Large mainstream retailers can’t find an adequate answer to the power of hard discounters, multinationals see the value of their brands decrease: private label is causing a true revolution, says expert Koen de Jong of IPLC.
Fewer brands, lower share
In Europe, private label now has a value share ranging from 17.7% in Italy to 47% in Ireland. There is no indication that those percentages will fall within the foreseeable future, quite the contrary. The private label offering is becoming more refined and penetrates to more and more categories. For consumers, the distinction between mainstream brands and private label has become irrelevant, says Koen de Jong, managing partner of consultancy agency International Private Label Consult (IPLC). The common thread in his fourth book, The Private Label Revolution, is the large impact that the hard discounters have, on the one hand on the private label strategy of the large retailers, and on the other hand on the brand manufacturers. That requires some explanation.
There is no end to the growth of private label. Should established brands feel threatened?
“Large premium brands are falling because they innovate too slowly, while retailers are much more agile. Where will that stop? Look at Kraft Heinz, which had to book a major write-down on some of its biggest brands. That company is run by financiers, who have lost sight of the consumer. The impact of private label is also increasing online. After the launch of a private pet food label, Amazon achieved a turnover of $ 200 million in one year. With that, they were immediately in the top twenty worldwide. That must be frightening for producers such as Mars or Nestlé ... There is certainly still room for brands, but there will be fewer and their market share will fall."
It is striking that it is the hard discounters who determine the game. Their business model is hard to counter?
"The ‘supermarketification’ of the hard discounters is now causing immense pressure on the market. Aldi and Lidl deliver a particularly high quality at very low prices and thus put their established competitors in defense mode. In the United Kingdom, the ‘big four’ have lost 7% market share in the past five years! Then it is interesting to take a closer look at the strategies those big chains are trying to defend themselves with. For example, look at Tesco: that retailer decided to reduce its range by 20 to 30% and to expand the range of private brands. The chain launched hundreds of inexpensive products under different brand names to replace the qualitatively substandard ‘Everyday Value’ budget brand, and Tesco Farm Brands appeared in the fresh produce departments in an effort to match the price and quality level of the hard discounters. But the gap remained significant. The hard discounters really offer the quality of premium brands, as all tests show. This ‘discounter magic’ is due to the very high rotations: in this way Aldi and Lidl can demand very high quality and very sharp conditions from their suppliers at the same time.
If the hard discounters move up a little higher in the market, don't they risk leaving room at the bottom of the market for more aggressive price fighters?
“I think they are very aware of their positioning. They will not falter, they are careful not to move too far towards the middle segment. Moreover, their strategy is hard to beat. Their core assortment consists of around 1,000 basic products of high quality at really low prices. They supplement this with in/out actions to create surprise and excitement. They generate margins with a festive assortment, organic products, fair trade, country themes... That works well. I therefore see few opportunities for new entrants. For example, look at the attempt by the Russian discounter Torgservis to enter the German market under the name Mere: they have no volumes, no market knowledge... I think that project will not last long. Discount retail must be in your genes. Jack's, that new discount chain by Tesco, will not be a success either."
The book nicely illustrates how the discounters organize their in/out specials around country themes, for example. Typical for their efficient way of working?
“Our IPLC partner in Portugal, Robertus Lombert, worked for Lidl for twelve years and therefore knows the house from the inside. He demonstrates how simple it works. In Greece, for example, the retailer will make a selection from its regular range of products that may be interesting from an international taste perspective. The central purchasing office will then compile a standard range from which each country can choose the sku's that they think are the most suitable, with an estimate of the volumes. This is centralized, the packaging is adjusted - with the same product photo everywhere - and the quantities sold are subsequently analyzed for future planning. Because it concerns existing products, the retailer does not have to re-negotiate or draw up new specifications. It is really about low-hanging fruit."
What is striking is that not only consumers, but also manufacturers are fans of the hard discounters.
“Manufacturers value Aldi and Lidl as good, reliable trading partners. Their volumes are predictable, they order and pay on time, it is nice to work together. Our research into the relationship between suppliers and retailers shows that manufacturers prefer to do business with the hard discounters. At mainstream retailers, they often hit a wall. In the book we quote the example of a supplier who developed a pioneering category vision exclusively for a large food retailer. And what did that retailer do? Write a tender... That is not a partnership, that is exploitation."
What factors determine the consumer's choice for a private label?
“We investigated that. Price and quality are obvious, but we also see that the perception of the retailer's image is a determining factor: to what extent does the shopper trust the supermarket chain? That image is often determined by initiatives in the field of organic, fair trade, animal-friendliness, sustainability... In Germany we have seen that large retailers sometimes dare to take sharp positions, with a lot of guts. For example, Rewe launched the campaign ‘Ja! zu Vielfalt und Toleranz’, a plea for diversity. And Edeka published a video in which it showed what would happen if only German products were on the shelves: an almost empty supermarket... Even when it comes to sustainable packaging, you can see that retailers are much more involved than brand manufacturers. They take their responsibility."
Mainstream retailers adjust their own brand strategy. A nice case is the recent relaunch by Ahold Delhaize of the old chocolate brand Delicata, at both Albert Heijn and Delhaize. A private label that does not include the name of the retailer, and which has the clear ambition to play a dominant role in the chocolate category. A trend?
"We call those ‘venture brands’ in technical terms. You do not always recognize them as a private label, because the name of the retailer is not on it. You see them mainly appear in emotionally charged categories and they are indicative of the agile, adventurous approach with which retailers try to appeal to the generation of millenials in particular. After all, these consumers turn away from the big brands. We also see that retailers are going to carry private labels from foreign colleagues. At Albert Heijn you will find products from the French frozen food chain Picard. Food retailers are also more likely to carry exclusive brands, such as the fresh Italian pasta from Bertagni at Delhaize. Such an exclusive brand then acquires the character of a private brand. In short, the definition of what a private label is, becomes broader. A third-party brand can play the role of a private brand, just like an exclusive brand."
There are many overlapping assortments in private brands: in general, many retailers do the same and also have the same private label suppliers. Where is the differentiation then?
“It is true that the range is becoming more uniform. I think there is room for some more adventure. When I worked as a consultant for Jumbo, I discovered a delicious walnut-fig jam on holiday in Corsica. I then presented it to the retailer for their premium private label. It was a unique product and it sold well. For a retailer the risk is low: you just try it. Put it on the shelf and see what happens. If it doesn't work, then you quit. A-brands often take years in product development, while retailers can switch quickly, with a ‘trial and error’ approach."
Does Koen De Jong see inspiring examples in the field of private label development today?
“In the past we always looked at the United Kingdom, but today I think that Albert Heijn in particular takes daring initiatives, certainly in the chilled categories. Their range of meals, sliced fruit and vegetables comes in transparent packaging with only a small AH logo. The product is the hero. They print as little as possible, with a view to sustainability. Coop has successfully launched the vegetarian house brand Karma in Switzerland. It responds to a current trend with a very striking packaging design. Very nice!"
And would the Dutch retail connoisseur think that Jumbo has a chance in Belgium?
“If you look at retailers who are making the move to international expansion, there are more failures than successes. It is a risk. Yet I think: why not? The price level remains relatively high in Belgium, so Colruyt will have to do something. On the other hand, I think that Colruyt and Jumbo would be a good match for each other: they are two family businesses with a similar EDLP strategy. ”
The book The Private Label Revolution by Koen de Jong is 240 pages thick and the result of four years of research by IPLC. It is available in English and can be ordered on the website www.iplc-europe.com.