Retailers improve margins thanks to more expensive private labels

European food retailers are refining their product range of private labels and are fully focused on added value. The goal is to improve their margins, to differentiate from the competition and to increase customer loyalty.

Higher prices

Hard discounters have put Europe’s traditional private labels under tremendous pressure in the past decade. Mainstream food retailers were forced to lower their prices, which in turn had a negative impact on their margins. To compensate for those losses, pretty much every European retailer is now investing to create private labels with added value (so-called “value added private labels” or VAPL), like premium, organic, “free form”, fair trade, ecological or regional product ranges. These have proven to be a strong weapon in the struggle to obtain a better market position, IPLC (International Private Label Consult) reports after a study at 25 retailers in nine countries. Colruyt, Delhaize, Carrefour, Jumbo and Albert Heijn were all part of the study.

Premium private labels’ average sales prices are markedly higher than the standard private label products: the Belgian price index for ecological and additive-free products is 160 and 297 respectively (compared to the standard private labels). The Dutch price index for these categories is 171 and 295 respectively. French retailers even have a 356 price index for “free form” private label products. IPLC points out that the manufacturing and marketing costs are not significantly higher for these products, which leads to improved margins. If they do steal away sales from the usual private labels, then that is fine, because the category’s profitability will only increase. Mainstream retailers are also better at introducing these private labels than hard discounters because they have a wider product range anyway.

Social responsibility

There are other advantages according to the researchers: consumers value everything related to ecology, animal welfare, regional products or food intolerance. Private labels that meet these needs showcase that retailers have taken their social responsibility and that they take sustainability seriously. It could also help increase customer loyalty.

The strategy is also beneficial to private label suppliers: retailers are looking for manufacturers with a drive for innovation. Manufactures that proactively help retailers expand their product ranges and stimulate category growth will strengthen their trade relations. IPLC will present its detailed results from ‘Opportunities in the Value Added Private Label Market’ in a seminar in Amsterdam on 28 May, on the eve of the World of Private Label on 29 and 30 May.