Loyalty Shifts From Branded Products to Retailers

September 1, 2009

The rapid growth seen by private label is coming to an end but branded fast moving consumer goods (FMCG) are set for a tough time going forward.

That is the key finding of Verdict Research’s new report on major European retailers’ private label relaunches during the recession.

Verdict reports private label has won a 28.3% market share of the European grocery market in 2008, at the expense of branded goods, but growth will fall back to a more steady and incremental pace.

However, Verdict claims consumers’ loyalty shift from branded to private label lines is permanent and the new battle for market share will be contested between retailers and within existing range architectures.

Simon Chinn: premium private labels will gain traction

The tentative revival of premium private label ranges is already taking place, it adds.

The study reveals that under economic duress in Q4 2008, EU consumers migrated to private label offerings on an unprecedented scale.

Trading down and switching have become endemic, while purchase decision-making times have increased, reports Verdict. As a result, value has become the overriding objective in retailers’ private label development, a reversal of a decade-long trend towards premiumisation and a focus on quality.

Across the EU, value private label ranges have produced stellar growth rates for almost every major retailer.

Daniel Lucht, senior analyst and author of the report, said: “For retailers, H2 2008 and H1 2009 was the optimal time to introduce new lines, as customers were willing to shop around and give new food and near-food ranges (such as disposable paper and household cleaning products) a try.”

The more successful retailers were in matching their product quality with branded products, the more effective they were in converting shoppers to private label ranges, said Verdict.

The major EU grocers including Carrefour, Tesco and Metro exploited this opportunity by launching 'fighter' ranges — new private label lines positioned at the value end — in an attempt to slow rampant discounter growth.

Tesco’s packaging tended to be retro, harking back to the 1970s (the last major economic crisis), while Carrefour and Metro Group combined the traditional good-better-best strategy with new products by substituting or strengthening their value ranges.

The fighter brands were intended to be sales drivers but predominantly they were designed to safeguard footfall, reports Verdict.

From a retailer’s perspective, it is better to have lower value sales, as a result of increased private label uptake, than to lose customers and sales to the competition.

While the fighter ranges slowed discounter growth and kept customers in store, the price paid was severely impacted margins and slower overall value sales, says Verdict.

The research company predicts after the recession there will be a shift back to the higher end private label ranges, which incorporate premium aspects such as organics or Fairtrade.

Simon Chinn, co-author of the report, said: “As consumer confidence is slowly returning in some markets, consumer purchasing behavior will become more polarised, with premium private labels gaining more traction again.”

Verdict forecasts the fighter ranges at the value end will lose momentum and shelf space although they will not disappear altogether.

In addition, it says retailers will lose interest because margins are low. And, because fighter ranges impact upon sales of branded FMCG, they make managing already strained commercial relationships with suppliers even harder.

But even with fighter brands’ diminishing importance, FMCG producers are not yet through the worst, warns Verdict.

Rising unemployment and continued uncertainty about the broader macroeconomic outlook will ensure private label as a whole will continue to gain share at the expense of branded goods.

Verdict reports across the EU, private label will emerge as one of the winners in this crisis: the attitude shift away from branded goods to store brands, also driven by the retailers so that they can gain a greater share of margin, will become further entrenched.

As buying groups and co-operatives have also been active and relaunched their private label offerings, the major opportunity open to FMCG producers is to look for new distribution channels, such as launching their own stores, investing in direct consumer contact through the internet or bypassing the supermarkets and trying new locations and channels, i.e. non food stores, it says. Another possible growth avenue is launching new value versions of branded goods themselves, and Verdict Research expects some activity on this front, especially if fighter ranges — boosted by a deep recession, high quality perceptions, a superb value proposition and perhaps further shifting attitudes towards the discounters — stay the course longer than the leading FMCG producers expect.