Without a doubt, learning to live with negative volume is going to be the most important macro trend in retail for the next 12 months to three years. Continued weak consumer confidence coupled with a drop in disposable income has meant consumers are reigning in spend and reducing consumption. Switching to cheaper brands is now the number one coping strategy for consumers across the region and a third of consumers now claim that they will continue to switch to cheaper brands even when the economy improves.
Retailers however are creating their own opportunities and in the process disrupting the trading environment. Their strategy for growth? Private Label.
During the course of the recession retailers have managed to pull sales by creating a strong consumer perception that Private Label is less expensive and/or offers good value for money. Retailers are innovating with new Private Label ranges in a way to differentiate from brands – and it’s working.
In Spain, a major Spanish retailer recently launched a private label skincare product. Despite entering a particularly difficult category to penetrate, the retailer quickly reached a leading position. In the UK, Sainsbury’s revamped its wine portfolio to address a gap for lower priced quality wines. As a result, Sainsbury’s wine sales accelerated and the premium sub brand Taste the Difference saw growth of around 50% in sales.
Typically 75% of households buy Private Label at a lower price differential of up to 23% compared to brands. In weaker economies in Europe such as Spain and Italy we’re seeing the fastest Private Label growth.
Despite these successes, Private Label presence across Western Europe as a whole is still in fact relatively low. Typically, if you look across UK, Germany, France, Spain and Italy, around a third of the macro category sales are now Private Label driven. As a percentage of sales it’s less than 20% in Italy, around 25% in Germany (if we include discounters), 30% in France and 50% in the UK.
Private Label – push or pull?
What’s interesting is that when we examined whether Private Label development is driven by retailer pull or economic push, it’s clear that it varies by country. In Germany we’ve seen healthy growth because retailers are pushing Private Label. In other countries such as Spain it’s more related to economic push. In France it’s more to do with the increase if promotions for Private Label so it’s down to retailer pull. In some countries such as the UK it’s a mixture of both.
The one constant theme however across Western Europe has been the increase in the number of Private Label items, which typically has seen a 5% increase in the portfolio of you take the broad average of those five countries. In parts of Western Europe, particularly in the south, there is still considerable underlying growth potential across the categories with scope to increase the Private Label share across more categories between now and 2015.
Shaping consumer behaviour
One strongly held myth about Private Label is that there will never be a bond between consumers and retailers by the ‘premiumization’ of Private Label. At Nielsen, we think there will be a stronger bond, not a weaker bond. Private Label certainly has the potential to shape consumer behaviour. Already we have seen behaviour change as a result of the recession and there are examples where Private Label is equally strong as brands at changing the shopper’s mission.
We’ve benchmarked Private Label at 33% of category sales. Conventional wisdom says that it’s unlikely to grow above 1% of category sales over the next couple of years. We actually think it could be more than 1%.
The dash for digital
As retailers look at strategies to generate future business growth, how they communicate will become critical. We’ve shown that Private Label development has growth potential, but not without the right communication mechanisms in place.
So how are retailers using communications to disrupt the trade environment as they look to establish growth through Private Label? The real game changer is going to be digital.
Retailers are starting to seize the opportunity. Tesco recently announced a global investment of $750 million in digital technology, moving into the media and digital retail space already occupied by Amazon.
There are also many examples across the region of retails jumping on digital to communicate with consumers, and with deeper engagement, you’d expect greater reward. All retailers are chasing the loyalty of shoppers. Retailers are also rewarding higher spending customers. We’re seeing aggressive engagement via social media, multi-screen, digital and smartphone and tablet apps. Cash back initiatives are another extension of loyalty. As a result, retailers are increasingly regarded as trusted brands, using Private Label as the springboard for differentiating concepts such as convenience, sustainability and service.
We believe that digital communications direct to consumers is likely to be as big a game changer in shopping behaviour as the online shopping revolution was 10 years ago, which was also led by retailers.
The path of retail disruption has only just begun
2012 was a watershed year across Western Europe and similar to 2008, which first seeded changing shopping behavior following the economic crisis. As we move forward, markets with mature or slowing economies or a consolidated trade structure will be most challenged by weakened consumer demand. Private Label will be seen by more retailers as a catalyst for growth.
Structured changes in food retailing are also on the way. Sales growths in larger stores will slow as online and small format store sales gain momentum. Finally, retailers’ digital consumer communications will replace many traditional styles of marketing currently used by brands.
Ultimately, how this disruption will play out we don’t yet know. What we do know is that the journey of retail disruption has only just begun, with 2013 likely to be a new turning point in retail history.