I spoke at an event last week in Singapore. A group of senior APAC marketers gathered in a swanky tropical hotel and pondered the years to come. One of the speakers was a (really rather good) economist who reassured the room that recession and inflation would prove mild across the Asian region. “Obviously there will be problems in Europe, we are still not sure about the US, and of course there are all the problems in the UK…”
Dot. Dot. Dot. The international code words for “you know what happens next”. In the case of the UK economy that means an economic tightening last seen in the dreary, painful pre-Thatcher years of the 1970s. A likely inflation rate of 18%. Trade union unrest. A weak, relatively unpopular new PM with a questionable tenure ahead. The Brexit hangover. War in the East. Energy price explosions. Dot. Dot. Dot.
From a marketing perspective the stringent reality of consumer life in the 2020s has many implications. Among the biggest and most predictable will be the rise, and rise, of private labels. Launched as economy lines a century ago, private labels have mutated and diversified so much that it has become all but impossible to develop a standard definition to encompass everything that private labels have become.
There are private labels that cost more than manufacturer brands. Ones that are sold across multiple different retailers. Ones with quality levels significantly ahead of the category. Ones that appeal to the richest segments of the market. But one traditional aspect of private label operations remains as true as ever. When economies shrink and belts tighten, the penetration and basket share of private labels increases.
Relationship between disposable income and private label sales – USA
The great American marketing professor Stephen J Hoch once completed a fantastic analysis of the relationship between private label’s share of grocery sales in the USA and the level of personal income American consumers enjoyed, shown above. As personal income booms and consumers feel better off their relative purchases of private labels decline significantly. But when times get tough and money is tight private labels quickly grow their share.
It’s a story that has almost certainly played out on this side of the pond too, with one important caveat. While American shoppers tend to be brand lovers who return to manufacturer brands when the economy improves, their British cousins appear far more loyal to their store brand purchases.
The more private labels you offer in store, the more profit you will generate.
Perhaps it’s caused by better British supermarkets or a more prosaic shopping culture, but the market share of private labels in this country rarely drops much once it has been established. A recession seems to push British shoppers to buy more private labels and, once they discover the quality can be the same, they stick with them through thick and thin. There is a reason that the share of private label grocery sales in the UK is close to triple that in the USA.
And it’s about to rise even further. “Whilst some of the changes in grocery spend will be due to consumers simply having a different basket mix compared with last year,” Mike Watkins from Nielsen noted earlier this year, “Our data also shows that consumers are now increasingly shopping for private label products as part of their coping strategy.”
UK private label share of grocery sales: 2011 to 2022
During the feel good years that surrounded the London Olympics, private labels accounted for around 47% of all grocery sales in the UK. That made the UK the leading private label country – ahead of the Germans, French and even the Swiss. And that proportion of sales has only increased in the subsequent decade with 53% of all grocery sales now going the way of private label. As the UK’s economic quagmire takes shape expect that proportion to grow even greater as the fraught few years ahead unfold.
For consumers, there are two clear advantages of private label purchase. First, these products save people money. Most basic private label lines position themselves at 40% to 50% less than the manufacturer equivalent. That’s a significant saving for consumers looking to cut back.
Second, purchasing private labels makes consumers feel like they are cutting back. Don’t confuse this emotional benefit with the fiscal one above. Saving money and symbolically feeling like you are saving money are two very different things. Many British customers know there is a storm coming but are unsure what they are supposed to do about it. Ignoring the £2 Heinz Ketchup and opting for the Tesco version might only save them £1.25 but the greater benefit might be the feeling of saving money, of cutting back. Multiply that emotion across 50 purchases and the symbolic act of buying private labels might be more important than the fiscal savings those purchases confer.
The image of private labels as basic ranges for households on benefit is long, long gone. The only data I’ve ever seen on household penetration of private labels suggest an even appeal across all the economic tiers of the UK. Indeed, with more than 90% of British households now regularly purchasing private label it is time to recognise its true mass appeal. After all, doesn’t everyone want to save money?
For supermarkets there is only upside in the growth of private label inside their stores. These products are significantly more profitable per unit of sales than their manufacturer brand equivalent. The margin differences vary by category, but a typical British supermarket might make a profit of only 1p or 2p when it sells a £1 bottle of Evian. That profit might be five-fold on a bottle of home brand water despite the significantly lower price point. For decades every big consulting company has had a line chart up their sleeve with retailer profitability on one axis, private label proportion of products on the other, and an almost perfect 45 degree line running between the two. The message: the more private labels you offer in store, the more profit you will generate.
And that shorter-term profitability advantage is matched by more enduring advantages. The more a supermarket stocks its own label products with multiple ranges and multiple SKUs, the less shelf space is left for the multiple manufacturer brands vying for big retail distribution. As private label share of shelf increases, the retailer’s negotiating power over manufacturers grows ever stronger and that translates into better terms and lower supply costs.
Suppliers are usually left in the unenviable position of trying to compete with their biggest customers.
Researchers at the Tuck School of Business estimate a 5% increase in retailer gross margin in categories where private labels prevail – a direct result of better unit profitability and the improved negotiating power of retailers with many private labels and less remaining shelf space.
And there is yet another longer-term reason for retailer attraction to private label: differentiation. If you’ve never worked in retail you probably scratch your head at the obsession with price that most retailers exhibit. But that obsession makes total sense when you realise that while manufacturers sell different products through different channels often to different consumers, that’s simply not the case for retailers who sell literally the same products to the same people in the same place at the same time. Tesco sits across the road from Morrisons. Hence the obsession with the only real difference at hand – the price of those products.
But private label adds a new, tantalising dimension of difference to that offer. If you start to develop a love for Aldi’s organic milk or Waitrose No.1 Colombian Coffee Ice Cream there is only one place to source those products. In a largely generic consumer decision making process, assuming physical availability exists for two supermarkets, the odd favoured private label might be the sole reason for the whole shopping choice to swing one way or another.
Any increase in private label sales in the UK is likely to be met with a giant recessionary sigh from brand manufacturers. On top of supply chain issues and inflationary price pressure, they also have to contend with even more private label pressure. The last 20 years saw private labels emerge as the number one competitor for most brands in most grocery categories. Suppliers are usually left in the unenviable position of trying to compete with their biggest customers.
The impact of private label is, of course, relative. Some categories like dairy now see more than 70% of sales going to private label. Others, like confectionary and beauty, have restricted the private label share of sales to single digits. Much of the difference depends on the strength of the incumbent brands within the space and the degree of perceived differentiation and symbolic value derived from each category. Milk has very few strong brands, it’s a generic product for the most part and nobody knows if you are drinking Sainsbury’s or a premium brand. Chocolate or deodorant is the opposite – with a plethora of strong brands, huge differences in product format and strong symbolic and social aspects to the purchase.
Irrespective of the current 2022 levels however, the tough economic conditions ahead mean that almost every British supplier will have to contend with increased private label competition. And it’s a threat no longer reserved to the freezer section of your local supermarket. Formerly impregnable categories like DIY and beauty are now seeing dramatic increases in private label penetration. Nielsen data suggests that private label wine is now approaching 50% market share in the UK. The coming recessionary storm will see these formerly brand dominated categories continue to buckle to the attraction of private labels.
The single most effective thing any marketer can do to protect their brand against private label competition is to build it.
Not everyone will agree with that prediction. There is a dangerous assumption shared by many marketers that there is a magical threshold beyond which the private label attraction wears thin. Why, the standard challenge goes, would a consumer keep visiting a supermarket if all their favourite brands are no longer stocked? When a store is more than 50% private label surely the consumer votes with their feet? There is a limit to store brand appeal.
But the reality of private label retailing is more complex than a simple, uncrossable threshold. While marketers bang on about the limits to private label penetration, they ignore the spectacular growth of both Lidl and Aldi and their sub 5% branded offer.
Retailers aren’t dummies. They ensure the most loved, most noticed premium brands remain on their shelves. That’s partly to assuage shoppers that even the most private label centric supermarket still offers them branded choices, and partly to frame the value of their store brands against the much more expensive branded alternatives. Never forget that how you frame and present a price is way more important than the price itself. There is a more complex, nuanced symbiosis between private labels and the premium brands that they undercut. It’s a much-missed fact that while most manufacturer brands have suffered tremendously under the cosh of private label, the leading brand in most categories is more distributed and now more profitable than ever. The world of grocery retail is a bifurcated one: premium brands and private labels prevail. The brands in the middle, the number four ice cream brands, are fucked.
What can manufacturers do?
There is zero doubt that private label sales will increase significantly in the tightened economic climate of the early Twenties in the UK. Increases are expected both in the traditional private label heartland of grocery shopping and across other, less likely channels too. And the key question is what the major manufacturers can do about it. There might not be a magical “fix” for private label, but there are concrete strategic steps that marketers can take.
The first and perhaps most important defence against private label is a pre-emptive one. The single most effective thing any marketer can do to protect their brand against private label competition is to build it. A brand is the opposite of a commodity. The more and the longer the brand has built its salience and its meaning to consumer markets, the less vulnerable it will be.
Let me reverse that logic too, the best way to make your brand vulnerable to private label is to commodify it. Sales promotions, cuts in ad investment, lack of clarity on what the key benefits and associations of the brand are, will all open the door to the private label threat. And, unfortunately, brand building is not a response to the upcoming threat of private label, it’s something you needed to have been doing – ideally for decades – prior to the current period. I’ve met a small army of managing directors who suddenly fell in love with brand building as private label came knocking only to discover that it was too late for that now.
Brand building investments are not something you can turn on like a lightbulb when the shadowy threat of private label starts to turn everything dark. You had to already have the lights on for many years.
Many manufacturers will bristle at the idea of maintaining investments in their portfolio of brands at the very time when sales are down and consumer spending tightens. But strategy is choice and as private label penetration grows manufacturers must decide which brands they will focus on and which they will either delete or de-prioritise. There was a time when running the number three or number four grocery brand in a particular category was a winning proposition. But as private label grows, and shelf space diminishes the dynamics of most categories will change. What was once a viable brand is now a liability and the company’s resources need to be transferred to bigger, more defendable brands in the portfolio. Even if a minor brand is profitable the question that marketers should be asking is whether all the resources, investment and time placed in a minorly profitable brand would not provide a better return placed with one of the company’s bigger options.
The other classic response to private label has always been innovation. New packaging, new flavours, new features, traditionally helped big brands stay one step ahead of the store brand challenge. Traditionally those categories with less innovation saw 56% more private label sales.
But while there will always be a place for product development in the repertoire of marketers, it’s fair to say the innovation advantage is not what it once was. Consumer proximity means retailers often know, ahead of the manufacturer, how well new innovations are working in the market and demand the same of their own products in relative quick succession. In some cases, big retail’s consumer insights, search for differentiation, and fast-to-market operating model allows them to pre-empt manufacturers with category innovations.
Last year, for example, Sainsbury switched all its own brand tea bags to plant-based plastic thus removing tons of microplastic waste and ensuring its tea bags are 100% biodegradable. The packaging is entirely plastic free too. It wasn’t a huge marketing story then or now. At the time, however, many of the manufacturer brands that Sainsbury also sells, including Tetley and Twinings, were still using plastic. Private labels aren’t just following quickly behind product innovation, they are often the vanguard.
Of course, there is another strategic option to protect sales in the era of private label. Nearly every manufacturer on the planet now dances with the devil and produces private label for the very retailers that threaten their existence. It’s a precarious but essential line of business. And while the additional profits that are generated by making store brands are valuable, they are significantly lesser than those generated from branded sales.
The scariest thing about private label is that while its penetration may flatten and drop by a few fractions, it never really falls back by any major amount.
And there is an added strategic threat that comes from making private labels for the retailers that I have seen played out repeatedly. Manufacturers win a big private label contract and dedicate some of their capacity to this new line of business. But as this business grows the manufacturer faces the potent threat of strategic schizophrenia.
On the one hand their core business was built on B2C, on brand equity, on innovation, on distinctiveness and differentiation. But now more and more of their efforts are devoted to the exact opposite: supplying one or two big B2B accounts with generic, made to order commodities. If manufacturers are not careful, they lose the focus on the very competencies that would have enabled them to best survive the private label challenge because they become too strategically dependent on the easy but fleeting contracts of private label supply. Companies must supply private label products, but they must assume this business will one day disappear and, while they have the contract, ensure it does not pre-occupy the company or distract it from its branded focus.
There is one final aspect of private label penetration that makes the years ahead all the more concerning. To follow the slow, snaking line of private label’s share of British grocery sales is to witness the story of the British economy. The line starts in the low 20% levels of the Seventies. But with each major recession or period of national contraction the line leaps higher and then, as the good times return, stays in place until the next recession occurs. The scariest thing about private label is that while its penetration may flatten and drop by a few fractions, it never really falls back by any major amount.
Each economic squeeze pushes consumers to experiment with private label. And as they discover equivalent, sometimes superior, quality the presence of private label endures. It’s a pattern that we are about to witness once again and for British marketers a challenge they must somehow endure.
Mark Ritson is the 2023 PPA Columnist of the Year and teaches marketing strategy on the Mini MBA in Marketing. Ritson will be on stage at the Festival of Marketing on 6 October, inviting the audience to score their own marketing capability with 10 tests of their current approach. Find out more here.