News Tuesday, June 12, 2018

Branded players must learn from own label strategies

Big brands can no longer ignore private label producers

For decades private label businesses have been viewed as FMCG sector also-rans, mere commodity players snapping at the heels of big brand producers. However, they have been steadily gaining ground on their rivals. Our most recent study of food and soft drink producers in the UK revealed that, for the first time in 30 years, private label businesses have nosed ahead in terms of return on capital. It is time for traditional branded producers to recognise that private label businesses are beating them to the finishing line, and work out what they can do to keep up.

The rise of own label from a cheerful bargain loitering on the lowest supermarket shelf to a challenger of big brands started with the consumer. A focus on quality, design and marketing over the past decade altered attitudes, allowing private label to sit with premium product. Tesco Finest, Monoprix Gourmet and Carrefour’s Reflets de France became readily accepted as high end fare, allowing retailers to grab higher margins across all price points.

Elsewhere, the insurgence of German supermarket discounters Aldi and Lidl helped remove the stigma attached to private label, with beauty editors extolling the virtues of a £6.99 tub of Aldi’s Lacura face cream alongside a £120 pot of Creme de La Mer.

A third tailwind for private label came in the form of technology. When you can compare price and quality at the touch of a button, big names simply become less and less relevant. This is particularly true of brand disloyal Millennials who are about to enter their prime spending years. These cumulative factors mean that in today’s food and drink industry, private label has a place at the table next to the Heinz and Coca-Colas of this world.

Whereas consumers and retailers have cottoned on to the virtues of private label, there remains an inertia among traditional branded producers to do the same: private label is still dismissed as a low margin slog that survives at the mercy of retailers.

Yet these very challenges have proven to be private label’s making. Aware that a retailer could switch a breadwinning contract to a competitor on a whim, the sector was forced to become agile, delivering flexible innovation on a large scale while keeping costs low. Many created an international footprint to reduce the dependency on a single group of retailers, and the smart ones diversified their ranges to serve more than one channel. Italian chocolate spread manufacturer Nutkao, for example, customises its product to serve the basics market as well as a high-end gourmet channel.

Meanwhile, from the comfort of their market leading positions, branded businesses failed to keep pace. Many legacy names remain stymied by large organisational structures and a risk averse corporate culture. Now, when faced with pressure, for example from an insurgent brand, private label is out of the starting gate while big brand is still looking for its horse.

Not all branded producers have been slow to react. In October 2016, Nestle created Froneri a joint venture with private label firm R&R in the ice cream sector. R&R’s private label capabilities coupled with the might of Nestle’s brand power means it can offer retailers a much coveted total category solution. Providing this service, positions Froneri not only as a supplier, but as a retailer’s ally with influence over innovation, pricing and promotion.

Branded producers must follow Nestle’s lead in adopting a strategy to learn from private label. This could include hiring private label talent and adopting best practice such as developing deeper relationships with retailers and more responsive supply chains. In other cases it is worth considering whether it would make sense to combine business models, or indeed work with a private label producer to take on co-manufacturing of smaller fast growing brands. What is certain is this once poor relation to branded producers has struck it rich and cannot be ignored.

This article first appeared on The Grocer 10 May 2018 (external link)

Key Contacts

Will Hayllar

Will Hayllar

Global Managing Partner

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