Mark Ritson: What will happen to Aldi and Lidl as the economy strengthens?

The UK enjoyed an unprecedented boom during the first few years of the 21st century and as households traded up, the major supermarkets followed. M&S, Tesco, Sainsbury’s and Waitrose all experienced growth that appeared to be without end.

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Then came 2008 and a sea change in economic fortunes. As austerity mounted, the lean German grocery retailers Aldi and Lidl grew rapidly in the UK. Their no-frills, almost exclusively private label-based offering appealed to shoppers unsure of the future and their finances.

You know these two narratives; you lived through them. But no one has explored what happens next. With the green shoots of recovery springing up all over the UK high street, will the narrative revert to a more premium story? As the clouds of recession part, will Tesco and Sainsbury’s see off their German nemeses and reclaim market share?

Interesting evidence is emerging from the US that this third act may be an oversimplification at best and categorically wrong at worst. A team of marketing and economics professors from The University of Chicago’s Booth School of Business and the University of Tilburg in Holland has published
a fabulous paper examining the drivers behind private-label consumption. The paper, Do Pharmacists Buy Bayer?, examines the irrational reasons why US shoppers overspend by $44bn (£26bn) each year on branded FMCG goods rather than opting for private-label equivalents that are, objectively speaking, just as good.

The answer may surprise you. We’ve known for many years that the relationship between household income and private-label share of the basket is orthogonal. That’s a fancy way of saying there is no relationship. If you queue behind someone with a trolley full of store-brand products, they are equally likely to be better off or poorer than you. The US research helps explain why. It has isolated a far more predictive variable to explain private-label purchase behaviour – category knowledge.

In the study, the researchers examine two inherently knowledgeable groups and their purchase behaviour in categories in which they are experts. In both cases, the greater the knowledge, the more private label penetrates their purchase choices. In the first group, pharmacists and doctors are far more likely to buy store-brand headache products than those with lower levels of clinical knowledge. In the second group, chefs are far more likely to buy store-brand cooking staples such as flour and baking soda than the general public.

It’s a great research for two reasons. First, it shows conclusively that if you have knowledge in a category and the confidence that follows, you are more likely to buy private labels than branded goods – irrespective of your household income. That’s an important long-term discovery given the influence we know knowledgeable consumers ultimately have over the mass market.

But the more intriguing implication is the impact it may have in the next decade as the UK enters a post-recession era. If you believe Aldi and Lidl have been growing because their almost exclusively private-label offer has appealed to shoppers on a purely cost-saving basis, the UK’s exit from recession should logically mean consumers will return to Tesco and Sainsbury’s and their more balanced store brand/manufacturer brand offer. But if you recognise that people are buying private labels not because they are trading quality for lower prices but because they know these products are as good as the manufacturer brands, our imminent escape from austerity will have no major impact on either Aldi or Lidl’s impressive share growth in the UK.

Consumers are buying store brands because they know they are made by the same companies, using the same ingredients and at the same quality levels as the branded alternatives. And for every manufacturer brand such as Heinz Ketchup that is genuinely superior to its store-brand rivals, there is a counter example where the private label has been formulated by an experienced retailer to be superior to any of its branded rivals.

The era of private-label domination, and with it the tangential growth of the German über-discounters, is set to continue – recession or not.

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