE countries. The winners will be those manufacturers who will be able to work effectively with the promotional tools and who will have a clear picture 2 Selected basket of the following categories: Beer, Chocoabout the promotional tools profitability. Econometric late Confectionery, Butters & Margarines, Waters, Coffee, analyses on Nielsen sales data in the CEE region prove Soft Drinks, Juices, Detergents, Toilet Paper, Deodorants, large differences in the effectiveness of promotional Toothpastes, Shower Gels, Shampoo.
Conclusion2

Source: Nielsen Retail Audit ScanTrack2

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tools not only among categories but also within one category. What works for one brand may not work for another. There are even differences on an item level for example, a big package needs different support than a smaller one etc. Furthermore, the manufacturers growth has to be supported by organic elements (innovations, loyalty building, optimization of distribution etc.) not only sales promotion. Our findings have important implications also for retailers in CEE countries. Retailers should change their current approach towards private labels. If they continue to use private labels only as price fighters without other differentiation and connection with their brand, they will compete directly with branded products and their promotions. This will further support the consumers desire to buy at the lowest price possible. In the countries with a high share of private labels, the difference between price level of private labels and branded products is the lowest. Both Switzerland and United Kingdom have the price index of private labels to average category price close to 90% (Nielsen Retail Audit). However, the same is true also in the CEE region. When we compare the categories across the four countries and analyze those where private labels are already strong (above 20% of value share), we can see that these categories are having the price level of private labels very close to branded products (a majority of them with a price index of private labels to branded products between 70 and 95%). In these categories (Juices, Milk, Cheese, Toilet Paper, Diapers, Pet Food or Sweet Biscuits), private labels do not have a significant price advantage, but the manufacturers of branded products were not successful in persuading consumers to be loyal to their brands. Based on this experience, we can expect that the strategy of higher quality private labels (that are still cheaper than branded products but not necessarily significantly cheaper) enables to build loyalty to the retailer and helps

especially in the time of an economic downturn. This approach would not support further growth of a price war between the cheapest private labels versus the highest price discount on branded products.
References
Dhar, S. K., Hoch, S. J. (1997). Why Store Brand Penetration Varies by Retailer. Marketing Science, 16(3): 208-227. Lamey, L., Deleersnyder, B., Dekimpe, M. G., Steenkamp, J., E., M. (2007). How Business Cycle Contribute to PrivateLabel Success: Evidence from the United States and Europe. Journal of Marketing, 71 (January): 1-15. Lamey, L., Deleersnyder, B., Steenkamp, J., E., M., Dekimpe, M. G. (2012). The Effect of Business-Cycle Fluctuations on Private-Label Share: What Has Marketing Conduct Got to Do with It? Journal of Marketing, 76 (January): 1-19. Quelch, J. A., Harding, D. (1996). Brands Versus Private Labels: Fighting to Win. Harvard Business Review, 37 (Winter): 99-109. Wakefield, K. L., Inman, I. J. (1993). Who Are the Price Vigilantes? An Investigation of Differentiating Characteristics Influencing Price Information Processing. Journal of Retailing, 69 (2): 216-233.

Authors Ing. Karel Tra Client Service Director, Nielsen Hvzdova 1716/2b, Praha 4, 140 78 karel.tyra@nielsen.com Ing. Miroslav Karlek, Ph.D. Head of Marketing Department Faculty of Business Administration University of Economics, Prague nm. W. Churchilla 4, Praha 3, 130 67 miroslav.karlicek@vse.cz This paper has been created with the financial support of the Internal Grant Agency of the University of Economics, Prague (research project mF/13/2012).

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