The just-food management briefing - private label - part III

By International News Services | 7 July 2010

Own-label lines are a key tool in building a retailer's reputation in areas from healthy eating to product safety. Grocers from the UK to Japan have developed strategies to ensure the suppliers they use and the products they sell support their corporate image.

Private label can be a virtuous circle for food retailers.

Grocers can use these lines to boost their own reputations for quality and good value and then that improved reputation in turn generates more sales of own-brand products. But retailers must get the products right.

US food retailers have had significant success transferring their good image to their private-label goods, especially when it comes to healthy options.

A research study conducted in 2009 by The Nielsen Company reported: "US retailers continue to make progress in offering store brand products with claims relevant to shoppers looking for healthier choices. Store brands flexed their marketing muscle in the health claims arena putting impressive growth numbers in emerging areas – genetically modified organism free, gluten free, and absence of a specific fat.”

US-based food marketing expert Dr Richard George agrees: "Retailers like Whole Foods Market have done a terrific job at offering unique private-label products that become a destination product for shoppers. For example, Whole Food Market Organic Fettucine compares very favourably to the leading national brands of pasta.”

But suppliers are also benefiting from the private-label trend, in marketing as well as production. Dr Ronald Goldsmith, Richard M. Baker Professor of Marketing at Florida State University, believes there are a number of benefits to private-label contracts. "It permits [suppliers] to make best use of their production capacity (avoiding downtime). They can make profit on manufacturing the private-label product that enables them to avoid raising prices on their own brand,” he said.

"They [private-label contracts] also prevent other companies from getting that business; the private label might hurt competitors as much, or more so, than the supplier. Supplying private-label product helps a manufacturer gain a strong presence in the distribution chain or product category.”

In European food markets, retailers have used their first-hand knowledge of consumers to design own-label brands that closely match their shoppers' preferences, boosting the reputation of product and retailer alike. 

"Retail is very close to the consumer, gets feedback every day about likes and dislikes, and this allows stores and retailers to react very quickly," says EuroCommerce’s Francine Cunningham. At the beginning, Cunningham says, own label "was confined to 'me-too add-on products' - but it's become more sophisticated and innovative and in many cases it’s now the market leader".

An example is how the UK's Marks and Spencer has become the market leader in ‘recipe dishes’, such as prepared and semi-prepared meals, under its own-brand name. 

Moreover, previously held perceptions that own-label goods are somehow inferior are dismissed by retailers. "Leading retailers have brands and reputations every bit as strong as the manufacturers and aren't going to put them at risk by sticking their names on substandard goods," explains Stephen Robertson, director general of the British Retail Consortium.

John Ibbotson, managing director of retail consultancy Retail Vision, says own-label sales "have been the biggest contributor to major retailers' profits in the last 20 years and the key footfall drivers in UK supermarkets". Retailers who did not adopt own-label strategies got left behind – "witness Woolworths [the UK general retailer that collapsed in 2008]”, he says. 

A similar understanding of the need to position own-label lines as quality items is evident in Japan.

Own-label lines are increasingly popular in the country, as retailers start to appeal to increasingly price-conscious consumers in a sector that is facing both contraction and deflation. Annual sales of own-label products at Aeon and Seven & I Holdings – Japan's two biggest retailers – now amount to JPY440bn (US$4.79bn) and JPY320bn respectively. 

Japanese retailers are, however, keen to position their own-labels as quality brands rather than just cheap generic alternatives. The design and packaging of own-label goods have become increasingly sophisticated as retailers put more resources and effort into their marketing.

"One of the main ways that retailers try to establish the own-label's brand image is through an emphasis on domestic production, and the use of Japanese ingredients," said Taneo Moriyama, managing director of food and retail market intelligence specialist Insight Inc. "This is particularly effective at the moment with concerns about food safety still strong after the Chinese-produced food poisoning incidents."

In 2008, pesticides were found in food from China. Tests that October on green beans revealed pesticide residue 34,500 times the level permitted by the Japanese government. Earlier in the year, 950 people sought medical treatment after eating frozen food imported from China, including dumplings from Hebei province.

Moriyama adds that retailers also advertise the checks and tests carried out on private-label lines, along with contracts they have with specific farmers. 

"Almost all of this communication is done within stores as the retailers usually don’t advertise own-label products on TV or in newspapers, although Aeon’s flagship Topvalu brand is an exception as it does promote that nationwide," explains Moriyama.

Again, for manufacturers supplying the own-label items, the sector often represents an opportunity to keep production running at profitable levels in a challenging domestic market - a factor that became even more important during the recent recession, Moriyama says. 

In China, and possibly other emerging markets, the risk of own label is all too apparent. A health scare involving a retailer brand could damage the entire reputation of a chain.

Sun Ming, a spokesman for Shanghai-based Centurymart, says sourcing reliable suppliers and learning from their Western counterparts are critical. "For example, we don't usually turn to suppliers whose major clients are big food companies, because our orders won't be taken seriously," he told just-food. 

The trick, which Centurymart based on advice from US-based private-label consultant Daymon Worldwide Inc, is working with smaller manufacturers armed with complete equipment and qualified research people. "They need big orders and we need reliable manufacturers, so it’s a win-win deal," Ming insists.

For many small and medium-sized manufacturers, it is indeed a win-win deal even though profits are low. Big, regular orders benefits the business, explains Li Liqun, manager of the private-label division at Changzhou-based Yitai Foodstuff Co, which makes powder foods and drinks, as well as biscuits.

"For example, we get daily orders for soy milk powder from Carrefour, and we don't have to worry about sales and returns, and also, there is no slotting fee, all of which is a huge relief to us," she says. 

Yitai now works with a string of retailers, including Carrefour, T&T Supermarket and Shengzhen-based supermarket Ren Ren Le.

As for quality control, aside from regular food inspections conducted by Yitai and the government agency, most retailers prefer third-party sampling.

"Our clients usually require sampling three times a year,” Li Liqun says. 

However, Li Wei from Shanghai Zhan Guo Ce Consulting, said it might be better for retailers to focus more on providing food materials and frozen foods. 

"This is especially proper for small retailers who are keen to develop the business. They are not trusted as food manufacturers, so starting from rice, beans and frozen chicken wings could be a safe way to gradually win the trust of consumers,” he suggests.

Sectors: Baby food, Bakery, Canned food, Cereal, Chilled foods, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Emerging markets, Food safety, Fresh produce, Meat & poultry, Natural & organic, Private label, Retail, Seafood, Snacks, World foods

Companies: Whole Foods Market, Aeon, Marks and Spencer, Carrefour

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The just-food management briefing, July 2010: private label

Demand for own label has been a key feature of the economic downturn. The sector may be mature in Europe but it has seen growth in the US - and emerging markets are catching on too. just-food's latest management briefing analyses the latest trends.

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