Retailers push private labels on penny-pinching public

Ever more present in the past couple of years in Romanians’ shopping carts, private label products are gaining strategic importance on the agenda of local retailers. The crisis has also helped boost sales as consumers have become more price-aware. The market for own brand products is estimated to reach up to EUR 1.2 billion this year after amounting to EUR 0.9 billion in 2010.

Simona Bazavan

Looking beyond sales volumes, the concept itself has come a long way since more than a decade ago when it was introduced locally. Private labels – products manufactured or provided by one company under a retailer’s own brand – were for a long time perceived as simply cheap merchandise, but as retailers have upgraded their approach, consumption has followed suit.

On the short and medium run the market will see major growth on this segment, Sorin Spiridon, manager at Ensight Management Consulting, told BR. “All major retailers have set ambitious targets regarding private labels, which are considered a critical success factor in differentiating themselves from the competition,” he said. In his estimation, the private label market reached approximately EUR 0.9 billion last year and will grow beyond EUR 1.1-1.2 billion in 2011.

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Data from Contrast Management Consulting confirms that retailers are placing growing importance on developing their own brands. However, the transition from product and price policy to a brand strategy will be the determining factor for sustainable success, Remus Laes, managing partner at Contrast Management Consulting Romania, told BR.

“Presently, the Romanian private label segment is in an early development phase. We anticipate a growing trend in the coming years, as the results of this strategy will generate competitive advantages such as customer loyalty,” said Laes.

At the end of 2009, sales of private label products represented 10 percent of the total sales of big retailers in Romania, according to Contrast Management Consulting. “By comparison, at a European level, this share stands at 20-30 percent. So we estimate considerable growth for Romania, as the market will follow the normal steps to maturity,” argued Laes.

In the very beginning, private labels were used by retailers as differentiation elements, but they have become a sine qua non factor in the portfolio of any player who wants to remain competitive, said Andreea Enache, senior marketing consultant with Ensight Management Consulting. “Currently, private labels are mainly responsible for maintaining competitiveness and supporting a certain price policy.” While private labels are of course a source of income and profit for retailers, their main function is to attract and generate customer loyalty, added Enache.

Looking at more mature FMCG retail markets, private labels can be a far more profitable business than selling nationally advertised brands as lower shelf prices generated by reduced production and marketing costs translate into higher margins.

In addition to providing differentiation from other players in the market and supporting consumer loyalty, private labels also have the advantage of reducing dependence on suppliers and thus allowing retailers to better manage their cash flow and the stock turnover, thinks Laes.

Metro Cash&Carry was the first player on the market to introduce the concept of private labels in Romania. The new approach to private labels is an important pillar of its overall strategy, with the company planning a stronger focus on the client, Adrian Ariciu, head of own brands management at Metro Cash&Carry Romania, told BR. He added that sales of private labels have increased in 2011 compared to the same period of last year.

Ariciu said that through their main characteristics – optimized range, a stronger orientation towards customer needs and competitive prices – the company’s private labels have been developed based on the specific business needs of Metro’s clients, in terms of quality, performance, packaging and price.

The average sale price of a private label is 10-20 percent below that of equivalent brands. “At the same time these products provide a quality standard comparable with the best on the market,” said Ariciu.

Metro’s private label portfolio includes six major brands: Aro, Horeca Select, Rioba, H-Line, Fine Food and Sigma, targeting Horeca companies, resellers and other clients. “All the products, which are developed both locally and internationally, are produced by suppliers that are audited in terms of the technological process and their capacity to create a product based on the defined profile,” said Ariciu. By 2012, Metro Cash & Carry wants to increase the percentage of private label sales to 20 percent.

The further development of its own brand portfolio is a priority for Billa Romania in 2011 and the coming years, Sabin Fane, marketing director with the company, told BR. “We are permanently looking for solutions to diversify and to improve our two private labels, Clever and My,” he said.

The crisis has generated changes in customer behavior, boosting the sale of private labels. And while when they first try such products the competitive prices determine the purchase, the quality-price ratio later creates loyalty, says Fane.

Billa’s present portfolio includes over 300 food and household products under the Clever brand and over 50 cosmetics and personal care products under the My brand.

More than 80 percent of these products are manufactured in Romania says Fane, adding that the company plans to continue and further develop relations with local suppliers.

Romanians show bigger appetite for private label products

Some 90 percent of Bucharesters have bought private label products, according to Nielsen’s Shopper Trends 2011 survey conducted at the end of 2010. In other Romanian big cities the share reaches 84 percent. Countrywide, 54 percent of respondents have said that their perception is that private labels target customers with a low income, 4 percent less than in 2009.

Low prices remain the main reason why consumers choose private labels over “name” brands, especially in the present economic context, but the purchasing decision is beginning to be more and more influenced by retailers’ capacity to build customized brands, following the classic product development process, with clear quality benefits and a brand positioned to a well-defined target customer, thinks Laes.

In the beginning, private labels were pretty much synonymous with very low prices, as the first such products were positioned on the low-end segment. Lately retailers have developed their private label portfolio by targeting new segments, says Enache. For example, Real has three private labels in its portfolio, Tip, Quality and Selection, positioned on the economy, medium and premium segment respectively, and a fourth, Bio. Retailer Cora has economy private label products such as Cora and Winny but these are supplemented by the premium Patrimoine Gourmand merchandise. The same happens at Auchan, which in addition to economy products sells delicacies under the Mieux Vivre Bio private label.

Laes argues that the future growth of the private label market will depend greatly on retailers’ capacity to diversify their portfolio of private labels, offering entry-level products, medium and quality. 

Such portfolio segmentation has led to a change in perception, thinks Enache, as customers have grown used to expecting high quality from such products at lower prices than those of the usual brands. “In most cases, the customer is not aware that private label products do not include marketing costs and they also come with certain cost benefits unlike other brands. What matters for them is the trust transferred by the retailer through the private label, and the price, which is below the average price on the market for identical products. The quality-price ratio remains the most important factor, while aspiration-based choices and emotional choices are less relevant,” said Enache.

Lower prices for private labels mainly come from reduced costs for marketing and communication activities which will never be as much for a private label as they are for traditional ones, thinks Enache. “And it wouldn’t make sense, considering that they already benefit from three important factors: brand awareness, brand favorability and shelf presence,” she argued.

The main products chosen for private labels are food and personal care and cleaning products as well as soft drinks, spirits and stationery.

The producer’s perspective

Private labels also mean business opportunities for local companies that go into partnerships with retailers to manufacture such products.

Spiridon says that private labels can be a win-win situation both for retailers and producers. Producing under private labels can mean lower general costs for large manufacturers whose portfolios include well established labels, while smaller ones can benefit from such partnerships by using the profits to build their own brands, asserts the manager. But at what point do producers risk sacrificing their own brand by generating competition for their products through private labels? The risks are highest for those who don’t enjoy great customer loyalty for their products, says Spiridon.

Private labels are a profitable business for retailers when they generate higher margins than “name” brands. But in order for this to happen, retailers have to be able to sell these products at the lowest possible prices, putting pressure on producers.

“The only option for many producers will be to sacrifice quality. This will be the weak point from which producers can benefit if they advertise their own brands as being of higher quality.”

Local cosmetics manufacturer Farmec Cluj-Napoca is presently producing under private label over 45 personal care products for Carrefour following a partnership that began in 2009, Mircea Turdean, the company’s general director, told BR.

The firm is also producing a house cleaning product for Rewe and last year it made six aerosol products for Reckitt-Benckiser.

Turdean says that private label production helps correlate sales volumes with production volumes, adding the benefit of an association with internationally appreciated brands. “To some extent it helps boost turnover. In Romania there is growth potential for private labels as consumers are more open to such products than they were a few years ago,” said Turdean. He also argued that private label production doesn’t affect the company’s own brand. “Private labels are not individualized products; their price is the main differentiation. Farmec products also come with a very good quality-price ratio but they also bring other benefits which are generated by the brand’s added value,” added Turdean.

He estimates that this year the production of private labels will generate about 10 percent of the company’s turnover after it contributed approximately 5 percent of the roughly EUR 22 million turnover last year. In 2011 Farmec Cluj-Napoca will continue its partnership with Carrefour and it is considering new ones with other retailers.

“As for the long term strategy, we will continue production under private labels as long as there is demand and such partnerships are beneficial, but we don’t expect private label production to make up more than 25 percent of the turnover,” said the general director.

simona.bazavan@business-review.ro

Photo: Laurentiu Obae, courtesy of Cora Romania