Budget brands are losing their fight against hard discount

Budget brands are losing their fight against hard discount

Budget private labels are not the right strategy to fight off hard discounters, according to the International Private Label Consult (IPLC). Their inferior quality damages a supermarket's brand image and its margins are dwindling.

Classic approach does not work

Almost every food retailer is wondering how supermarkets can stop the flow of customers going to hard discounters, especially as these now seem to be able to offer high quality products at low prices. A typical mainstream retailer strategy is to offer low-priced items in bland packaging, the so-called budget private labels. After examining supermarket chains' private labels in nine European countries, the IPLC now believes that strategy has failed.

 

In the study, the analysts have consistently compared the mainstream private label and the supermarket's budget private label with Lidl's private label and the leading national brand. A mainstream private label's average price is 33 % lower than the national brand, while the budget private label is 62 % cheaper abd Lidl is 54 % cheaper. Those price differences have remained relatively stable over the past few years.

 

The IPLC has also compared the quality of the products, based on the list of ingredients and how the package looked (no sensorial evaluation at all). For example, the amount of tomato in ketchup, the amount of hazelnuts in chocolate paste or the amount of fruit in jam were examined to see how each brand fared. In many cases, the budget private brands' quality was inferior to Lidl's quality. Packaging was also often quite basic: simple photography, a limited colour pallet, no ring-pull on canned goods and no no-drip solution for ketchup are some of the differences.

 

Negative effects

It is remarkable to see that most retailers (excluding Edeka in Germany and Spar in Austria) will position their budget private brand below Lidl's price level and are adamant about being cheaper than the hard discounter, it seems. Tesco in the United Kingdom is the clearest example, as its Everyday Value budget private brand is 85 % cheaper than your average brand product.

 

Quality-wise, most of Lidl's products are at least as good - or even better - than the national brands. However, mainstream retailers' private budget brands are significantly lower quality than name brands, excluding - once again - Edeka and Spar. Low-priced budget brands therefore do not pose a major threat to the hard discounters' surge in Europe. Even more so, because these private budget brands have smaller margins, the category's profitability drops when an increased number of shoppers chooses the cheapest option. Its low quality may also reflect badly on the retailer brand itself.

 

Solutions to the problem?

IPLC's experts point to several recent initiatives that could help fight hard discounters. In 2014, Carrefour decided to remove its logo from the Carrefour Discount brand, eliminating any link between the Carrefour brand and its very own budget private label.

 

Albert Heijn did something similar in 2015 when its cheap AH Basic product range was cut from its strategic important fresh convenience range. All budget private brand products were given fancy labels, excluding any link to AH, or the higher quality AH private label. Equally in the Netherlands, Jumbo launched the Allerslimste Koop product range, containing national brand quality, in an attractive and recognizable packaging, on Lidl's price level.

 

German Edeka positions its budget private brand product range, Gut & Günstig, at Aldi's price and quality level, while giving its packaging an upgrade. At the same time, products with an added value were placed under the Edeka private label, only 19 % cheaper than the national brands (compared to an average 33 % European price gap).

 

Shoppers will not be fooled

These initiatives clearly show retailers are trying to fight off hard discounters and want to keep hold of their own shoppers. According to IPLC, the classic three-pronged retail strategy (cheap - better - best) will eventually disappear as shoppers will not be fooled any more by inferior products at low prices, especially when they can get better quality at low prices at discounters. Retailers have to understand that sub-par products placed under their own banner will harm the consumer's faith in the retailer brand.