Personal Care MarketWatch
FEATURE ANALYSIS Loyalty shifts from branded products to retailers
Although the rapid growth seen by private label is coming to an end, branded fast moving consumer goods are nevertheless set for a tough time going forward. Verdict believes that consumers' loyalty shift from branded to private label lines is permanent and that the new battle for market share will be contested between retailers and within existing range architectures. Under economic duress since Q4 2008, EU consumers have migrated to private label offerings on an unprecedented scale, boosting private label's share of EU27 grocery retailing significantly to 28.3% in 2008. Trading down and switching have become endemic, while purchase decision-making times have increased. As a result, value has become the overriding objective in retailers' private label development, a reversal of a decade-long trend towards premiumization and a focus on quality. Across the EU, value private label ranges have produced stellar growth rates for almost every major retailer. For retailers, H2 2008 and H1 2009 was the optimal time to introduce new lines, as customers were willing to shop around and give new food and near-food ranges (such as disposable paper and household cleaning products) a try. The more successful retailers were in matching their product quality with branded products, the more effective they were in converting shoppers to private label ranges. The major EU grocers (Carrefour, Tesco and Metro) exploited this opportunity by launching 'fighter' ranges - new private label lines clearly positioned at the value end - in an attempt to slow rampant discounter growth. Tesco's packaging tended to be retro, harking back to the 1970s (the last major economic crisis), while other players such as Carrefour and Metro Group combined the traditional good-better-best strategy with new products by substituting or complementing their value ranges. In general, the fighter brands were aimed at marketing purposes as much as they were supposed to be sales drivers, but predominantly they were designed to safeguard footfall. From a retailer's perspective, it is better to have lower value sales (as a result of increased private label uptake), when customers trade down in store, than to lose customers and sales to the competition. While these fighter ranges slowed discounter growth and kept customers in store, the price paid was severely impacted margins and slower overall value sales. Verdict Research predicts that, after the recession, there will be a shift back to the higher end private label ranges, which incorporate premium aspects such as organics or fairtrade. As consumer confidence is slowly returning in some markets, consumer purchasing behavior will become more polarized, with premium private labels gaining more traction again. At the value end, the fighter ranges will lose momentum and shelf space, as the novelty factor wears off, although they will not disappear altogether. Another reason why these brands will not stay the course is that retailers will lose interest because margins on value grocery lines are low. In recent months, many of the leading players ran promotions on their private label ranges, but this will also come to an end as players try to recoup lost margins and gain higher sales growth by trading consumers back up again. Moreover, fighter ranges, which clearly impact upon sales of branded fast moving consumer goods (FMCG), make managing already strained commercial relationships with suppliers even harder. However, at least some manufacturers will also have an interest in seeing the private label lines outperforming, especially if they also produce them on their premises.
Personal Care MarketWatch
Datamonitor. This brief is a licensed product and is not to be photocopied
BFCM0349/ Published 10/2009 Page 10
Personal Care MarketWatch
That said, even with fighter brands' diminishing importance, FMCG producers are not yet through the worst. Rising unemployment and continued uncertainty about the broader macroeconomic outlook will ensure that private label as a whole will continue to gain share at the expense of branded goods. Across the EU, private label will emerge as one of the winners in this crisis: the attitude shift away from branded goods to store brands, also driven by the retailers so that they can gain a greater share of margin, will become further entrenched. As buying groups and co-operatives have also been active and relaunched their private label offerings, the major opportunity open to FMCG producers is to look for new distribution channels, such as launching their own stores, investing in direct consumer contact through the internet or bypassing the supermarkets and trying new locations and channels, i.e. non food stores. Another possible growth avenue is launching new value versions of branded goods themselves, and Verdict Research expects some activity on this front, especially if fighter ranges - boosted by a deep recession, high quality perceptions, a superb value proposition and perhaps further shifting attitudes towards the discounters - stay the course longer than the leading FMCG producers expect. Private label has not only been a major development in food retailing but has cut across boundaries and, in non food retailing especially, the 'green theme' has come to the fore. In DIY and electricals, players are milking the potential of energy efficiency by launching new appliances and devices with which consumers can simultaneously reduce their carbon footprint and save money. The trend towards energy efficiency heralds a massive opportunity to boost own-label profiles. Driven by crisis economics and bursting housing bubbles, DIY retailers have started to focus on value and on 'outgreening' each other. Verdict Research believes that, in electricals, the opportunity for private label ranges is real and that the offer so far has been chronically underdeveloped. In furniture and clothing, eco-friendly materials have become indispensable. Verdict Research believes that the 'green theme' is almost predestined for retailers' private label development, as it enables them to differentiate their offering and raise their profile in terms of quality perceptions and environmentally friendly positioning. This point is valid for every retail sector, but particularly so for grocers. Premium private label products such as organic or fairtrade usually promise higher margins than standard private label ranges and they also help to drive the marketing message. Although sales of organic/natural products have clearly been affected at present, they are proving resilient and should rebound once the economy recovers. On a broader level, as long as climate change remains an acute threat, being environmentally friendly will remain very much on the agenda. Once price considerations ease, organic is poised to become the hot topic again.
Personal Care MarketWatch
Datamonitor. This brief is a licensed product and is not to be photocopied
BFCM0349/ Published 10/2009 Page 11
