Are brands dying? Why the rise of private label is reshaping the consumer landscape 

On the face of it, these are boom times for consumer brands. Recession is often an enemy of product development, but major retailers’ shelves tell a different story.

In February 2011 alone, consumers couldn’t move for new product launches. In the US, shoppers at Supervalu supermarkets could pick up a six-pack of Buck Range Light beer for US$2.99, a price which drew the attention of late-night talk-show hosts’ skits. In Spain, visitors to El Corte Inglés shops indulged in a new range of Veckia body lotions and shower gels. And in India, Smart Choice corn flakes were doing a roaring trade at upmarket Spencer’s stores.

These launches, however, had one thing in common: they all came from private labels, without a major consumer goods manufacturer in sight. And they’re part of a trend which is reshaping retail: across the world, consumers are turning their backs on brand names in the food, drink and consumer goods (FDCG) sector, creating a quandary for manufacturers and a tricky position for mainstream retailers, whose relationships with suppliers are rapidly being rewritten.

Research suggests that the consumer mindset has shifted, perhaps inexorably, making the differences between branded goods and own-label products less important. In January, US consumer intelligence provider Mintel reported that 34% of primary household grocery-buyers did not consider they were giving anything up by opting for an own-label product in place of a branded one. Only 19% were clear that it was worth paying more for a brand. Separate 2010 figures bear this out, showing the penetration of supermarket labels in the US at 18% compared to 15% in 2007.

In the UK, where 35% of consumers were buying a higher proportion of own-label goods in 2009 compared with the year before, private label brands are even more established. Japanese supermarkets have seen a rise in private labels, while German giant Metro expected its Real brand to account for 25% of food sales in 2010.The aim, said CEO Joêl Saveuse, was to increase customer loyalty and profit margins.

“Manufacturers of brands should be worried by consumers moving away from them at the moment,” says Jon Wright, Head of Retailing at market research company Euromonitor International. “Consumers are in many cases defining value in terms of price, which is where private labels come into their own.

“In previous economic downturns private label has taken volume and value share from branded products. After the effects of the downturn have worn off, consumers invariably look to replace some of their new private label purchases with branded goods once more, but many do not. The ultimate effect of this is that private labels do not hold on to all of their new consumers, but overall sales share goes up for private label products.”

Deeper shift

The new consumers willing to question the value of branded goods have brought a new term into the marketing lexicon. “Hybrid consumers” do not buy private-label goods simply on principle, but they have identified product sectors where trading down is an option. Foremost among these is cleaning products: in the Mintel survey, more than half of respondents said they did not believe branded cleaning products were any better than own-label counterparts. Dairy products, cereals and fruit juices may also be prominent in hybrids’ minds.

JulianThomas, KPMG’s Global Advisory Sector Lead for Consumer Markets, says social media has accelerated the trend: “Consumers today interact more and more through media channels that manufacturers and retailers cannot control. Traditional consumer behavior was based on systematically filtering brand choices to arrive at a final selection. But now, consumers can evaluate a shifting array of options and remain engaged with a brand through social media after a purchase.

“Traditional marketing strategies should be rethought to align with the way the relationship between brands and the consumer has changed.”

While the private label phenomenon is global, its impact varies widely by region, says Wright: “Private label penetration is very strong in Western Europe, but has some way to catch up in North America and many markets in Eastern Europe. In other regions, particularly Latin America and Asia Pacific, it has even further to go.”

Natalie Berg, Global Research Director at analysis firm Planet Retail, says that in many Asian markets there are still aspirational factors that give branded products great sway.

“That’s changing, though,” she adds, “as large supermarkets like Wal-Mart and Carrefour move in with their own labels, which in turn give a boost to domestic own-label products.” 7-Eleven has particularly aided this phenomenon: its Seven Premium brand now accounts for 20% of sales in its Japanese stores, a significant figure because its sites are generally mid-ranking in floor-space terms.

But the drift to private label is not universal, even in its most prominent markets. Figures from analyst mySupermarket show that over the two years to mid-2010, branded laundry detergents increased market share by 13% in the UK, and branded cleaning liquid by 6%, while bread, fish fingers and baked beans also showed gains for well-known manufacturers.

“There are some indications that in this climate shoppers have not moved away from brands as significantly as in other downturns,” says John Noble, Director of the British Brands Group, which speaks for branded goods manufacturers. “Those that have will be strongly influenced by their new experiences. If the cheaper products they turn to do not perform as well, there is a strong likelihood that they will return to their favorite brands as soon as they are able to.

“Areas where quality is important and the incumbent brand offers a differential advantage have tended to fare better. Where the branded benefit may be unclear – toilet tissue springs to mind – brands have to work harder to explain why shoppers should choose them. There is plenty of evidence that brands that continue to promote their benefits in a downturn emerge stronger.”

Must try harder

For manufacturers looking to counter the rise of private labels, simply slashing prices to match supermarkets’ cut-throat offers is often not an option. “Pricing will remain part of the battle,” says Wright. “However, in some ways it is a zero-sum game as either brands undermine the strong work they have done previously by devaluing the product they offer or they squeeze their margins so much that it makes it not worthwhile to do anyway.

“Innovation, either in terms of quality, convenience or health and wellness, is the order of the day for brands. Yet that has been the main area where brands have let themselves down. They felt the status quo was acceptable as consumer habits had not changed in the past. The most successful companies, such as P&G and Gillette, kept innovating despite the fact that they owned some of the most successful and well-liked brands.”

With a tight focus on a single area (Unilever, for instance, owns more than 400 brands but gains 70% of its sales from 25), manufacturers can get an edge over producers of own-label creations, who may not know their customers as well or be able to invest in product development and marketing strategies.

Sara Lee, which announced in January that it would be splitting into two companies, has spent much of the past several years divesting itself of brand lines. This underlines the increasing importance of tight focus but points towards another trend – that as the skirmishes between brands and own-label intensify, it will be second- and third-tier brands that pay the highest price.

“It’s not healthy for big brands to have too many tail brands,” says Planet Retail’s Berg. “We’re seeing a cleansing process as retailers reduce the number of stock-keeping units (SKUs) and rid the shelves of products,” she says, adding that Wal-Mart has cut SKUs by 15% in recent years. “This is beneficial to brand leaders. [UK supermarket] Asda cut the range of candles available and sales soared. Wal- Mart dropped two peanut butter offerings and, likewise, sales rose.”

For some brand-owners, the rise of private labels is sweetened by the pay-off they receive as “white label” manufacturers of supermarkets’ own products, although margins in this area tend to be lower. Berg says some mid-market brand manufacturers, which were previously resistant to white-labelling, have found capitulating is the best way to keep their own offerings on the shelves.

Branded products are able to leverage buyers’ feelings of heritage and nostalgia (the retro marketing of the Lucky Charms cereal brand in the US is a notable example). And they can use advertising and social media in a way that centers more closely on their products. But inevitably, the very fact that own-labels are selling on their own turf means brands must make more effort, says Wright.

“Without strong advertising or talking directly to consumers, brands are being squeezed out of the shopping process,” he says. “Manufacturers need to be having one-to-one conversations with consumers as much as possible.”

KPMG in the UK’sThomas says consumer markets companies must understand the “consumer procurement journey” to revise strategy, optimize media spend and fully leverage supply chains: “Organizations that have successfully navigated the new brand environment have revised their marketing portfolios rather than rewriting them. They have exploited social media opportunities while keeping an unwavering focus on the needs of the consumer. Brands should innovate beyond the familiar and deliver to market rapidly, and clearly communicate and deliver on their brand promise.”

The problem is that own-label retailers are having a persistent conversation with their customers. And their “no brand” products have, slowly, become brands in their own right – supermarkets’ premium ranges have become viewed as brands that happen to be manufactured by their retailers. As Devendra Chawla, Business Head of Private Brands at Indian retailer Future Group, puts it: “A label on the shelf becomes a brand by covering the two-foot distance to the trolley.”

Noble remains optimistic for his members: “Brands help people navigate complex markets and help them make informed decisions… the role of branding is arguably more important than ever.”

Manufacturers seem to realize this: many, including Unilever, P&G, Nestlé and Reckitt Benckiser, have banded together to market themselves in television and newspaper ads under the banner “Brand Power”, trying to persuade consumers that a trusted name counts. The brainchild of Australian agency Buchanan Group, the campaign is now active in 14 countries.

As a fightback, it is a start. As Nestlé CEO Paul Bulcke says, private labels with low margins cannot absorb commodity price rises as well as multinationals, giving them hope of short-term market share gain. But the impression remains that the manufacturer-retailer relationship has shifted. The question is: will things ever return to “normal”?