MKTG 450 Selected Topic in Marketing: Distribution Management Spring 2009, Dr. Stefan Wuyts Private labels

Structure: Channel functions 1. Channel Management Channel design Vertical integration Contracts Partnerships Dark sides Power Connectivity and control 1. Channel Management Retailing Private labels Retail assortments Cooperation in retail Pricing Price promotions 2. Retail Management New trends Collaboration and competition in retail 3. New insights

Cfr: What is a marketing channel? Manufacturer Marketing channel management Intermediary Retail management End user

What is a private label? = shop’s own label = store brand = the own brand of a retail chain

Private label shares in different world regions % PL share Western- Europe ‘Big-5’ Other Western- Europe Central/ Eastern- Europe U.S. Asia- Pacific China Latin- America 2002

Key questions Why are private labels so successful? Which strategies can brand manufacturers use to counter private label success? Results from a global study: - 33 countries Western-Europe, Eastern-Europe, Latin-America, Asia, U.S. - consumer panel data on nearly 2000 product categories - consumer surveys on over 20000 respondents covering attitudes and perceptions on these categories

The 4 C’s of private label succes Countries Consumers Customers Categories Private label succes

The 4 C’s of private label succes Countries Private label succes Customers Categories Consumers

PL share varies across countries % PL share France Italy U.K. U.S. Spain Austria Ireland Norway Poland Romania Russia Japan Korea China Brazil Chile Germany Belgium Denmark Portugal Sweden Croatia Hungary Slovakia Ukraine Malaysia Taiwan Thailand Argentine Netherlands Switzerland Hong Kong Czech Rep. Central/ Eastern- Europe Latin America U.S. Asia Western Europe ‘Big-5’ Other Western Europa China What drives PL share across countries?

Drivers of PL success across countries Retail concentration The degree to which sales in FMCGs are concentrated in a few retailers National competitiveness The degree to which countries create an environment in which firms can compete successfully (government policies, infrastructure)

Drivers of PL success across countries Index of PL share 100 (average) Low High Low High Retail concentration +87% National competitiveness +83%

The strategic country-private label success matrix Brand heaven threat opportunity Brand hell PL share higher than expected PL share lower than expected Switzerland U.K. Germany Netherlands Spain France Belgium Ireland Portugal Austria U.S. Hungary Sweden Norway Poland Italy Czech Republic Slovakia Japan Croatia Thailand Taiwan China Romania Russia High Low Brazil Korea Argentina Denmark Chile Hong Kong Median

The 4 C’s of private label succes Countries Private label succes Categories Customers Consumers

PL share varies across categories

Category characteristics that explain private label success (1) Quality gap between brands and PLs difference in perceived quality between brands and PLs Trust gap between brands and PLs difference in trust consumers place on brands versus PLs

Quality and trust as drivers of PL share Index of PL share 100 (average) Low High Low High Quality gap brands vs. PLs +55% Trust gap brands vs. PLs +61%

Category characteristics that explain private label success (2) Package similarity the degree to which consumers perceive that brands and PLs look very similar Advertising intensity the extent to which consumers perceive that brands in the category are heavily advertised New product activity the extent to which consumers perceive that there are many new product introductions in the category

High package similarity

Category characteristics that explain private label success Index of PL share 100 (average) Low High Low High Low High Package similarity +55% Advertising intensity +77% New product activity +56%

Example: Canned green beans vs. diapers (U.K.) Key drivers Canned green beans Diapers New product activity 2.27 3.70 Advertising intensity 2.24 4.37 Package similarity 2.91 2.29 Quality gap -0.47 0.85 Trust gap -0.51 0.80 Private label market share 82% 16% Price premium brands 0% +24% Ratings on first three drivers on 5-point scale with 1 = very low and 5 = very high. Ratings on the last three drivers computed on difference score with a positive (negative) figure indicating a higher score for brands (private labels)

The 4 C’s of private label succes Countries Private label succes Customers Categories Consumers

Consumer characteristics that explain private label success Age Gender HH size Urbani zation Educa tion Inco me Social class Cluster 1 Belgium Portugal Younger Male Smaller Lower Cluster 2 Netherlands Poland Sweden Thailand Older Female Larger Cluster 3 Croatia Hungary Slovakia Cluster 4 Argentina Austria Czech Rep Denmark France Italy Spain Switzerland Taiwan U.S. Cluster 5 Germany Ireland Norway U.K. Higher

The 4 C’s of private label succes Countries Private label succes Customers Categories Consumers

Retailer characteristics that explain private label success Store loyalty (vs. brand loyalty) What action would you take if your preferred brand in the category XXX is out of stock? 1. Purchase the desired item at another store 2. Buy another sku of the same brand at the same store 3. Buy another brand or PL at the same store 4. Return to the store another day to buy the brand you want  1 & 2 = brand loyalty = power of brand manufacturer over retailer  3 = store loyalty = power of retailer over brand manufacturer Retailer size Hard discounter format almost exclusive focus on PLs

The relationship between store loyalty and propensity to buy PLs PL buying Propensity (index) 100 (average) Low High Store Loyalty Here is what retailer CEOs say: “Consumer loyalty is a fundamental reason for having own labels” “Private labels is what consumers want. It makes them loyal to the chain.”

The bigger the retailer, the larger PL share 18000 16000 r = .54 14000 12000 Retailer FMCG sales 10000 8000 6000 4000 2000 5 10 15 20 25 30 35 40 45 PL FMCG share France Germany Spain UK

Hard discounters contribution to PL growth (2000-2002) % of total PL growth from hard discounters France 44.6 Germany 73.2 Spain 34.6 U.K. 80.9 Austria 28.1 Belgium 55.8 Ireland 78.3 Netherlands 65.4 Portugal 53.1 Poland 22.9 Czech Rep 28.8 Hungary 18.8 Slovakia 8.3

The circle of PL success Package similarity Low innovation & advertising by brands Increased PL share Low brand trust advantage Growth of (hard) discounters Low willing- ness to pay price premium for brands