April 2016

RETAILER BRANDS Serving consumers, SMEs and innovation

This report was written by Christel Delberghe, Director of Policy at EuroCommerce, based

on a review of the literature and inputs from members of EuroCommerce and the European Retail Round Table (ERRT). We are grateful for their contribution to this report. We also thank Andy Batty (Better, Simpler, Cheaper Ltd), Prof. Jonathan Reynolds (Saïd

Business School, University of Oxford), and Koen de Jong (International Private Label Consult BV) for their helpful comments and guidance.

TABLE OF CONTENT

Introduction and summary of key findings

1

CHAPTER 1 - A FORCE FOR CONSUMER SATISFACTION

Consumers value retailer brands highly

5

The economic crisis and the rise of discounters have influenced shopping habits 9

Store and channel switching 10

Key determinants of consumer choice 14

Consumer shopping behaviour: retaining consumer loyalty 15

Consumer switching products 16

Conclusion 17

CHAPTER 2 – CONTRIBUTION TO A COMPETITIVE MARKET

The importance of brands

20

Range construction: the importance of achieving the right mix 21

A-brands continue to dominate important pars of the market 22

A-brands’ response to the crisis and retailer brands growth 25

Retailer brands – a less expensive way to respond to consumer demand for differentiation and variety; they are less costly to bring to market

27

The digital age is a game changer 29

Conclusion 31

CHAPTER 3 – A POSITIVE DRIVER OF INNOVATION

Why innovation matters for retail companies

33

Driving innovation: branded goods and retailer brands rely on different business models 34

Retail innovation is more inclusive and effective 35

Retail innovation: a dynamic process focused on the consumer 37

Protection vs. dissemination of innovation 39

Conclusion

41

CHAPTER 4 – SUPPORTING SMALL AND MEDIUM SIZED ENTERPRISES AND LOCAL PRODUCERS

Retailers support SME development through their retailer brands

42

Retailers support local farming through retailer brands 47

A commitment to responsible practices in relations with SME producers 48

Conclusion 48

OVERALL CONCLUSION

1

Introduction and summary of key findings

Retailer brands have been defined as products or services that either carry the brand of the retailer,

or are separate brands that are controlled by the retailer.1 They can be found on store shelves with

national or international manufacturer brands and SME brands. Retailer brands can be manufactured

by a range of suppliers. Large manufacturers often produce retailer brands products alongside their

own manufacturer brands. Many small and medium size manufacturers specialise in particular

product lines and concentrate on producing retailer brands almost exclusively. Some major retailers

and wholesalers operate their own manufacturing plants and provide retailer brand products for

their own stores2. Retailer brands are a means for retailers to differentiate and complement their

assortment to rapidly meet ever-changing consumer needs.

In 2014, the European Commission published a study (Modern Retail Study),3 which concluded that,

overall retail developments between 2004 and 2012 have led to increased consumer choice and

innovation. It also revealed a strong level of competition in local retail markets as incumbents adapt

their assortments to the entry of new players in those markets. However, the results also showed

that supplier concentration and the economic crisis had a negative impact on innovation4 and

suggested that there was a “negative non-linear relationship between private label growth and

innovation”.

The purpose of this report is to document the benefits retailer brands in Fast Moving Consumer

Goods (FMCG) bring to consumers, to the market, to innovation and to thousands of Small and

Medium sized Enterprises (SMEs) and local producers. In doing so, it also addresses issues arising

from four theories suggested by the European Commission Directorate-General for Competition to

explain the study findings on the relationship between retailer brands and innovation. This report

integrates desk research and interviews, and bases its arguments on practical examples, expert

feedback and academic sources. It also puts into perspective the findings of the Modern Retail

Study, showing the diversity of national situations: consumer purchases remain strongly influenced

by local tastes and preferences. The report suggests that, while retailer brand growth and slower

innovation (as defined by the researchers) may have coincided, there is no evidence of any causal

relationship between the two.

Main elements of this report

The retail market is intensely competitive. Consumers want convenience in every aspect of their

shopping experience. They want choice, and that choice to be presented in a way to make buying

decisions easy. This means that ranges must be logical for them, without confusion or duplication.

Range selection is therefore a critical retail skill that determines a retailer’s competitive position.

Brick-and-mortar retailers select their ranges with great care. Get it wrong, and they lose market

1 Oxera, (2011). The economic benefits of retailer own-brands. 2 Private Label Manufacturer Association. 3 European Commission, (2014). The economic impact of modern retail on choice and innovation in the EU food sector, final report. 4 The research employed a narrow definition of product innovation which was measured by analysis of the EAN codes available on the shelves of retailers’ shops with respect to five dimensions: new products, new variety / range extension, new packaging, new formulation and relaunch.

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share. They have space and other constraints to contend with. Each product therefore must

represent a Unique Selling Proposition to deliver real choice, rather than duplication.

In bricks and mortar stores, retailers create a core range, which will reflect regional and demographic

differences.

Discounters have the most limited ranges so it is even more important for them that their ranges

have the lowest possible level of duplication. Retailer brands are important in this context because

the retailer can ensure that each and every product is designed to optimise choice and minimise

duplication. The discounter business model is based on fewer Stock-Keeping Units (SKUs), which

reduces retailers’ costs significantly. So, retailer brands will become even more strategically

important for all grocery businesses as competition, inter alia from discounters, continues to

intensify.

Online retailers have the benefit of working with virtual shelves. That means that customers can

tailor the way the range is presented to make the decisions they make simpler. They can filter out

items which do not interest them. Online retailers can thus stock huge ranges but offer customers

edited choices with less risk of customers being confused.

Today, European consumers value retailer brands and buy them regularly - and in significant

quantities. According to the Private Label Manufacturers Association, in 2014, retailer brands

represented some 30% of the market in 15 European countries. Market shares have continued to

grow, although national situations vary. Retailer brands provide real benefits that consumers value.

Without retailer brands, the larger manufacturer brands would increase their dominance, and thus

their ability to set (higher) prices in many categories. Retailer brands have led innovation through

investment in the cold chain and new product development. The combination of these with lower

prices has resulted in long established brands being challenged.

The period covered by the Modern Retail study includes the deepest period of economic stagnation

since the Great Depression in the 1930’s and as such should not be considered as “business as usual”.

As stated by the Modern Retail study itself, “the period covered by the study is characterized by the

2008 economic crisis which has had significant impact on consumer purchasing power.”5 This

stagnation led to an unusual period for business, with customers being more price-conscious than

ever, and the recovery only happening slowly. Throughout the crisis, consumers tried retailer brands,

got to know and trust them, making repeat purchases. Changing consumption trends, emerging

health and social concerns have also led to consumers expecting more benefits from the products

they purchase, and turning to retailer brands, which can offer a range of such options.

Under these circumstances, in many European countries, manufacturers have cut back on their

innovation spend and focused their portfolios on A-brands (and removed B and C brands), in order to

offer consumers prices and promotions to attract them while the crisis hit their purchasing power.

They have done this while maintaining their overall profitability, and dividends for shareholders.

Many multinational producers have diverted investment from mature (yet still highly profitable)

markets in the US and Europe to pursue greater growth potential in emerging economies, where the

5 European Commission, (2014). The economic impact of modern retail on choice and innovation in the EU food sector.

3

combination of stronger consumer loyalty and a fast-growing middle class offer greater prospects for

growth.

At the same time, competitive pressure and low consumer switching costs have forced retailers to

constantly innovate, in order to differentiate themselves and adapt to consumer demand. They have

needed to do so in order to retain consumer loyalty and avoid what would have been the alternative,

a painful “price-race to the bottom” on a limited range of the same branded goods, that would only

intensify price wars and consumer price sensitivity.

Consumers have a considerable choice of retailers and exercise that choice. In doing so, they trigger

market competition. Shops have no option but regularly to refresh their range of products to attract

customers. The emergence of new forms of trade, including e-commerce and the possibility to

compare prices and products across different stores along with the development of discount

retailers, have increased competitive pressure and market transparency.

Retailers have developed authoritative and highly successful retailer brands in collaboration with

suppliers. Markets with higher retail efficiency often have a broader range of retailer brand. Retailers

use their direct access to consumer information to experiment with new products. They develop

innovative products with their suppliers through e.g. joint product development, exchange of sales

data, customer feedback, testing, advertising, etc. This is often a trial and error process. Retailer

brands innovate and are more inclusive; consumers value this and switch between products.

Retailer brands increasingly take the lead in building and extending trust by launching entirely new

categories. They seek to meet consumer expectations on convenience and social reponsibility. They

have created wider choice through Good, Better and Best ranges. Retailers’ closeness to customers

has helped them develop categories neglected by major brand manufacturers such as ready meals,

innovative recipes, regional products (often in partnership with local initiatives), reformulation (eg.

free from palm oil when the reference product has palm oil; reduced salt/sugar, etc ), ‘free-from’

products (eg. gluten-, lactose- free), products of animals fed with no GMOs or no antibiotics,

specialty jams with original tastes, yogurts sold individually (hence reducing waste).

By exchanging information, testing and renewing their products, retailers have sought to offer quality

retailer brands to complement the national brands, an approach that has been the subject of close

study and found to be more efficient in creating store differentiation through variety and quality.6

Even where an innovation is not radical, it still generates value and with retailers’ ability to launch

products more cheaply, it can be sold successfully. Retailers also use their own brands to facilitate

consumer choice through the use of “umbrella concepts” that span different categories.

The quality of retailer brands often goes well beyond legal requirements. Many retailer brands have

consequently won quality awards. Examples of standards applied beyond regulatory requirements

include GMO free, certified palm oil, sugar/salt reduction, Fair Trade Cocoa programmes, or FSC

certified packaging. Retailers apply quality standards through third party certification schemes such

as IFS, BRC, ISO22000, IMQ, ICS BIO, Ecolabel, non GMO, MSC, ACS etc. Through their brands,

6 Corstjens, M. & Lal, R. (1996). Building Store Loyalty through Store Brands. Graduate School of Business, Stanford University.

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retailers play an instrumental role in supporting and promoting the growth of sustainable agriculture

and fishery (eg. development of MSC standards for sustainable fisheries). Many retail companies

require their suppliers to subscribe to social compliance codes. Retailers also support government-

driven initiatives in changing product reformulation, nutrition labelling and promotion of healthy

diet.

Overall, an important economic impact of retailer brands is the support they offer to networks of

SME manufacturers and local producers. This contributes to competitiveness and significant

employment in the agri-food chain. SMEs are a key partner, providing flexibility and innovation.

Through collaborating in retailer brands, retailers offer SMEs invaluable access to their (local,

national and international) network of stores and knowledge of the market. SMEs benefit from

retailer brands as they do not have to bear the costs associated with branding (launching, marketing,

promotional support, etc.) of manufacturer brands and can expand on the back of the retailers’

marketing of its own name and image.

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KEY MESSAGES

Consumers regularly purchase retailer brands. They see them as offering good value for money and a good alternative to manufacturer brands.

Consumers have increased their purchases of retailer brands through the crisis and recession.

Consumers have a choice of retailers. They visit different stores and their loyalty is not guaranteed. The effectiveness of loyalty schemes in generating consumer loyalty is limited.

Consumer shopping behaviour depends on national circumstances and preferences.

This chapter sheds light on consumers’ purchasing behaviour and how they perceive the value of

retailer brands. Although shopping behaviour depends on national circumstances, generally,

European consumers purchase retailer brands regularly. They find them good value for money and a

good alternative to manufacturer brands. This has been particularly the case following the economic

crisis. With consumers’ loyalty being hard to retain and loyalty schemes being of limited effect,

retailer brands emerge as a crucial tool in ensuring that customers find what they are looking for and

return to a particular store. With such a high level of consumer acceptance, it is difficult to argue that

public authorities should side with brand manufacturers against the views of consumers and seek to

limit retailers in launching their own branded products.

Consumers value retailer brands highly

Today, consumers value retailer brands and buy them regularly and in significant quantities. In

Europe, 70% of respondents to a 2014 Nielsen survey7 believed them to be a good alternative to

name brands and 69% believed they offered good value for money. 71% said retailer brand quality

had improved over time. The following graph shows levels of consumers’ positive perception across

Europe both in terms of value and quality.

7 Nielsen, (2014). The State of Private Label Around the World.

CHAPTER 1 – A FORCE FOR CONSUMER SATISFACTION

6

Source: Nielsen Global Survey of Private Label, Q1 2014

Consumers trust retailer brand ranges as much as national manufacturer brands: as shown in the

graph below, two-thirds of shoppers in a UK survey trust retailer brand products as much as national

brands. Nearly half (47%) said that retailer brand products had the same status in their minds as well-

known manufacturer brands. Most shoppers (62%) believed that the values and benefits of well-

known brands ‘meant less’ today than a few years ago, and would mean even less in the future

(44%). This opinion was highest among shoppers aged 25-44.

Source: IGD ShopperVista; base: all main British grocery shoppers, March 2015

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An extensive survey by the Private Label Manufacturers Association across 14 European countries8

sheds further light on how consumers perceive retailer brands, what the key drivers for their

purchases are and how they make their purchasing decisions. Key findings are:

Overall, 90% of consumers purchase retailer brands regularly: 46% of survey respondents

purchased them frequently and 43% occasionally. Only 10% reported that they did this

rarely or never. A Nielsen survey in France showed that the vast majority of households

purchased retailer brands, with 84% of consumer baskets containing at least one retailer

branded product.

Consumers purchase significant quantities of retailer brands: 32% of the PLMA survey

respondents said that half or more of their basket consisted of retailer branded products.

Value for money remains the key criterion for consumers (73% of the PLMA survey

respondents) buying retailer brands. Other reasons included quality (37%), special offers or

vouchers (34%), taste (30%) and trust and confidence in the retailer (24%).

Retailer brands’ quality: Over 60% of the PLMA survey respondents strongly agreed or

agreed that the retailer branded products they bought were as good, if not better, than

manufacturer brands.

Consumers like the retailer brands of the main supermarkets where they do their

shopping: over 40% of the PLMA survey “strongly agreed or agreed, that the retailer they

used for their main grocery shopping has better own brand products than other chains”.

Consumers intend to continue to buy retailer brands in the future: many consumers

discovered retailer brands during the financial crisis. 81% intended to continue purchasing

retailer brands after the economy improved whilst only 20% said they would stop. 57% of

survey respondents stated that this was because of “my overall satisfaction with own

brand products in the past”; 49.4% because of the “better quality of own-brand

products”;42.6% cited “more variety of own brands”. 27.6% said that their choice was

based on “new and innovative own-brand products”;13.2% “more own-brand organic

products”;10.2% “more health and wellness products”.

Consumer purchasing patterns differ across countries and product categories, reflecting the level of

development of retail brands in markets, but also the fact that retail markets remain driven by

national consumer preferences. As a result, any assumption that broad cross-country trends exist

should be scrutinised particularly carefully in the light of local circumstances.

Within a country, purchasing patterns for retailer brands are highly heterogeneous across product

categories, and are influenced by variables such as social acceptance, trust, quality or health

concerns.9 Studies show that with certain products, shoppers who perceive a high purchasing risk

tend to prefer manufacturer brands. In sectors such as baby food, make-up, shaving products, beer

or cola, big manufacturer brands easily lead the market. This is a result of consumers’ long term

association of the brand with quality or social acceptance which retailer brands have not managed to

match. On the other hand, in categories where there is a lower perceived level of risk (such as frozen

8 Today’s European shoppers, results of PLMA’s consumer survey, based on exclusive research for PLMA prepared by Survey lab, 2013. 9 Koen de Jong, (2015). Managing Private Labels.

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vegetables, fruit juice, rubbish bags), consumers are attracted to retailer brands, particularly if they

consider the retailer as having a good reputation or quality image.10

The graph below shows the difference in performance between product categories in the main

European markets.

Source: Nielsen (2014 )’The State of Private Labels Around the World.’

10 J.N. Kapferer, (2008). The New Strategic Brand Management.

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+1.4

VALUE CHANGE

+0.7

WEIGHED AVERAGE

CHANGE IN VOLUME

-1.3 DEFLATION

+0.8 ANNUAL CHANGE IN

VALUE

The economic crisis and the rise of discounters have influenced

shopping habits

A consumer survey11 in 14 EU countries, reports that the state of the economy has affected the daily

lives of 64% of shoppers and that in 2013, 9 in 10 consumers had a status quo or negative perception

of the future of the economy.12 Unsurprisingly, this has affected their purchasing patterns:

During the recession, consumers have spent differently on food. They have eaten out less

and spent more on food to cook at home, including luxury items. 86.1% of survey

respondents said that they made a meal with fresh or raw ingredients very often (47.6%) or

somewhat often (38.5%).

The chart below shows that, similarly, and despite falling prices in France, consumers have

tended to purchase fewer, but higher quality, products13.

Consumers have also changed their shopping habits in other ways: 53.6% reduced their

impulse buying and 50.4% purchased more retailer brands. Consumers tried retailer

brands and found them good; 66.8% of respondents reported trying a retailer brand for the

first time in product categories where they originally bought manufacturer brands.

A significant proportion of consumers (21.7% of respondents) claimed that they changed

the type of retailer where they did their regular shopping.

Though there are wide variations between countries14, discounters have become significant players

in the retail landscape of most European countries. This reflects the dynamic nature of retail, and

represents a significant shift in format innovation. In 2013, they achieved a 20% market share across

Europe15 (from less than 10% in 1991). The business model of discounters was developed around

limited space and assortment (1,000-2,000 Stock Keeping Units on average16) in which retailer brands

play a key role. In all countries, confronted with additional competitive pressure, other retailers have

reviewed their retailer brand assortment to respond to the rapid growth of discounters, resulting in

the growing presence of a three-tier retail brand segmentation (good, better, best).

11 Today’s European shoppers, results of PLMA’s consumer survey, based on exclusive research for PLMA prepared by Survey lab, 2013. 12 When asked “Looking back at the past 6 months, would you say that these economic conditions for you and your family have improved?” 48.7% of respondents stated stayed the same, 42.7% stated got worse. “Today’s European shoppers”, results of PLMA’s consumer survey, based on exclusive research for PLMA prepared by Survey lab, 2013. 13 Kantar world panel – consumer morning’s 9th edition, 3rd February 2015. 14 from 11% in FR, IT and SP to over 40% in BE and DE; Grocery universe 2015 results of the 53rd inventory of retail grocery in Belgium, Nielsen. 15 Grocery universe 2015 results of the 53rd inventory of retail grocery in Belgium, Nielsen. 16 In the DG Competition study of modern retail, a hypermarket is defined as being over 2,500 sqm and offering up to 20,000 Stock Keeping Units (SKUs); supermarkets as being 400-2,900 sqm and offering 5,000-10,000 SKUs and discounters offer a more limited assortment of 1,000 to 2,000 SKUs.

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Today, consumer perceptions of discounter brands have changed as shoppers have become more

familiar with them. The majority of shoppers agree that the quality of discounter own brands is

similar to standard supermarket retailer brands or better than the equivalent ranges in

supermarkets17. Consumer panels and blind tests of discounter products in several markets have

shown discounter brands scoring higher than some manufacturer branded or more expensive retailer

brands. More recently, discounters have also launched premium ranges as part of their assortment

or special seasonal offerings (Christmas, Easter etc).

Source: IGD ShopperVista Channel Focus food discount April-June 2015 (Base: food discount shoppers)

Store and channel switching

“With more choices than ever before, consumers have a tremendous range of options and their

loyalty has become harder to retain”18. Every day, consumers vote with their feet for the shop

(whether offline or online) that offers them the best value and best customer experience.

Technology is changing the loyalty game too: with a huge supply of easily accessible information,

consumers consult reviews, check social media and compare prices. Consumers expect more for less,

and if their expectations are not met, they switch quickly to another retailer.

When doing their shopping, consumers compare not just one product but a basket of products in a

range of stores. They will visit different stores, depending on their reason for shopping: shopping to

stock-up, weekly shopping, for a special occasion, on-the-go shopping, top-up, etc. According to

17 IGD Retail Analysis. 18 Saatchi & Saatchi, (2015). Brand Loyalty Reloaded.

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consumer survey findings19, 84% of consumers do their shopping in more than one store; 48% in two

stores; 35% in three or more stores.

Example - Belgium

A market study20 conducted in Belgium shows that on average, Belgian households visited 5.3

shops (chains) per quarter in 2012. The chart below shows the evolution of the number of store

chains consumers visit on a quarterly basis.

Source: GfK

A GfK study shows that the Belgian consumer made an average of 169 visits to grocery stores in

2013. This means an average of 3.25 times a week. The chart below shows a downward trend

since 2008, with a stronger decrease in 2013. In 2012 people visited a store 3.38 times a week.

19 Today’s European shoppers, results of PLMA’s consumer survey, based on exclusive research for PLMA prepared by Survey lab, 2013. 20 The Marketing Map, based on GfK data.

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The graph below shows that the frequency of shoppers’ visits also depends on the format of shop

involved.

Number of visits per distribution channel per year

Source: GfK Panel Services

Example - Netherlands

A recent study of consumer trends21 shows that on average, Dutch consumers have a choice of

four supermarket chains in their neighbourhood and the average shopper visits 2.6 supermarket

chains every month; 79% visit several supermarkets and 47% visit three or more.

When comparing supermarkets, consumers pay attention to price (42%), the appearance of the

store (40%) and size of assortment (40%). On average shoppers visit two thirds of the

supermarkets in their area, meaning that proximity remains an important criterion for choice of

where to shop. Shoppers do 72% of their overall grocery spending in their first choice

supermarket, 19% with the secondary choice and 9% with their third choice.

21 EFMI business school and CBL, (2014). ConsumentenTrends 2014.

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Source: ConsumentenTrends (2014) EFMI Business School and CBL

Example - Germany

The German market is characterised by a high number of products on offer. Over the past decade,

consumers have changed their shopping behaviour, making fewer trips and buying a smaller

selection of products, making it more challenging for retailers to win the daily “fight for the

customer”. The following graph shows the reduction in the frequency, the value and the number

of products purchased.

Source: GfK

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Key determinants of consumer choice

Consumer choices in terms of shopping decisions are still highly dependent on price, as 70% of

European respondents in a 2015 Nielsen survey confirmed. But other factors also play an important

role, such as the reason for going shopping (ie. stock up or on-the-go shopping), perceived quality

(49% of respondents to a Nielsen survey considered this an important factor) and diversity of

assortment (important for 43% of Nielsen respondents), convenience such as proximity, accessibility,

easy parking, time spent at checkout, opening hours etc. The ranking of these criteria depends on

national circumstances and consumer preferences.

Source: Nielsen global survey of e-commerce Q1-2014, in “The future of grocery” Nielsen, April 2015

Example - Belgium The graph below highlights various criteria for consumers in determining their preferences in

where to shop. In Belgium, proximity appears to be the determining factor (over 30% of

respondents state this as a key criterion), followed by price and quality22

22 Le niveau des prix dans les supermarchés, SPF Economie, based on GfK data.

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Example – Netherlands The choice of shopping destination is driven by price (86% of respondents state this is an

important criterion), followed by store appearance and product range.

Source: ConsumentenTrends 2014

Consumer shopping behaviour: retaining consumer loyalty

To keep customers coming back to their stores, retailers need to be aware of the elements described

previously as driving a decision to switch from one store to another. Nielsen recognises that the

choice is immense: “consumers have more shopping choices than ever, and as channels proliferate,

protecting and building store loyalty is no easy task.”23

The importance of branding and developing brand equity as a means of retaining consumer loyalty is

widely recognized: “If a brand does the right thing, produces great products and services and behaves

well, people will vote for that brand with their purchases and loyalty. However, if a company does

what you do not like, you will vote them out.“24 According to a study by the Global advertising

company Saatchi & Saatchi, nearly half of people in the U.S aged between 18 and 44 agreed that

“brand loyalty derives from the experiences that brands create from them, a role which in our case is

played by the retailers.”25

In the case of retailer brands, satisfaction created by one retailer brand increases the credibility of all

retailer brands, making already volatile store loyalty even less predictable.26 As a result, retailers

have made huge efforts to create a strong, positive image of their store brand in terms of quality,

cleanliness, character, etc. The image of the store brand is, however, not limited to these aspects,

but also includes the associations that consumers have with the retailer itself, its engagement with

customers, corporate values, innovative activities and the shopping experience it offers. When

23 Nielsen, (2015). The future of grocery 24 European Brands Association (AIM) web site. 25 Saatchi & Saatchi, (2015). Brand Loyalty Reloaded. 26 Saatchi & Saatchi, (2015). Brand Loyalty Reloaded.

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carried on retailer brand packaging, the store name itself becomes a self-reinforcing, tangible brand,

which guides the shopper in his or her purchasing decisions, if carefully and consistently built.27

Loyalty schemes can be perceived as a mechanism that could lock consumers into one store/brand

through the use of loyalty bonuses. A Nielsen survey of cardholders in 2013 in France, however,

shows that loyalty card holders still conduct half of their purchases in competing supermarket

chains28. This means that in practice, the effectiveness of such loyalty schemes remains limited and

consumers do not feel “locked” into a scheme.

Consumers switching products

Research shows that, in fact, there is widespread evidence that shoppers for food are “multi-brand

loyal” – that is, they have a portfolio of substitutable products in their heads. Ehrenberg argues that

“for fairly frequently bought goods, most customers are polygamous, with split loyalties to several

steady partners (…), one consumed more often than the other.”29 He further argues that there is not

one single factor determining repeat buying, but different factors such as position on the market,

number and the popularity of other brands or pack sizes or varieties available, nature of the product,

weight and nature of promotions30.

In a majority of cases, shoppers make decisions on what to buy before they go to the store, but there

is also plenty of room for last minute in-store decisions. The consumer survey conducted for PLMA31

shows that nearly 90% of consumers make a list prior to going shopping. However, 72% of

respondents look for products beyond those they intended to buy and more than half of consumers

say that they always/frequently browse the store and look for unadvertised deals and items on

promotion.

When consumers get to the shelf and look for a brand or product, 28% select the particular brand

straight away without hesitation, but 40.2% look to see what other brands of that product are

available, 13% consider the supermarket’s retailer brand even if it is not their first choice. The same

survey shows that if they cannot find the brand they are looking for, shoppers switch and

experiment: if a particular brand is not available, 48% of respondents buy a different brand, 32% buy

the retailer brand, and 14% go to another store to look for the particular brand or ask staff for

assistance (6%).

A study by the Düsseldorf Institute of Competition Economics32 shows, on the basis of an analysis of

the German market for nappies, that consumers switch their purchasing if presented with a cheaper

alternative of similar quality, and that both store and brand loyalty are difficult to maintain. In

particular they show that the closest and most frequently purchased substitutes to the leading brand

for nappies are discounters’ retailer brands.

27 Koen A.M. de Jong, (2015). Managing private labels. 28 Nielsen, (2013). Cartes de fidélité des enseignes… et infidélité des shoppers. 29 A. Ehrenberg, (2004). What brand loyalty can tell us. London South Bank University 30 Ehrenberg, A, (2000). Repeat Buying. Journal of Empirical Generalisations in Marketing Science, Vol 5, No.2. 31 Today’s European shoppers, results of PLMA’s consumer survey, based on exclusive research for PLMA prepared by Survey lab, 2013. 32 Haucap et al., (2013). Inter-Format Competition Among Retailers - The Role of Private Label Products in Market Delineation. Düsseldorf Institute for Competition Economics.

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Conclusion

In conclusion, consumers trust retailer brands and find them good value and a good alternative to

name brands. The theory put forward by the European Commission DG Competition that “consumers

may not easily switch between shops, giving retailers little incentives to maintain an innovative

product offer” simply does not hold true and contradicts the evidence provided elsewhere in the

Commission report:

If consumers really did not switch between shops, retailers would have little sense of

challenge when a competitor opened a new shop in a given catchment area. Yet the

Modern Retail Study itself shows the opposite, reporting a high level of responsiveness by

existing retailers to the entry of a new competitor in a given catchment area.

As demonstrated in this chapter, in practice, consumers have a considerable choice of

retailers and habitually exercise that choice. In doing so, they trigger competition in the

market. Shops have no option but to regularly refresh their range of products to keep

attracting customers. The emergence of new forms of trade, including e-commerce and the

possibility to compare prices and products across borders has already had a competitive

impact, which will only grow. Equally, the development of discount retailers has increased

these competitive pressures and market transparency33.

Retailers increasingly use their retail brands as a marketing tool and as a vehicle for

conveying their overall brand image and its constituent values to the consumer. To do so,

they use a strong visual identity linked to the store brand itself.

Loyalty schemes may act to give retailers vital information about consumer preferences,

but their effectiveness is limited in creating loyalty to a particular store.

33 For example, according to Kantar figures Aldi and Lidl now account for 10% of the UK market, with over half of all households visiting one of them each month. Three years ago, their combined market share was 5%. “in the last 12 weeks, the 2 retailers have attracted another additional million shoppers compared with last year while average spend per trip has increased by four percent to £18.85, which is 78 p ahead of the total retail average” cityam.com (18/11/2015).

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KEY MESSAGES

The business models of retailer brands and branded good are different and subject to ongoing changes, dictated by consumer tastes and expectations.

Leading manufacturer brands (“A-brands”) continue to dominate significant parts of the market; multinational manufacturers have diverted investment away from mature markets to seek further growth opportunities in emerging economies.

Retailer brands are a way to improve the marketing mix, to provide differentiation and encourage customer loyalty. They have become a brand in their own right.

Consumers still want to see their favourite brands on shelves, and retailer brands complement, rather than replace A-brands.

This chapter highlights the development of retailer brands as autonomous brands, and shows that

both strong name brands and retailer brands play an equally important and complementary role in

retailers’ assortments. Above all, they contribute to differentiation and choice, based not solely on

price, as would be the case if only branded products were available.

Introduction

According to the Private Label Manufacturers Association, in 2014, retail brands represented some

30% of the market in 15 European countries (see table below). Market shares have continued to

grow in most European countries, although national situations vary.

Countries Retail brand market share - volume (%)

2014

Variation 2013-2014

Retail brand market share - Value (%) 2014

Variation 2013-2014

Austria 39.8 0.65% 28.5 -

Belgium 41.8 1.00% 31.3 5.38%

Czech Republic 31.8 1.04% 22.4 1.75%

Denmark 31.7 2.44% 25.4 1.52%

Finland 29.7 -10.32% 23.6 7.72%

France 34.6 -1.33% 27.4 -1.26%

Germany 44.2 1.56% 34.5 1.53%

Greece 21.8 -0.61% 16.4 1.78%

Hungary 33.9 3.65% 25.2 3.31%

Italy 20.5 1.06% 17.6 1.09%

Norway 27.9 1.45% 22.7 9.11%

Poland 34.5 4.10% 24.3 3.42%

Portugal 43.6 -2.78% 32.9 0.25%

Slovakia 33.1 0.96% 22.7 2.47%

CHAPTER 2 - CONTRIBUTION TO A COMPETITIVE MARKET

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Spain 52.1 1.69% 42.0 2.67%

Sweden 30.7 -1.11% 25.2 0.80%

Switzerland 52.7 -0.48% 44.5 -1.61%

Netherlands 28.7 0.83% 27.2 1.62%

Turkey 22.4 5.73% 15.0 6.66%

UK 45.4 0.38% 41.4 1.30% Source: PLMA, based on Nielsen data

The development of retailer brands is triggered by supply and demand factors34. Supply side factors

are based on strategies by retailers to grow larger and faster than their competitors, be different

from their competitors, attract and keep customers, and gain efficiencies in systems and procedures.

Bell describes the way this has happened for food retailing as an “inexorable logic” (Bell, 2000).35

There are, he suggests, four stages of development:

the growth of large retail chains, as retailers sought to increase their buying power.

the advent of large retail formats, facilitated by increasingly relaxed planning regimes,

initially in Belgium followed by France, Portugal, and then the UK.

the development of dedicated distribution systems by the large integrated retailers: the

development and application of scanning systems provided the necessary information for the

supply chain to be reversed from ‘producer push’ to ‘consumer pull’.

the emergence of retail chains as national brands in their own right: the effect is to move

away from head to head price competition to a differentiation strategy based on range,

service, store format and location.

In terms of the demand side, changes in consumption preferences were triggered by economic and

societal factors such as increased proportion of working women, ageing population, smaller

households, increased urbanization, importance of local products, rich becoming richer, millennials

taking over, etc.36 In Europe, as compared to the US (where, according to Nielsen data retail brands

have 17.5% market share)37, retailers have sought a different route to offering value to their

shoppers. In the long run, this has contributed to increasing customers’ trust in retailer brands.

Furthermore, concentration in the European retail sector has made retailers look for new means of

differentiation, leading them to invest in retailer brands as a tool to achieve this. In turn, increased

scale has made investments in more sophisticated retailer brands possible.

With the growth of retailer brands across Europe, national brand producers have sought to maintain

their volumes and revenues through intense promotional activity, sometimes at the expense of R&D

spending. In parallel, retailers have sought, through their retailer brands, new ways of interacting

with consumers, seeking to respond to new customers’ needs, supporting innovation and change. In

other words, retailer brands have become new brands in their own rights. Retailers and suppliers

34 S. Burt, (2000). The strategic role of retail brands in British Grocery Retailing. European Journal of marketing, volume 34. 35 Bell, R. (2000) Food Retailing in Southern Europe. European Retail Digest, Issue 25, p. 29 36 R. Benson-Armer, S. Noble, A. Thiel, McKinsey & Company, (Dec 2015). The consumer sector in 2030: trends and questions to consider. 37 Nielsen, (2014). The state of Private Label Around the World.

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work together to develop retailer brands, which serve to stimulate consumer choice and should not

necessarily be seen as a threat to manufacturers or producers.38

The importance of brands

There are many different definitions of brands but in general terms, a brand can be seen as a

collection of associations that consumers have when they think of a product or a service. Brands

identify products and carry a promise to consumers. Intangible features provided by the brand go

well beyond any functional characteristics of a product and influence its attractiveness. A brand is

developed by combining consumer needs with product and packaging innovation. The strength of a

brand is determined by its reputation among consumers and in many ways the lifestyle choices and

aspirations which it seeks to represent in consumers’ minds. Consumers are willing to pay a

substantial premium for a strong brand and also incur some inconvenience to obtain such a brand.39

Key characteristics of brands include:

Logo: a symbol used to identify a good and differentiate it from competitors;

Company identity: a strong corporate brand gives a competitive advantage to organisations.

Legal instrument: a brand indicates the statement of ownership;

Image in consumer’s mind: a brand builds up consumers’ ideas and feelings towards it. It

constitutes an assurance of quality and consistency for consumers when they do not have

the time or ability to investigate available alternatives;

Value system: a brand's strength is underpinned by its heritage, customers’ personal

experience with the brand and its reflection of individuals’ personal and cultural values.

Retailer brands share, broadly speaking, all the features of a brand: they are aimed at target

customers, selecting competitors, defining offer and price, setting up packaging and communications

strategies, etc. They also have to respond to two constraints simultaneously: they need to find their

place in the retailer’s marketing mix (in which they are a key component of identity, loyalty

generation and differentiation) and to use pricing as a driving force behind the marketing mix.40 This

makes the retailer brand subject to three complex conditions as it must:

express the values of the store;

position itself in relation to big brands;

deliver a ‘plus’ compared with low-cost products. It therefore resembles a quality label

attached to a price.

In pursuing their strategic brand positioning, retailers need to take into account several variables

which go beyond simply appealing to the consumer. They need to ensure relevance, functionality

and to be able to create synergies with the other goods in the product offer, so that not just a single

product, but the overall shopping experience is enriching and meets customers’ needs and

expectations.

38 European Commission, Final Report from the Expert Group on Retail Innovation, p. 22. 39 Rabobank, (2011). Private labels vs. brands, an inseparable combination. 40 J. N. Kapferer, (2008). The New Strategic Brand Management.

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Range construction; the importance of achieving the right mix

Retailer brands are a means to provide differentiation and to encourage store loyalty. If retailers

were to sell only name brands, they could only compete on price. By introducing retailer brands,

they complement their assortment to more fully reflect consumer needs and respond to competitive

pressure. As consumer loyalty is never guaranteed (see chapter one), retailer brands are also a way

to promote loyalty by creating greater identification with the store’s brand and values. Retailer

brands associated with good value for money or quality and innovation perceptions will support the

competitive image of the retailer and provide a point of differentiation.41 As a result, “private-label

owners do not compromise on quality because they cannot really afford to put a store name or

their own brand name on a product that may be considered inferior.”42

A successful range offers real differentiated choice and seeks to avoid duplication; this requires skills

to identify products that will win, but also developing viable niche markets that make the retailer

more attractive to visit. Manufacturer brands and retailer brand products all play important roles in

offering real choice: manufacturer brands tend to be “mainstream”, that is, where volume potential

is greatest, whilst retailers also develop products across a broader spectrum of quality, price points

and niches, ensuring a balanced overall range offering. Retailers will also adapt ranges store by store

to better suit a store’s local consumer preferences and to offer locally sourced products.

Source: European Retail Round Table (2014). Retail Information Toolkit

Retailer brands need strong A-brands because consumers value them. Consumers like to compare

products and expect their favourite brands in the shops they visit (must-stock items). Strong A-

brands drive store footfall and provide a comparison point in terms of quality and price. Retailers will

seek to benchmark their mainstream brands on these features.43 They co-exist positively with well-

known brands because they are aware that whether real or perceived, the wrong range choice

41 Koen A.M. de Jong, (2015). Managing private labels. 42 Planet Retail. 43 Rabobank International, (2011). Private labels vs. brands, an inseparable combination.

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reduces the desirability of the store to the consumer and footfall, producing unsatisfactory results for

both retailer and brand manufacturer.44

A-brands continue to dominate important parts of the market

Over the past years, strong manufacturer brands have consolidated through mergers or acquisitions

between competing brand owners. Overall, big international brands achieve a significantly higher

return on investment and operating margins compared to retailers. The shape of markets may vary

across countries, but strong brands remain dominant and unchallenged across a number of product

categories.

Example – UK and France

In the UK, despite the high penetration of retailer brands, Nielsen reports that, on average, 40%

of sales come from the branded category leader, with 41% from retailer brands and 19% from

other brands. A recent report published in France shows that, on average, the two market

leaders in each FMCG product category represent 62% of sales of branded products. Many other

brands have a market share over 50% on certain categories.

Water Soft Drinks Beers

Nestlé 32.70% Coca Cola 51.40% Heineken 37.10%

Danone 26.20% Suntory Or-Schw 20.30% Carlsberg 30.10%

Alma 22.60% Retailer Brand 9.80% Anheuse 14.60%

Retailer Brands 13% Pepsico 6.90% Retailer Brands 4.90%

Tea Herbal tea Chocolate powder

Unilever Lipton 41.20% Unilever 33.10% Nestlé 41.80%

ABF Twinings 25.60% ABF 16.40% Mondelez 25.90%

Retailer Brands 8.70% Retailer Brands 15.60% Retailer Brands 13%

Roasted coffee Coffee pads Soluble coffee

Mondelez 45.90% Douwe Egberts 35.90% Nestlé 59.10%

Douwe Egberts 12.90% Mondelez 29.70% Mondelez 18.10%

Retailer Brands 19.70% Nestlé 15.50% Retailer Brands 18.10%

Retailer Brands 11.60% Source: Fédération des entreprises du Commerce et de la Distribution, IRI, 2014

Category leaders are growing stronger around the world. Smaller brands increasingly find it hard to

differentiate vs. the big brands and are generally in decline or being bought out by the big brands as

part of their strategies to dominate categories. Replacing declining brands with retailer brands

usually comes at the expense of B and C brands (brands with a less defined profile).45

44 J.N. Kapferer, (2008). The New Strategic Brand Management. 45 Many producers of these brands have switched to producing retailer brands (see chapter 4).

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Example - Netherlands

Data from the Netherlands below shows that over 11 years, the market share of A-brands has

continuously increased despite retailer brand market share increasing. In many categories, the

retailer brand presents the only real alternative to major brands.

*f=forecast .

Source: Rabobank International (2011) “Private labels vs. brands, an inseparable combination”

Example - France

The graph below shows that in France, the share of brands/retailer brands/SME branded

products overall remained stable over the period 2009-2014. Over the past two years, the

proportion of retailer brands has slightly decreased (from 29.80% in 2012 to 28.70% in 2014) to

the benefit of SME brands, and to a lesser extent, of larger brands.

Source: Nielsen Strategic Planner

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Retailer brands may have limited the growth of some leading brands in certain categories, but

generally, big brands’ turnover and market share continue to grow. The graph below shows that

growth in turnover of brands in the Dutch market outperforms the average turnover growth rate of

retailer brands.

Source: EFMI Business School, January 2014

In spite of their stronger market performance and their claims to the contrary, as the table below

demonstrates, A-brands’ CAPEX relative to their turnover is not substantially higher than those of

retailers. This shows that strong margins are necessary to meet shareholders’ expectations and

justify the amounts spent on marketing and advertising to maintain brand equity. It also shows that

capital investment among A-brands has not been proportionally higher than in retail.

Net results (m €)

Turnover (m €)

Net margins

ROE CAPEX/Turn-over

Procter & Gamble 11,643 83,062 14% 16.4% 4.7%

Kraft 1,043 18,205 5.7% 40.5% 2.7%

Coca cola 7,098 46,012 15.4% 26.7% 5.6%

General Mills 1,824 17,910 10.2% 25.3% 4.1%

Unilever 5,171 48,436 10.7% 36.3% 3.9%

Pepsico 6,513 66,683 9.8% 40.3% 4.5%

Nestlé 14,456 91,612 15.8% 15.1% 4.6%

Pernod Ricard 1,027 7,945 12.9% 11.1% 3.7%

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Danone 1,119 21,144 5.3% 14.6% 4.7%

Mondelez 2,184 34,244 6.4% 9.6% 5.1%

L’oréal 4,910 22,532 21.8% 16.1% 4.3%

Carrefour 1,249 74,706 1.7% 12.5% 3%

Casino 251 48,493 0.5% 6.6% 3.2%

Auchan 574 53,500 1.1%

Manufacturers average 12.4% 23.4% 4.6%

Retailers average 1.2% 10.2% 3.1% Source: FCD (French Retail Federation), 2014, based on groups’ annual reports

A-brands’ response to the crisis and retailer brands growth

In response to the crisis and increased competition from retailer brands, brand manufacturers have

stepped up their promotional efforts in order to narrow the price gap with retailer brands, and

consequently shoppers in many cases continue to choose a name brand. The crisis has triggered

many brand manufacturers to concentrate more on price promotions to maintain market share, or

re-packaging (smaller sizes46), rather than to invest in product innovations. These promotional

strategies can be effective for manufacturers. A Nielsen study reveals that, in mature markets such as

the UK, increased branded goods promotions are directly associated with a decline in retailer brand

value share. Despite an average cost 30% below that of a branded good, narrower price differences

reduce the price attractiveness of retailer brands. The need for non-price differentiation and

increased activity in niche and premium sectors47 becomes greater if retail brands can only offer

price as their main benefit. Other countries, such as Italy and France, have experienced the same

trends due to increased levels of promotional activity benefiting name brands. In Germany on the

other hand, continuous innovation through increased offerings of premium products, combined with

greater promotional activity, have encouraged consumers to opt for retailer brands, which they trust

and support.

Multinational producers have in fact diverted investment and innovation from mature (yet still

highly profitable) markets in the US and Europe to pursue greater potential growth in emerging

economies, where the combination of stronger consumer loyalty and a fast growing middle class

generate greater growth prospects. Global brands have bought out local brand leaders and absorbed

them into their own global brand. Nielsen reports shoppers in Asia and the Middle East to be

strongly brand-loyal, as opposed to Europe, where retail brands are more widely accepted.

Resource-constrained shoppers tend to prefer to buy a trusted brand and are prepared to pay a

premium for this: 58% of Asia-Pacific respondents in a Nielsen survey believed that brands are worth

the extra price.48 Nearly 60% of respondents in India and Thailand and 55% percent of respondents in

the Middle East believed they risked wasting money when they tried new brands. Loyalty is not

46 Euromonitor research August 18th, (2014). Smaller packs for bigger sales? Part Two: The Importance of Pricing. See also Jonathan Weeks, Ipsos ideas blog. Big opportunities from small packets. 47 IRi, (2014).Private Label in Western Economies: Closing the price gap, losing share. 48 This is 10% above global average and 26% higher than in Europe. Nielsen, (2014). The state of Private Label Around the World.

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generated through prices alone, but through ongoing customer satisfaction. Some argue that

retailer brands have so far not managed to compete effectively with the leading brands in these

markets leaving the field clear for them to dominate categories.

Source: Nielsen Global Survey of Private Label, Q1 2014

Brand manufacturers have also sought to consolidate their brand portfolios around leading brands

and divested secondary and tertiary brands. For example, in Spain, after years of growth & affluence

(2001-2007), a number of large multinational companies that had taken over national brands went

through a process of divestment, moving their manufacturing capabilities and relocating production

in other countries, seeking higher standards of efficiency and productivity, with the net outcome of

8,600 redundancies and the closure of 41 factories (2001-2015).

Furthermore, retailers are not the only sales channel for branded goods. Manufacturers have other

channels and outside options including exports, catering, hospitality sectors, etc., which are often of

significant economic importance. Brand owners like Apple and Nestle are also establishing a direct

relationship with consumers via their own physical distribution channels or websites – e.g. Nespresso

stores which maintain exclusive distribution of their products, Lindt chocolate shops representing

some 10% of the group’s sales with 275 stores or via the establishment of internet platforms. So,

whilst lobbying that retailer brands stop them from innovating, manufacturers are actively recruiting

consumers direct through social media and e-commerce in an attempt to maintain a dominant

position on the market.

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Retailer brands – a less expensive way to respond to consumer demand

for differentiation and variety; they are less costly to bring to market

Retailer brands are less costly to bring to market due to a differential cost structure. Even if the

retail brand and manufacturer brand products are identical, marginal manufacturing costs may differ

through differences in production technology, scale, or the prices paid for labour or materials.

Retailer brands cost less to bring to market because manufacturer and retailers work more closely

together. They do not require the significant marketing costs of manufacturer brands. They offer

access to major markets to SMEs who cannot afford to match brand manufacturers’ budgets to

support a product launch. Instead, this cost is borne by the retailer.

The cost differential is illustrated below:

Today, the most dynamic segments of the market are those offering differentiation such as premium,

organic, local products, ‘free from’ and discount products.

Example - Italy The table below illustrates the dynamics of different retailer brand segments, identified

according to their positioning and average price compared to the average price of all products in

that category. Overall, the share of retailer brands between 2008 and 2012 has increased in

value by nearly 30%. Within this, the highest growth has been achieved within the premium

segment (+55% growth), which suggests that premium retailer brands are addressing a market

segment which manufacturer brands are unable to.

2008 2014 % Change in Sales Value

TOTAL GROCERY 100.0 100.0 +0,3%

Total Share of Retailer Brands 14.1 18.2 +29,5%

Leader Brand Share 27.7 25.2 -8,8%

Follower Brand Share 25.3 24.2 -4,1%

Share Other Brands 32.9 32.4 -1.2%

Total Retailer Brands 100.0 100.0 +29.5%

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Share Premium > 130* 15.7 18.9 +55.9%

Share Medium 86 – 129 36.4 36.3 +29.1%

Share Discount < 85 47.9 44.8 +21.1% *Premium products have an average price over 130, meaning that the price of the retailer brand is on average 30% higher

than the average price level in that specific product category. Source: Nielsen

Example - France

While “standard” continues to dominate the retailer brands market, their growth was negative

in 2015. By contrast, the fastest growing segments were organic (+4.7%) and premium (+2.3%)

products (Nielsen data, 2015).

Example – Germany

The value-added or premium segment within retailer brands is the area where higher growth has

been achieved (2007-2014: +43%):

Source: GfK & Serviceplan

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The digital age is a game changer

In digital, retail shelf space constraints disappear; the online range can be infinite, meaning online

retailers have less need for targeted range-editing. This means new opportunities for retailers49 and

manufacturers, benefiting consumers. New business models have emerged and disrupted the market

by creating a completely new approach to fulfilling the traditional retail role. The survival of

traditional retailers will depend on how well they manage to build and maintain customer contact

and loyalty; retailer brands are one important component of their strategy.50

Purchasing behaviour differs online and offline and some product categories are better suited for e-

commerce than others.51 When online shoppers choose a retailer for their groceries, they do so

because they also trust its brand as an offline retailer. Online stores are available to consumers

anytime anywhere, presenting a broad selection of products with easily accessible and comparable

product information. But they do not allow consumers to see or feel products, which is particularly

important when it comes to products such as groceries, especially fresh foods.52 This may lead

consumers to buy products they are familiar with, making brands even more relevant in the online

marketplace.53

Retaining consumer loyalty is more difficult online as consumers can easily compare information.

Research shows that, as consumers become used to shopping across channels, the less loyal they

tend to become.54 In these circumstances, the shopping experience (website ease of use and

functionality, delivery methods, product quality, pricing, product range, customer support, etc.) will

therefore matter even more.55 Ipsos Mori research found that “experience is the new brand and the

tool by which consumers make their decisions”. Online, there is even less room for mistakes in

terms of getting the customer experience right.56

Understanding how consumers are using the technology and emerging trends in online consumer

behaviour is key. The graphs below show a segmentation of purchases across age groups and

product categories and the frequency of purchases online.

49 For example, the share of retailer brands tends to be higher in “dark stores” than in brick and mortar reflecting the higher market share in the categories most purchased on-line. 50 Oliver Wyman, (2015). The endgame in European Grocery. 51 Nielsen, (2015). The future of grocery. 52 Cebollada J. & Arce-Urriza M. (2012) Private labels and national brands across online and offline channels. Management Decisions. 53 Cebollada J. & Arce-Urriza M. (2012) Private labels and national brands across online and offline channels. Management Decisions. 54 McKinsey, (2015). The future of online grocery retailing in Europe. 55 McKinsey, (2015). The future of online grocery retailing in Europe. 56 Ipsos Mori. Global Trends 2014 (http://www.ipsosglobaltrends.com/files/gts_2014_web.pdf).

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Social media networks play an increasingly critical role in informing and targeting consumers. This

holds a great potential for retailers, though commercial outcomes are still difficult to measure57. 34%

of respondents to a survey, aged 16-35, believed that a brand became more attractive when using

social media platforms.58 73% of consumers surveyed in another study claimed that they researched

and purchased online more than they did 5 years ago, with social media an important part in the

process.59 As a result, retailers have adapted and established online communities where they engage

directly with customers, generate brand value and loyalty. Recently, Belgian retailer Colruyt attracted

a large number of consumer reactions and questions on social media following the announcement by

the company that they would rename its popular “Cara Pils” as part of an operation to simplify their

retail brand range. As a result of these comments, the company maintained the trusted name known

by customers.

57 “Retail & wholesale: key sectors for the European economy”, Institute of retail management, SAID business school, University of Oxford. 58 http://www.goldmansachs.com/our-thinking/pages/millennials/ 59 Best Retail Brands 2014, Interbrand.

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The pictures below show Tesco UK and Mercadona Spain Facebook pages, displaying pictures of the

retailer brands in different contexts (Christmas desserts recipes and new product introduction).

Conclusion

This chapter has demonstrated that, in spite of recent retailer brand developments, the position of

A-brands on the market remains overall unchallenged. The allegation that increased retailer brand

penetration might reduce manufacturer brands’ incentives to innovate because they cannot achieve

the scale required to make innovation profitable therefore does not hold true:

Retailer brands today represent about 30% of the market in 15 European countries. The

fastest growing segments in retailer brands are those in which A-brands are either not or

considerably less present such as organic, ‘free from’, premium or discount ranges.

A-brands tend to continue to dominate certain product categories as consumers demand

them. Retailers therefore need to stock these A-brands. A-brands tend to target mass

consumer markets, with big production runs. They generally avoid the specialised segments,

which retail brands can more successfully address. They drive traffic into stores and provide a

comparison point in terms of quality and price. Retailers use their retailer brands alongside

A-brands in order to meet customers’ individual needs, address their preferences better and

sharpen their own profile vis à vis their direct competitors, namely other retailers.

Over the past years, in many European countries, manufacturers have cut back on innovation

spend (and removed B and C brands) in order to offer the price promotions that consumers

expect, whilst maintaining their overall profitability and dividends for shareholders.

Multinational producers have diverted investment from mature (yet still highly profitable)

markets in the US and Europe to pursue greater potential growth in emerging economies,

where the combination of stronger consumer loyalty and a fast growing middle class

generate greater growth prospects.

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CHAPTER 3 – A POSITIVE DRIVER OF INNOVATION

KEY MESSAGES

Retailers innovate to the same extent as manufacturers.

Retail innovations can be more quickly brought to market. Retailers use their knowledge of their customer base to develop innovation; they start small and scale up; retail innovation is more inclusive and effective.

The market is very dynamic; many product introductions fail as a result of a lack of consumer acceptance and insufficient promotional support.

Retailers have innovated to meet customer demand and, through their retailer brands, have created

whole new categories. Retailer brands help to differentiate one retailer from another. Through

innovation and responding to new trends, retailer brands have become recognised and trusted

entities in their own right.

Retailer brand development grows directly out of the needs and demands of the customer. Retailers

are close to the consumer, they have comprehensive information on the demand side of the market,

which enables them to participate effectively in the R&D effort by introducing product improvements

and new innovative products much more quickly than large food manufacturers.60

The assertion that retailer brand penetration can reduce the incentives for brands to innovate is

based on a flawed understanding of the real drivers of innovation and an equally flawed assumption

that retailer brands today are merely copies of existing brand products. The facts show that

successful innovation is only achieved by a product that meets a consumer need, and delivers a

promise beyond its strictly functional characteristics, whether it is a retailer or a manufacturer-

branded product.

The models of innovation in branded goods and retailer brands differ, however. As discussed in the

previous chapters, retailer brand innovation is often faster and less expensive to bring to the market.

It is based on retailers’ knowledge of their consumer base (consumer data, sales, loyalty schemes,

etc.), which enables them to anticipate new trends. Retailers also understand that bigger ranges

reduce X-efficiency, which is particularly relevant given the growth of discounters. Thus, the

incentive to introduce innovative products with a genuine Unique Selling Proposition, as opposed to

variant extensions of a product often introduced by manufacturer brands, is a lot stronger. Retailers

have an excellent record of capital investment in innovation. Centralised distribution and the cold

chain spawned innovation by retailers in fresh food. It is only fairly recently that manufacturer

brands have adopted this approach in order to dispel the image that their products are often highly

processed and less healthy.

60 Bergès-Sennou, Fabian; Bontems, Philippe; Réquillart, Vincent, (2004). Economics of private labels: A survey of literature. In: Organization 2 (1), pp. 1-23, p.20.

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This chapter looks at the drivers of innovation, the models of product introduction within brands and

retailer brands and the key characteristics of innovation through retailer brands.

Why innovation matters for retail companies

Competitive pressures and low consumer switching costs force retailers to constantly innovate and

adapt to changing consumer demand. As reported by Nielsen, “innovation is crucial in a world in

which grocery and mass retailers generally offer the same product range as their competitors, and

store density makes store switching easy”61. Innovation is seen as the only way to retain consumer

attention and bring consumers into stores. In a competitive market, retailers use their brands to

differentiate another. “The alternative would be a price-race to the bottom” –Nielsen states.

Suggestions that innovation can only occur on one side of the market is in essence misleading. In

order to fight and thrive in a highly competitive market, all actors need to innovate and differentiate

from others: it is a prerequisite of success. Innovative activities may be scientific or technological, but

also organisational, financial or commercial. In broader terms, innovation can be defined as “the

implementation of a new or significantly improved product (good or service), or process, a new

marketing method, new in business practices, workplace organisations or external relations.”62

Retail innovation indeed, ranges much more widely than product innovation. Being so close to

consumers, retailers receive daily feedback on how well they perform. This puts pressure on them to

constantly innovate. Retail innovation aims to improve the shopping experience and achieve

efficiency gains by increasing productivity and speeding up administrative processes. Traditional

61 Nielsen, (2014). Continuous innovation, the key to retail success. 62 Oslo Manual. OECD, (2005); the Oslo manual also suggests the following definition of product innovation “introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics”.

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measures of innovation fail to capture the real innovation effort and investment made.63 Retailers

are both product (through retailer brands) and process innovators (e.g. efficiency of the chain, store

experience). They also innovate in marketing, organisation and technology. They tend to engage

more in open collaborative innovation, and develop collaborative strategies across sectors within

the supply chain (eg. joint product development). As indicated previously, retailers also able to

innovate incrementally.

Driving innovation: branded goods and retailer brands rely on

different business models

The ways products are introduced differ between branded goods and retailer brands, and

approaches to sourcing, manufacturing and product sales are distinctive. The process of introducing

innovation by manufacturer brands is built on an expectation that the product can achieve a

sufficiently high weighted distribution to justify the significant advertising and marketing

investments required to support a product launch.64 In this context, branded product development is

supported by intense market research and panel tests; it takes time and has to deliver scale. In

simple terms, this means that brand manufacturers need to address mass, rather than niche

consumer markets, and are thus likely to be a lot more cautious in taking fairly small steps beyond

tried and tested product formats and formulas.

Retailers, on the other hand, are more flexible in adapting their assortment to local needs. If they

spot a new customer need, retailers are able to respond quickly and develop new products. Retailers

also measure performance differently: range performance matters to assess the performance of

retailer brands, while manufacturer brands are assessed according to individual product

performance. In this context, if all the R&D costs are taken into account, niche product innovation

may not be profitable enough for a brand manufacturer.

The process involved in introducing new retailer brand products is faster and relatively more

efficient. This typically involves an initial analysis of the market and the strategy to be adopted, based

on the retailers’ knowledge of the market. Suppliers are selected through a tendering process. Final

adaptation of the product follows discussions between the retailer and the supplier. The product is

released, delivered and its performance monitored. This approach to product development is more

flexible and less bureaucratic than in large manufacturing businesses. Retailer brands require less

effort in terms of promotion and advertising than national brands. They use their stores to pilot a

product, starting small and scaling up if the product is found to meet consumer demand.65

63 See the report from the expert group on retail sector innovation, European Commission, DG Research and Innovation, Innovation Union 2013 and “retail & wholesale: key sectors for the European economy”, Institute of retail management, SAID business school, University of Oxford. 64 “the economics of branding, with a high level of fixed costs in research, production and communication, are such that the availability of sufficient retail distribution stimulates innovative efforts, whereas limited distribution has the opposite effect because the investment in innovation cannot be recouped”; AIM – FoodDrinkEurope comments on the study commissioned by DG Competition of the European Commission on the economic impact of modern retail on choice and innovation in the food sector. 65 “Retail & wholesale: key sectors for the European economy”, Institute of retail management, SAID business school, University of Oxford.

35

Retail innovation is more inclusive and effective

Through their retailer brands, retailers have been at the forefront of many innovations. Nielsen

reports that “looking at the change of private label over time, the quality and range of products

have increased exponentially in recent years (…) retailers are driving this phenomenon through

three key tactics; premiumisation, price promotion and innovation. Consumers are responding, with

almost half (49%) saying they would buy more store brand products if they become available across

more categories.”66 Another Nielsen report emphasized that “retailers are increasingly stepping up

their game and delivering new products that fulfil evolving shopper needs. European retailers have

led the way, developing award winning packaging, taking products up-market and appealing to

consumers’ values (eg. sustainable and fair trade products).”67 For instance, SPAR Austria reports

higher food sales with the higher-priced, organic retailer brand products than with its budget line.

Retailers have developed authoritative and highly successful retailer brands in collaboration with

suppliers. Markets with higher retail efficiency often display a richer retail brand environment.

Innovation allows retailers to differentiate from one another. Retailers use their consumer

information to experiment with new products. They engage in the process of product innovation

with their suppliers through e.g. collaboration with their suppliers, joint product development,

exchange of sales data feedback testing, advertising, etc. This is often a trial and error process.

Retailer brands innovate and are more inclusive; consumers value this and switch between

products.68 There is no evidence that retailer brands would be less innovative than manufacturer

brands.

Not all customers necessarily expect technological innovation, but they do expect retailers to make

their life easier and more pleasant, but precisely what this means differs by customer group. In this

context, retail innovation is carried out in a more proactive manner, by recognizing that consumer

segments are fragmented and adapting the offer accordingly.69 By way of an example, a study in the

US has identified that less than 10% of the U.S. consumers, account for 30% to 70% of sales, a

category which may inspire pipelines of innovation directly designed to meet the needs of such

“superconsumers”.70

For retailers, innovation is successful when it meets consumer demand: “no matter how innovative

a change, without sales, the product is worthless.”71 Each year thousands of products are launched,

and the existing range and space must evolve to remain relevant for customers. The need for regular

change is driven by a number of factors, including emerging product development, seasonality, new

brand launches, brand extensions, declining markets and products that are failing to justify their shelf

space. Retailers use their deep knowledge of their customer base to experiment with new products.

Products can be innovative in several ways. For example, retailers have offered price/quality

66 Our penchant for private label, Kosta Conomos, Nielsen Australia 22-12-2014. 67 Nielsen, (2014). The state of private label around the world. 68 More details on the role of retailer brands in meeting aspects such convenience and social concerns as (fair trade, organics, environmental, animal welfare, etc) in the study “The impact of private labels on the competitiveness of the European food supply chain”, LEI, Wageningen University & Research center, 2011. 69 J.N. Kapferer, (2008). The New Strategic Brand Management. 70 Saatchi & Saatchi, (2015). Brand loyalty reloaded. 71 Winger, R. & Wall, G. (2006), Agricultural and Food Engineering working document - Food product innovation – A background paper, p. 5, Rome, Italy Food and Agriculture Organization of the United Nations.

36

combinations that previously did not exist, or offered products through different channels (in

different store formats, over the internet).72 By introducing three-tier segmentation, retailers have

developed products which offer good / better / best quality and recognisable and attractive price

point options. Their assortments seek to give consumers more choice within different budgets and

can respond to niche consumer trends.

Retailer brands increasingly take the lead in building and extending trust by launching entirely new

categories. They play a role in meeting consumer expectations such as convenience and social

concerns. Retailers’ proximity to customers has helped them develop product categories that have

been neglected by major brand manufacturers in areas such as ready meals, new recipes, regional

products (also in partnership with local initiatives), reformulation (eg. free from palm oil when the

reference product has palm oil; reduced salt/sugar reduction, etc.), ‘free from’ products (eg. gluten

free), products of animals fed with no GMOs or no antibiotics, salads for snacking (pre-packed),

specialty jams with original tastes, yogurts sold individually (hence reducing waste). Even where an

innovation is not radical, it still generates value and with retailers’ ability to launch products more

cheaply, it can be still worthwhile.73 Retailers also use their own brands to facilitate consumer choice

through the use of “umbrella concepts” that span across different categories.

Some retailers even go beyond the three-tier model and implement more sophisticated range

designs. For example, SPAR Austria has introduced a 5-stage pyramid: starting with basic products

(commodities at a low price), followed by a “good value for money” brand across the whole

assortment, then the niche products and new, innovative products (‘free from’, Vital, etc.), followed

by organic range and finally, a premium segment, all of which offer competitive pricing.

The quality of retailer brands often goes beyond legal standards and many retailer brands have won

quality award. Examples of standards applied beyond regulatory requirements include GMO free,

certified palm oil, sugar/salt reduction, Fair Trade Cocoa programmes and FSC certified packaging.

Retailers apply quality standards through third party certification schemes such as IFS, BRC,

ISO22000, IMQ, ICS BIO, Ecolabel, non-GMO, MCS, ACS etc. Through their brands, retailers play an

instrumental role in supporting and promoting the growth of sustainable agricultural and fishing

practices (e.g. development of MSC standards for sustainable fisheries). Many retail companies

require their suppliers to subscribe to social compliance codes of conduct covering issues such as

child labour, forced labour, discrimination, freedom of association, work schedules, salaries and

bonuses, health and safety. Retailers also support government-driven initiatives through for example

product reformulation, nutrition labelling and promotion of healthy diet.

Example

Boston Consulting Group used Aldi as an example to showcase retailers’ increased involvement

in innovative initiatives74. By reacting to an emerging trend for responsible consumption in both

its general brands and new organic lines, Aldi managed to capture 39% of the German fair-trade

and organic coffee market, and grew by 33%. A-brands, which represented only 12% of the fair-

72 Oxera, (2010). The economic benefits of retailer own-brands. 73 Bunte, (2011). The impact of private labels on the competitiveness of the European food supply chain. 74 Boston Consulting Group, (2015). When Social Responsibility Leads to Growth.

37

trade/organic market, experienced a more modest 9% growth (study conducted from 2010 to

2013).

The Boston study identifies similar trends in other countries.75 For example, a combined study carried

out in Germany, the UK and France during the same period revealed that the annual growth of

products associated with responsible consumption was twice the growth of conventional products

(8.5% versus 4.5%). Overall, Europeans were willing to pay a substantial premium (between 13% and

110%) for these products over conventional ones.

With continuous growth, responsible consumption is likely to become a highly contested arena,

meaning that neither retailer brands nor manufacturer brands can stand still. In order to succeed,

they will have to continuously question their relevance, related benefits, brand credibility and price

points.76

Retail innovation: a dynamic process focused on the consumer

The assumption that retailer brand growth can lead to less innovation77 is based on an incorrect

understanding of the dynamics and drivers of innovation and the importance of consumer

preferences. As stated by Nielsen, “successful product launches are the culmination of organizational

focus and commitment to product development, creative marketing, smart leadership and, above all

else, an in-depth understanding of what drives consumer preferences.”78

To continue to thrive in a market, a product needs to provide value and to differentiate from its

competitors, whether they are manufacturer brands or retailer brands. The market is highly dynamic

with thousands of products introduced every year, but also very few that succeed. Out of 62,000 new

Stock Keeping Units (SKUs) introductions in Western Europe79, only 24% survived after one year. A

GfK report in Germany identifies a 70% “flop” rate of innovation; this is not a new phenomenon, as it

was already captured in 2005. The report identified the following three main reasons for this

“missing consistent orientation for customer value”, “missing professional innovation

management” and “missing sustainable marketing support”. When looking at the reasons for such a

high level of failure, the lack of consumer acceptance and inadequate promotion support are often

outlined.

The low rate of success of new products may also be explained by the relatively low investment in

R&D by brand manufacturers, too much focus on superficial marketing and failure to capture real

consumer demand. Out of 12,000 products launched in 2011/13, Nielsen identifies just a handful of

real breakthrough innovations delivering distinctiveness, relevance and endurance in the market.

They find little evidence that activity (ie. number of products) alone drives category growth because

in all categories examined, many products do not achieve enough sales velocity and are delisted.80

75 Boston Consulting Group, (2015). When Social Responsibility Leads to Growth. 76 Boston Consulting Group, (2015). When Social Responsibility Leads to Growth. 77 AIM-FoodDrinkEurope contribution to the DG COMP study on modern retail developments and their impact on choice and innovation. 78 Nielsen, (2015). Looking to achieve new product success? Listen to your consumers. 79 Western Europe is defined as FR, IT SP, UK; the period covered is 2011-13. Source: Nielsen, breakthrough innovation report 2014. 80 Nielsen, (2015). Nurturing Innovation: How to succeed in years two and three

38

This confirms the fact that manufacturers have taken a lot of fruitless investment out of the system

by focusing more on A-brands (see chapter two).

Another Nielsen study on innovation81 shows that the majority of innovation revenue is generated by

a minority of products (20% of the innovations account for 70% of innovation generated revenue).

The graph below shows, for example, that 3% of new SKUs in beer in the UK in 2013 generated 80%

of all revenues from innovation in the category. The survey outlines the need for companies to be

more selective at an early stage in order to avoid wasting resources on products that do not perform

an important “job” in consumers’ lives. In this respect, retailers have a greater potential to direct

resources effectively to potentially valuable innovation, as they are able to gain much more direct

feedback from their customers on their needs and expectations.

Source: Nielsen

81 Nielsen, (2015). Nurturing Innovation: How to succeed in years two and three

39

The graph below shows that the breakthrough innovation winners82 that have had an enduring

presence in the market are also backed up by multi-year support plans including sustained trials

over a longer period. The two additional factors in long-term success identified are the ability of a

new product to meet a consumer need and to deliver an exceptional product experience. The study

suggests that new products that do not perform well on need/desire in pre-market research but are

launched anyway succeed only 41% of the time in the long-term. In other words, there is a nearly

60% chance of a new product failing if it provides no real and new consumer benefit.

Source: Nielsen

Many second tier manufacturers (B and C brands) lacking necessary media and marketing support

have turned to producing retailer brands as an efficient means of bringing products to the market

without incurring the massive marketing costs linked to branding.

Protection vs. dissemination of innovation

The suggestion that retailer brands are simply copies of manufacturer brand products and free ride

on their innovative efforts reflects a misconception of a dynamic market in which, once introduced,

successful innovation is quickly and easily copied by other manufacturers.

For example, SPAR Austria has launched retailer brand product lines with over 100 articles

(convenience products, pasta, soup, ready-to-eat meals), in collaboration with famous chefs and

restaurants. These products meet their high standards and have not been on the market in any

other form.

82 Nielsen, (2015). Nurturing Innovation: How to succeed in years two and three

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Illustration: ready made meals prepared in collaboration with chefs and restaurants

Illustration: Pasta Boxes: first introduced in France by Sodebo and followed by many other brands

In the EU, there is an extensive body of legislation to protect intellectual property rights (trademarks,

copyrights, designs, models, patents, etc.) that seeks to provide a balance between the need to

promote innovation by granting a certain degree of protection, and the need to promote

competition and facilitate the dissemination of innovation. There is also legislation which prohibits

“passing off” a product by any party (manufacturer or retailer) by imitating a brand with the

intention of confusing consumers. The law therefore provides numerous means for brand owners to

seek redress. Manufacturers can also use the Supply Chain Initiative83, an EU wide initiative to

promote fair conduct in the market and resolve such issues.

In practice, however, most so-called innovations in terms of particular shapes or colours do not meet

the criteria for the granting protection because they often involve small, incremental changes. A

certain degree of flexibility is necessary to avoid the creation of monopolies and allow companies to

83 The Supply Chain Initiative is a voluntary mechanism to implement and enforce principles of good practice in vertical relations in the food supply chain. The confidentiality principle states that “Confidentiality of information must be respected unless the information is already public or has been independently obtained by the receiving party lawfully and in good faith. Confidential information shall be used by the recipient party only for the purpose for which it was communicated”. Companies can use the dispute resolution options made available through the SCI to deal with any dispute arising over the application of this principle.

41

legitimately draw inspiration from ideas and behaviour of others and thereby facilitate the spreading

of new ideas and a broad diffusion of innovation.

Conclusion

Consumers are at the heart of the supply chain; they drive innovation. Retailer brands broaden

consumer choice and cater to a wider set of customers. Retailer brand assortments help to

differentiate one retailer from another. Through innovation and leading in responding to new trends,

retailer brands have become recognised and trusted entities in their own right. Any suggestion that

private labels may per se be less innovative than brands by nature is based on a flawed

understanding of the drivers of retail innovation and of market dynamics; thus invalidating the

proposition of DG Competition (Assortment Effect Theory) that “Private Label products may be less

innovative than brands by nature, and replacing brands with Private Labels on the shop shelf

therefore leads to a less innovative range of products”:

The nature of product innovation and the processes involved are different between branded

goods and retailer brands. The retailer brand innovation process is a quicker and less

expensive means of bringing new products to market. It is based on retailers’ direct

knowledge of their customer base through e.g. consumer data, sales, loyalty schemes, or

communication one-to-one with the consumer. Retail innovation is more inclusive and allows

retailers to differentiate themselves from their competitors – e.g. ready-made meals or

similar visual identity on packaging through different product categories. The fastest growing

segments in the retailer brands market today are those in which big brands are either not, or

considerably less, present.

The facts show that successful innovation is only achieved by a product that meets a

consumer need, and which delivers a promise beyond its strictly functional characteristics,

whether it is a retailer brand or a manufacturer branded product. Product failure is not

attributable to the presence of retail brands. If a product fails, it is often due to the

substitutability of new products, their low innovative performance, their lack of sufficient

advertising support and their failure to attract strong consumer acceptance because they do

not really cover consumer's needs.

Retailers are overall better at responding to changing consumer priorities. Innovations

include: removal of food additives, salt reduction, nutritional labelling, shelf ready packaging,

packaging reduction initiatives, sustainable sourcing, animal welfare, producer clubs, removal

of mechanically recovered meat, environmentally preferable purchased products (EPP),

lifestyle ranges, exotic taste products or limited editions of special seasonal products. In

some areas, brand manufacturers can be seen to have followed innovations introduced by

retailers, such as organic, vegetarian products or packaging innovation.

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CHAPTER 4 - SUPPORTING SMALL AND MEDIUM-SIZED ENTERPRISES AND LOCAL PRODUCERS

KEY MESSAGES

The vast majority of retailer brands are produced by small and medium-sized enterprises. Thousands of SMEs who could otherwise not compete with large, multi-national brand manufacturers enjoy access to domestic or even international markets through the mechanism of retailer brands.

Through retailer brands, SMEs benefit from the retailer’s access to information on consumer preferences. They do not need to incur the massive costs linked to brand development.

Through their brands, retailers support regional and local products, benefitting local SMEs and farmers. Relations with smaller retail brands manufacturers often lead to longer-term partnerships, as such relationships help retailers differentiate and bring innovation to the market.

Retailer brands are products or services that either carry the brand of the retailer or a separate brand

that is controlled by the retailer.84 They can be made by large manufacturers who produce both their

own brands and private label products, or by small and medium size manufacturers that specialise in

particular product lines and concentrate on producing private label almost exclusively, as well as by

major retailers and wholesalers that operate their own manufacturing plants and provide private

label products for their own stores.85 Through their brands, retailers support the thousands of SMEs

who produce them, including giving them greater access to markets domestically and externally.

Retailers have developed long-term partnerships with SMEs producing their retailer brands including

through industry partnership agreements. As retailer brands develop, there is scope for the retailer

brand industry to further consolidate, specialise and increase its capacity to innovate.

This chapter looks at the production of retailer brands and how, through these, retailers support

networks of local SMEs including farmers.

Retailers support SME development through their retailer brands

The vast majority of retailer brands are produced by small and medium sized enterprises. Studies

show that this is due to their ability to respond with the flexibility required by the nature of their

business and the possibility of supplying a number of retailers. SMEs also tend to be more regional

and fragmented than large brand manufacturers, lacking the financial strength or organisational

structures to support the marketing of their own products when faced with strong national

84 Oxera, (2011). The economic benefits of retailer own-brands. 85 Private Label Manufacturer Association.

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competition.86 In a report, the European Commission observes that retailer brands “have also

allowed for less well known brands or medium sized companies who could not compete with the

major brands to remain in business and grow.”87 Through their retailer brands, retailers provide an

entry to the market for many thousands of smaller suppliers who could otherwise not compete with

major brand manufacturers. A study conducted for the European Commission in 2011,88 concludes

that retailer brand development “offers small enterprises the chance to take advantage of the brand

positioning of the large retailers and to access and experiment with large markets under the retail

brand umbrella, which means taking a smaller overall risk (…). With the scale efficiency offered by

supplying large retailers and without the need for brand marketing support, retailer brand producers

can operate at lower costs than brand producers and provide the retail customer with a basis on

which they can afford good value for money.”

SMEs producing retailer brands are a source of dynamism in the market. As set out in chapter two,

the most dynamic market segments in many countries, are to be found in retail brand niches, such as

organic or ‘free from’ products. A number of examples show that although the overall market share

of SMEs in food production has fallen, the market share of SMEs in retailer brand production has in

fact grown. This suggests that while some SMEs exited the market, others may have switched from

branded goods to retail brands.89 For example, in France, while the overall turnover generated by

retailer brand sales fell by 0.3% in 2014, the turnover generated by SMEs increased by 4.4% (and by

1.3% for large manufacturer brands). “This development essentially comes from the retailers’

product offering. The big brands are less profitable for the retailer, but they bring traffic to the

stores. Retailers differentiate nowadays by offering products manufactured by SMEs, which drive the

profitability of their stores” (Christine Barthe, FEEF).90 Similarly, in Italy, the premium and organic

categories increased by 5.9% in 2014; in this country, retailer brands offer a fundamental distribution

channel for a qualitative agri-food production system.

Retailer brands help many small suppliers to access national and international markets alongside the

retailer. Many brands known simply within a national market may also enter new markets by means

of retailer brands, since these may be better known in those markets. This way, manufacturers avoid

the massive advertising investments required to launch a new brand within a market.

Examples

Auchan helps SMEs to extend their reach beyond the French market: Portugese and

Romanian stores buy products made by French SMEs.

Casino own brands produced by SMEs are sold in stores in Brazil, Colombia, Vietnam,

Thailand and the UAE. Casino also has export trading activities and sells retailer brand goods

sourced in France to other distributors abroad.

86 Feenstra, R. C. and Matthew D. Shapiro, (2003). What can the price gap between branded and private label products tell us about markups? 87 Commission Staff Working Document on Retail Services in the Internal Market, page 46 (2011) 88 LEI, (2011). The impact of private labels on the competitiveness of the European food supply chain, Wageningen University & Research center. 89 LEI, (2011). The impact of private labels on the competitiveness of the European food supply chain, Wageningen University & Research center. 90 l’Usine Nouvelle, (21/01/2015). Le recul des marques de distributeurs en France profite aux PME.

44

Carrefour has focused on exporting the expertise of its French SMEs: in 2014, 16 SMEs

supplied 100 products in the Carrefour stores in Poland.

SPAR Austria distributes retailer brands from local Austrian SMEs to other countries it

operates in (such as Hungary, Slovenia, Italy or Croatia) and the other way round. SPAR

Austria provides these suppliers with extensive support throughout the entire process: this

allows suppliers to expand capacity with confidence through the business relationship, and

SPAR provides know-how and quality management.

SPAR developed own-brand ice cream with a small ice cream manufacturer in Styria. Today it

is the only mid-sized ice cream production company in Austria, with 30 products on the

shelves of SPAR Austria, 10 in SPAR Slovenia and 15 in Hungary, with distribution in Italy and

Croatia to be launched shortly.

A small traditional bakery from Italy produces a speciality bread for 1,400 SPAR-

supermarkets in Austria. The product was completely new to the Austrian consumers and the

expansion would have never been possible under a manufacturer brand.

Modern retail procurement systems promote safer and healthier processing and production systems.

As a result, even if becoming a supplier to a local or foreign-owned retailer does not lead to exports,

it can still open the domestic market to the local farmer or food processing plant, providing enough

scale to invest in technology and product quality. SME suppliers gain valuable direct access to

information on consumer preferences, while not having to finance the development, marketing and

distribution of a brand. Without the production of retailer brands, many SMEs would be unable to

finance the marketing of their brands in new markets.

Retailer brands play an important role in bringing unique food specialties (delicatessen produce,

cheeses, biscuits etc.) to a wider market, thus helping increase their sales. Lesser-known local

specialties and recipes, in particular, benefit from this positive partnership with established retailer

brands. Retailers look specifically for local producers that offer high-quality and niche products,

which provide a lot of opportunities for local SMEs. Retailers are keen on supplying regional and local

products in response to consumer demand. This will continue to be beneficial to the local SMEs.

Examples

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Example

Mega Image, the Romanian branch of Delhaize opened ‘Gusturi Romanesti’ (Romanian flavours)

retailer brand store, offering consumers a wide range of Romanian products based on traditional

recipes. The concept won a Euromonitor innovative grocery concepts award in 2015.91

Adrian Nicolescu, Marketing Manager Mega Image Romania: “Romanian Flavours stores are a

differentiation tool on the retail market in Romania. In order to bring to our stores the traditional

products, we focus our efforts on identifying high quality goods produced by local manufacturers.

Furthermore, in our attempt to preserve the authentic flavour, we are striving to identify the

products that follow our mission, that is, ensuring quality, respecting seasonality and offering

support to those who want to get involved in this initiative.”92

Retailers have a strong interest in engaging in stable and long-term partnerships with their SME

suppliers, as they help retailers innovate and to introduce new products to the market.93 A study

conducted for the European Commission identifies that, overall, innovation increased because

retailers invested in developing new products. In addition, they maintained high levels of

manufacturing effort through a mix of competition and collaboration with food processors.94 In

France, 70% to 80% of retailer brands suppliers are SMEs and 90% of contracts reflect a relationship

which has lasted over 10 years, reflecting the sustained partnership that retailer brands can develop.

91 Source: http://blog.euromonitor.com/2015/09/the-best-new-retailing-concepts-of-2015.html 92 http://www.retail-fmcg.ro/retail/retail-national/mega-image-deschide-un-nou-magazin-gusturi-romanesti.html 93 Report on the 2011 Symposium on Retail Competition. 94 LEI, (2011). The impact of private labels on the competitiveness of the European food supply chain, Wageningen University & Research center.

46

Examples

Auchan France

In 2014, SMEs generated 27.9% of Auchan’s sales (the French average is 23.7%).

400 SMEs manufacture more than 50% of Auchan’s products.

Out of the total number of suppliers of own brands at Auchan, 45% are SMEs.

Each year, Auchan and the French Federation of Enterprises and Entrepreneurs (FEEF) organise a

national SME exhibition, in which several hundreds of SMEs showcase their products to Auchan

associates, with the purpose of establishing partnerships and taking their products to the shelves.

Carrefour France

In 2012, Carrefour counted 25,000 products produced by SMEs and very small enterprises.

Today, Carrefour estimates on its shelves more than 60,000 products sourced from 5,000

small and very small suppliers. In 2014, these companies recorded a 9% increase in turnover,

which was also accompanied by a positive trend in job creation.

SPAR Austria

SPAR Austria supported a small family-owned pasta-manufacturer, enabling them to deliver

their 8 premium branded products nationwide.

A small supplier of innovative smoothie drinks was taken under the SPAR umbrella, a

cooperation which led to 8 articles being developed for all 1,400 stores in Austria (and 6 of 50

stores in Croatia)

SPAR Austria is one of the leading European retail companies in the private label sector with

about 3,500 own brand articles in its assortment accounting for about 39 % of turnover

(2014).

About 7,000 organic farmers supply 750 organic private label products

Isfi Spices-Belgium

A small company, founded in Belgium in 1983, Isfi has gradually become an innovation leader in

the selection, packaging and blending of herbs and spices for retailer brands. This has happened

through long-term collaboration with Metro and later with other retailers in the Belgian market.95

This SME-retailer collaboration has been based on open innovation, which benefits both: Isfi

focuses its investment on innovation development and quicker launch of new products and the

retailer can offer more choice and innovative products at a better price. The collaboration also

contributed to Isfi’s success on both domestic and international markets (market leader in

Belgium, with 40% market share, 22% of turnover exported to clients in Europe, Middle East and

Asia.)

NLS Lda - Portugal

NLS Lda. is an agricultural food producer located in the western region of Portugal (Lourinhã) that

has launched a dedicated production line for the retailer brands of CONTINENTE (Portuguese food

retail hypermarkets chain), with a product line named “Fácil & Bom” (ready-to-cook vegetables

for soup). This SME-Retailer collaboration has been based on open innovation, which directly

95 Final Report from the Expert Group on Retail Sector Innovation (2013).

47

benefited this Portuguese SME: NLS was able to evolve from an undifferentiated wholesale

producer to a specialised producer of a unique product in the market, without having to incur

crushing marketing and manufacturing costs. With the production line “Fácil & Bom” NLS was

able to invest in new machinery and in new jobs, with a positive impact in the local region.

Retailers support local farming through retailer brands

Through their brands, retailers can provide significant support to the farming sector. A clear example

has arisen during the agriculture crisis over summer 2015, as farmers were faced with decreasing

prices in the milk and livestock markets resulting from surplus production globally, exacerbated by

the Russian embargo and a drop in Chinese consumption, the lifting of milk quotas, stagnating

consumption and changing dietary habits in Europe. Through their brands, retailers have

demonstrated support for local production through short term price stabilisation mechanisms and

promotion of local products with local consumers.

Examples

Delhaize supports local Belgian producers: 70% of the company fresh assortment originates from

local producers based on stringent quality standards. 750 local products are directly delivered to

stores by 150 local producers. Through their “mieux pour tous” initiative, Delhaize supports fair

incomes for pigmeat producers, whilst offering consumers better quality. The initiative is based

on supply chain collaboration at all levels to deliver pigmeat from animals benefiting from a

varied and balanced diet focused on omega 3 rich material. The initiative covers the entire chain

including feed producers, growers, slaughterhouses, and a scientific body to oversee and control

all levels. The scheme covers the price differences arising from specific feed requirements; it

provides an incentive to the producer at no extra cost to the consumer. During the crisis in 2015,

an additional amount was paid to contribute to farmers’ incomes in light of the historically low

prices in the pigmeat sector.

Kesko (Finland): the THANK THE PRODUCER campaign

In 2015, Finnish retailer Kesko launched the “thank the producer campaign” in collaboration with

the main farmers’ organisation, the Central Union of Agricultural Producers and Forest Owners

(MTK). The campaign is based on recognition that 82% of consumers find it important to eat

domestically produced food. About 80% of the products sold at K-food stores are of Finnish origin.

This generates work and welfare across the country. Through the campaign, K-food stores offer

their customers a chance to provide support direct to pork producers. Consumers can pay one

euro extra for a ham, in which case Kesko will pay an additional euro to the producer. The scheme

will be expanded to other products in 2016.

France: French Retail Federation (FCD) joint initiative with Coop de France

In 2015, FCD, representing large retailers in France signed a joint initiative with Coop de France,

representing agriculture cooperatives. Based on a recognition that many food prices and

consumers’ food budgets have decreased, the two organisations developed a joint initiative to

give new impetus to business relationships (by identifying and drafting good practice as a basis

for commercial agreements), improve competitiveness, enable sustainable development and

mobilise local and regional networks.

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Portugal: Continente Producers’ Club

Launched in 1998, Continente Producers’ Club (“Clube de Produtores Continente”) is a support

structure whose goal is to bring the agricultural sector closer to the direct sale of products to the

consumer, promoting the Portuguese economy in a sustained manner. With more than 200

members in mainland Portugal, in Madeira and the Azores, Continente Producers’ club creates

jobs, fosters agricultural development and leverages ambitious and innovative projects. Its work

is focused on local production planning based on consumption forecasts and guaranteed sale of

produce and on the development of competitive products with clear benefits throughout the

value chain from producer to consumer.

A commitment to responsible practices in relations with SME producers

Retailers value the partnerships developed with SMEs. Through the Supply Chain Initiative, registered

retailers signal their commitment to the application of principles of good practice in commercial

relationships. They also agree to address their disputes in a manner that allows business continuity.

Supporting activities and initiatives inspired by the SCI are taking place across Europe.

In Belgium, organisations in the food supply chain have had a platform for a dialogue since 2010.

Recently, they agreed on a joint initiative aimed at standardising and harmonising extra-legal

requirements and promoting combined audits. This initiative saves time for the farmers and auditors,

reduces costs and promotes the interchangeability between systems.

In France, there has been a long tradition of partnerships between the large retail association FCD

and the association representing smaller retail brand manufacturers (FEEF). These place special

emphasis on respect and ethical behaviour during negotiations and in their implementation process,

a better integration of constraints incurred by SMEs during commercial negotiations, promoting

information sharing on market conditions in particular, in order to define common development

goals and encouraging the use of internal mediation.

In 2014, one of these partnerships led to the establishment of a contact point within large retailers

for SME relations. Other examples include: Participation in the Supply Chain Initiative; a Code of

Conduct on the termination of business relations; an agreement on termination of commercial

relations (2013); “Responsible Supplier Relationships” scheme: an initiative supported by the

Government which aims at improving relations between suppliers and large retailers (November

2014).

Conclusion

Through their brands, retailers support networks of SMEs and contribute to the competitiveness and

employment in the agro-food chain. SMEs are a key partner, providing flexibility and innovation and

retailers providing access to their network and knowledge of the market. SMEs benefit from retailer

brands as they do not have to bear the costs associated with branding (launching, marketing,

promotional support, etc.) of manufacturer brands.

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Any suggestion that retailer brands might be less innovative than manufacturer brands and

undermine the capability of the food industry or farming sector to innovate is based on an incorrect

understanding of the market:

In practice, retailer brand innovation is very often a collaborative combination of the process

knowledge of the retailer brand manufacturer and the insight into consumer preferences

brought to the table by the retailer. This “co-creation” of value is of mutual benefit to both

the retailer and the manufacturer partner as well as, of course, to the consumer. Retailer

brands are also produced by brand manufacturers and they are also brands themselves.

As A-brands have consolidated, many second tier manufacturers have turned to producing

retailer brands, as an efficient means of bringing products to the market without incurring

the massive marketing costs linked to branded goods. The collaboration between retailers

who bring their knowledge of consumer preferences and smaller manufacturers (SMEs)

enables these to become specialists in niche areas. It also gives the opportunity to SMEs to

sell their products directly to consumers (through a retailer) – something they could not do in

the past while working for other bigger manufacturers. Thus, it helps to create employment

and increase the level of investment in local areas: it settles population in rural areas creating

industry where it was not.

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OVERALL CONCLUSION

This paper sought to demonstrate that retailer brands are a force for consumer satisfaction,

innovation and promoting a competitive market for both retailers and suppliers. It sought to reflect

recent developments in retailer brands and offer a market-based context to the European

Commission study of modern retail developments and their impact on consumer choice and

innovation.

In this process, we have been unable to find any evidence to support the Commission modern retail

study conclusion that retailer brand growth can be associated with less innovation in the market, but

rather that:

The economic crisis has had an huge impact on consumer purchasing behaviour; consumers have

tried retailer brands and come to trust them, and buy them regularly;

As price remains a key determinant for consumer purchases, retailer brands are important for

retailers in allowing them to differentiate as well as compete on price. Without retailer brands,

retailers would supply the same products and only compete on the basis of price, stifling choice

and innovation.

With customer spending constrained, brand manufacturers re-focused their brand portfolio to

concentrate on key leading brands; they have cut innovation spend and removed B and C brands.

They focused on price promotions to maintain their overall profitability; they have diverted

investment towards emerging economies offering greater growth prospects;

Through retailer brands, retailers are looking to respond directly to consumer demand. The

process of bringing retailer brands to market is cheaper, faster and more responsive to both

innovation in the market (e.g. specialty ingredients, packaging) and to consumer demand. It is

also incremental, as retailers start small, and if successful extend access to their entire network.

Through retailer brands, retailers work to support networks of small and medium-sized

enterprises and local producers, giving these access to wider domestic, and in many cases,

international markets. This cooperation often results in long-term partnerships.

By contrast, manufacturer brands are highly concentrated and tend to dominate the market

segments in which they are present. They play a key role in retailers’ assortments, as they are

products consumers expect to see on the shelves. As a result, they enjoy relatively higher net

margins (on average some 10%) against 1-3% net margins for retailers.

The key findings in this report point to the need for public authorities and policy-makers to recognise

the role of retailer brands in helping consumers to buy high-quality food at reasonable prices. They

should resist pressure to treat competition from retailer brands as somehow being an unfair trading

practice. Any limit to their development would directly be to the detriment of consumers. Consumers

interests, and those of promoting competition, can thus be best served by allowing consumers access

to the widest choice possible. Retailer brands are a powerful driver of that choice and innovation.