The Re-Emergence of

Private Label
How should CPG manufacturers approach this new
cycle of accelerated private label growth?

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 T HE R E -E MERGENCE OF P RIVATE L ABEL
How should CPG manufacturers approach this new cycle of accelerated private label growth?

P
rivate label products represent a dilemma for many
consumer product companies. They are a competitive
threat, but they also represent the brand position of major
customers. You can compete aggressively, but will you
also compromise your trade relationships? As more
retailers put financial and managerial commitment behind their
private label offerings, it will require a complex balancing act for
consumer product companies to manage their brands and their retail
relationships effectively.

For brand manufacturers this may be a bellwether moment, a time

where the economy, consumer perception and retail commitment will
favor the growth of private label and store brands. But it also
represents a time when the rules can be redefined, when the
economic ‘new normal’ in consumer buying behavior is still evolving,
“Retailers have been talking when many share positions are up for grabs.
about taking out #3 or #4
IS NOW THE TIME FOR ‘REAL’ PRIVATE LABEL GROWTH?
brands for more than a
Private label products are not new; they have existed throughout the
decade. We’re finally history of retailing. In Europe retailers such as Boots, Marks & Spenser
starting to see that happen.” and Tesco have had private label store brands for generations. During
the recession in the early 1980’s generic ‘no name’ brands were
Don Knauss introduced in the U.S. as low cost alternatives to national brands.
Chairman & CEO During the late 80’s and 90’s, private label growth was phenomenal
Clorox Company
reaching over 15% of grocery unit share and was then predicted to
surpass 30% by the turn of the century.
However, without significant investments in enhancing product quality,
packaging and branding, growth rates in private label slowed down
significantly. For the last 10 years private label unit share in the U.S.
has hovered around 21% with little sign of significant relative growth
against national brands.
But, according to IRI, private label unit and dollar shares have started
to rise sharply again in 2008 and are expected to keep on increasing
through 2009. The most dramatic growth was in the Grocery channel,
but noticeable increases were also observed in Drug, Club and other
retail channels.
So why now? What could be different this time that will promote
private label growth vs. the previous forecasts in the 1990’s? We see
six fundamental drivers of a renewed, accelerated and sustained
private label penetration:

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The quality gap between
national brands and private
label products has been
reduced or eliminated.
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The Re-Emergence of Private Label |2
1. The Recession. U.S. consumers’ increased emphasis on value and
affordability, as a result of an economic downturn of historical
proportions, is an obvious explanation for the recent rise in private
label sales. Consumers have been showing an unwavering
willingness to trade down and experiment with lower priced
alternatives, for which private label is widely seen as an acceptable
option. The longer the recession lasts, the longer experimentation
will happen and the more difficult it will be for consumers to return
to their previously favored brands. However, the recession alone
cannot fully explain this phenomenon.
2. Retail Landscape Consolidation. The level of retail concentration in
a given country has proven to be highly correlated with private
label penetration. Higher levels of concentration not only give
retailers higher bargaining power against brand manufacturers, but
also create critical mass required for making investments in the
development of more sophisticated private label programs. As the
consolidation of the retail landscape in Grocery/Mass/Drug
channels accelerates in the U.S., a spike in private label
penetration is expected. Today, the top 5 U.S. retailers represent
over 35% of all retail sales in the country.
3. Improved Product Quality. Private label quality has improved
dramatically since the days of generic products. As attested by
several Consumer Report studies, the quality gap between national
brands and private label products has been reduced or eliminated
over the past several years. But, more importantly, consumer
perception has improved substantially, creating a highly positive
attitude towards private label. In a recent survey by The Nielsen
Company, 63% of consumers considered private label brands to be
of equal quality to national brands, and 72% of the respondents
felt that private label products were good alternatives to name
brands.
4. Enhanced Retailer Capabilities. Over the last several years, many
retailers have been improving their skills and capabilities in various
areas. They have been hiring brand and category managers from
consumer product companies, investing in marketing analytics, and
ramping up their innovation and branding capabilities. As a result,
retailers have developed a deeper understanding of consumer
segmentation and targeting, as well as more sophisticated
portfolio management strategies and brand positions.
5. Renewed Strategic Approach. U.S. retailers are finally well
positioned and willing to rethink their overall approach to private
label, following the steps of successful programs in Europe (e.g.,
Tesco) and Canada (e.g., Loblaw’s). The traditional approach to
developing low-cost, generic alternatives to national brands,
targeting price-sensitive brand-agnostic shoppers, is giving way to
a much more strategic role for private label, as part of a thoughtful
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shopper segmentation, category management and assortment

planning strategy.
6. The Wal-Mart Effect. In early 2009, Wal-Mart announced that it
was gearing up for an aggressive re-launch of its Great Value
brand, a move that has the potential to create a step-change in
private label penetration in the U.S. With 5,000 products in its
lineup and representing 16% of Wal-Mart’s unit sales, Great Value
is already the largest food brand in the U.S. An aggressive push by
the world’s largest retailer will most certainly act as a catalyst for
further investments in private label.

U.S. Consumer’s Perception of Private Label Brands Quality

Store brands are good 69%

alternatives to name brands 72%

Most store brands quality are as 60%

“We leverage our good as name brands 63%

manufacturing and Some store brands products are 32%

higher quality than name brands
procurement capabilities to 33% 2005

2008
19%
innovate and introduce new Store brands are not suitable for
products where quality matters 16%
items that add value to our Store brands have cheap-looking 17%
package
customers.” 16%

David Dillon Source: The Nielsen Company, July 2008

Chairman & CEO

The Kroger Company THE SOPHISTICATION OF PRIVATE LABEL
During recent years we have witnessed a slow evolution of private label
programs that, we believe, will dramatically accelerate in the upcoming
years.

Private label programs are beginning to produce brands on their own

right. Brand attributes such as “consistency”, “reliability” and “trust”,
for example, continue to enhance the traditional “good value for the
money” position. Retailers are starting to see the opportunity to
expand their private label brands beyond their own store network,
similarly to the distribution agreement that brought Loblaw’s’
President’s Choice products from Canada to the shelves of Jewel
grocery stores in Chicago in the early 1990s, and Safeway’s recent
efforts to build partnerships to grow distribution of its O Organics line
of products in Asia and South America..

Another (and more traditional) approach to private label has been to

develop “store brands”, which carry an explicit reference to the
retailer’s store banner. Tesco has mastered this approach in the U.K.,
and Trader Joe’s (controlled by German retailer Aldi) has done
extremely well in the U.S. In every case the retailer has developed a

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Many brand manufacturers
are finding that their
“brand” leverage has
eroded and their product
strategies must change.
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The Re-Emergence of Private Label |4
brand identity that transcends category marketing and helps to brand
the store itself.
Part of the magic behind these more sophisticated private label brands
is an intense effort at understanding consumers and shopping behavior.
Retailers are grounding their private label strategies on in-depth
shopper insight and powerful data mining and loyalty card analysis.
Dunnhumby, a U.K. based research and marketing firm, has helped
retailers such as Tesco and Kroger unlock the hidden insights into their
shoppers’ behavior. Through loyalty card and POS scan data, the
analysis has helped these retailers refine their assortments, pricing and
consumer targeting efforts to significant success. Today, both Kroger
and Tesco offer multi-tiered private label products managed as part of a
comprehensive portfolio that meet specific consumer needs.
Multi layered approaches to brand positioning and assortment
management have emerged as a vehicle to attract different consumer
segments to the store. After a period of copycat private label products
on the shelves, many retailers now understand the value of branding
and segmentation to develop unique store brands and categories for
their shoppers. For example, Tesco has aligned its private label portfolio
to suit each of the various customer segments and have used their own
stores as a testing ground for creating unique and innovative products.
Retailers are also offering a full spectrum of private label products,
moving beyond the value segments into the territory of luxury and
specialty sectors.
The unfortunate result of this multi-layered private label approach is
that national brands are often caught in the middle in terms of price
and assortment. Higher valued ‘signature’ private label brands are
positioned as greater quality and value than competing national
brands. Private label ‘budget’ brands are positioned to appeal to lower
cost/ lower quality consumer tastes. Often national ‘name’ brands are
caught in the middle with little differentiation and must rely on
promotions and advertising to prompt sales.
More established private label programs are also venturing into
previously unimaginable areas beyond traditional grocery categories.
Loblaws, for example, has introduced a collection of ‘fast fashion’
clothes under its Joe Fresh brand. The effectiveness of these far-
reaching initiatives is still unknown, but it demonstrates that no
category is out of reach for the incursion of private label. At the end of
the day, it may be only a question of time and intensity.
RESPONDING TO PRIVATE LABEL GROWTH
Historically consumer product manufacturers have been able to
demonstrate superior value to both consumers and retailers based on
their deep insights into consumer needs, proven product quality,
cutting edge innovation and sophisticated brand marketing. But on all
of these dimensions, private label brands have shown significant
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progress and in some cases superiority. Many brand manufacturers are

finding that their ‘brand’ leverage has been eroded and their product
strategies must change. Those national brands that are not #1 or #2 in
their categories must focus on promotional events and aggressive
pricing to remain on the shelf.
As branded products manufacturers ponder about how to address the
re-emergence of private label, from our experience, we have found
that brand and private label strategies are very dependent on four key
elements:
1. Category characteristics. Private label penetration is heavily
skewed by product category. High private label share categories
(e.g. milk, cheese, trash bags) have different competitive dynamics
than the very low private label share categories (e.g. razor blades,
laundry detergent, shampoo). This can be largely explained by
what attributes are important to consumers when going through
the purchase cycle and how consumers perceive certain categories.
Commoditized categories will tend to display higher private label
“Where the customer penetration in comparison to categories where innovation is a
buys our type of product, major driver of consumer preference or where the risk of switching
is perceived as high. Hence, the category profile will be the primary
we should be there.” influence on manufacturers’ brand strategies.
Brenda Barnes
Chairman & CEO
Sara Lee Company

2. Manufacturer position within the category. Category

concentration is another important consideration. Dominant
brands typically manage to slow down private label penetration in
a category, as consumer preference is slow to shift and as it takes
longer for retailers to generate critical mass around a private label
offering. But category concentration needs to be assessed in the
context of how brands stack up in the hierarchy. If you are a strong
#1 or #2 in a low private label penetrated category, you strategic
options are much greater than if you are a tertiary brand on the

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3. shelf. As retailers segment and position their assortment the third

4. Level of sophistication of the retailer private label program. Some
5. Strength of the retailer relationship. Finally not all retailers are
Do you understand how
your core consumer
behaves with regards to
private label?
and fourth brands are vulnerable to being displaced by private
label tiered offerings.
retailers have developed their private label offerings into brands
on their own right (e.g. Wegmans, Kroger, Loblaw’s) while others
still rely on control label brands offered by wholesalers and buying
groups. The more sophisticated the retailer ‘s private label
program, the more important it is for branded products
manufacturers to develop a clear brand positioning strategy for
their products in relation to the store brands.
created equal. Manufacturers must segment their retail customers
the same way they segment their consumer groups. Sales volume,
growth, profitability, strength and length of relationship will all
influence the type of positioning a brand manufacturer will
develop with their retail trading partner. In many cases,
manufacturers will not be able to fight private label brands
promoted by a key retail partner and will have to determine a way
to co-exist and differentiate their products alongside the store
offerings. Ultimately it is the consumer that decides the
assortment strategy. Too many private label products and too few
national brands may result in frustrated shoppers that cannot find
their brand.

BRAND MANUFACTURERS MUST CHOOSE THEIR STRATEGIES WISELY

Branded consumer product companies who choose to ignore or
combat private label will inevitably find themselves at odds with
retailers. A product positioning strategy is needed that encompasses
the four elements of private label influence.

Branded consumer product manufacturers can consider several key

initiatives as part of their product and category positioning strategies.

Include private label in your competitive maps

Private label can no longer be considered a generic denomination
or a mere price point. In many categories they must be considered
proper brands. As you evaluate private label positioning, look
beyond monitoring performance and enhance your understanding
of positioning, appeal to shoppers, assortment and promotional
strategies.

Understand impact on who is your core consumer

The general demographics of private label shoppers have been well
documented, but do you understand how your core consumer
behaves in regards to (and perceives) private label products? This

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should be done in collaboration with (rather than independently

of) your retail partners.

Enhance category understanding and management

Private label plays different roles and creates different dynamics
across categories—in some cases, private label enables an “entry
point” that elicited experimentation among non-users and
promoted the entire category, while in others private label
severely cannibalizes branded sales.

Understand the retail strategy

“We will stop being the sales
agent for the manufacturer
and become the purchasing
agent of the consumer.”
Dave Nichols
Former President Loblaw’s
and creator of President’s Choice
Retailers need to differentiate their stores from their competition
either through pricing, assortment or unique products. Consider
working with large retailers to develop exclusive brands. For
smaller retailers consider different sizes or special SKU offerings. In
each case the retailer can gain a level of differentiation while the
brand manufacturer helps to strengthen their brand value.
Increase pace of product innovation
Brand manufacturers have always been able to compete effectively
by innovating their products and package designs. Explore other
areas of innovation creatively in order to strengthen brand
relevance and maintain category vibrancy. Consider extending your
brand through innovative services or ancillary products. Look
beyond your four walls—collaborate with suppliers, retailers,
consumers and others.
Improve in-store marketing and merchandising
Shopper marketing and in-store promotional campaigns should be
adjusted to target the ‘new normal’ consumer. Are there
opportunities to work with your trading partner to target specific
shopper behaviors and reward loyal customers?

WHAT’S NEXT?
Given the convergence of forces, it is expected that private label will
increase in share and become a more pervasive aspect of most grocery
categories. As a brand manufacturer, you can no longer ignore or try to
compete head-to-head with many private label offerings. Brand
manufacturers must position their own brands based on category,
consumer and retail positioning – something that will differ by each
retail customer. The balance between product portfolio strategy and
customer portfolio strategy will be a key part of the successful path
forward for brand manufacturers.

Brand manufacturers have a unique opportunity to create a win-win

strategy with their retail trading partners and their private label
brands. The economic downturn coupled with the new consumers
focus on value will create innovative opportunities for product
positioning and sales. As consumers evaluate their purchase decisions,
all brands and products are vulnerable. By properly positioning your
brands against the new consumer attitudes, an opportunity exists to
redefine your brands and your relationship with your key trading
partners.

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committed to helping our clients rapidly improve their business performance.

For more information, please contact us at 312-357-6740 or visit us at: www.bridgestrategy.com

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