Retailer own-label products have yet to impact strongly in the region, but that could soon change. Peter Barton reports on the likely impact.
At between 3-4%, the market share of private label in the Middle East is neither negligible nor earth-shattering. In a region with so many blockbuster market segments, it seems hardly worth a second glance. When real estate is flying and there's a new mobile phone out every week, you can be forgiven for allowing sales of baked beans, bleach and bin bags to slip under the radar.
All this is set to change, according to the latest study from AC Nielsen, 'Power of Private Label 2005'. The report suggests the regional value of private label sales will increase by 15% through 2006, faster than the global average. Coming off a low base, it contends, the Middle East is primed for several years of sustained growth and increasingly sophisticated product marketing.
"One thing is certain," says Hubert Lobo, the company's head of retailer services, "private labels will give global brands a run for their money in the next two years."
There are two strong trends to support AC Nielsen's prediction. The first is the physical expansion of the major supermarket chains. The second is the increasing cost of living, and pressures on domestic budgets. If rent, petrol and school fees are rising - and unavoidable - one area that savings can be made is by trimming the weekly grocery shop.
"The success or failure of private label will depend entirely upon the footprint of the retail chain in a particular region. The larger the chain, the more likely it is that private label is going to be accepted," says Lobo. "Price differentiation is also a major incentive to purchase private label."
At present the bulk of private labels are pitched at the price-conscious shopper: basic product at entry-level prices. That would tally with AC Nielsen's global findings. Private label in what it terms 'Emerging Markets' (which includes the Middle East) is priced 40% lower than manufacturer brands. In North America, one of the more sophisticated markets for private label, the average price is just 27% lower.
"In this region it is important to keep in mind that the consumer is constantly seeking greater value propositions. This will become even more salient given the increasing cost of living and will further give a boost to the growth of private labels" adds Piyush Mathur, the research company's GCC managing director.
"The higher margins for the retailers would translate into a greater push in the form of visibility and merchandising by them."
If the rise of private label is inevitable, who will lose out and how will the manufacturer brands react?
Over there, coming here
"Private label has definitely dented the market share of some branded products," says Vipul Bahl, marketing manager of FSL, distributor of the Diamond brand, "but it's only in patches."
While he allows that individual price-driven promotions have impacted, he says the overall performance of Carrefour's Number 1 own label has been patchy. Where it has gone toe-to-toe with Diamond products the impact has been minimal: "Unless it's a price-driven category - kitchen cleaners or bleaches - the consumer is not trying Carrefour's products. It's the same with Spinneys' Home Choice tea. I don't see many people switching from Lipton."
Other mid-market brands are equally dismissive. Taufic Zeidan, marketing manager of Health Water Bottling, distributor of the Nova water brand, says brand value still counts for plenty. "Water is like the cola market," he reasons. "Who can tell Coke from an own-label? You pay for the brand."
Zeidan points to the growth of branded heavyweights - Coca Cola, Nestl and PepsiCo - and the treated water market as evidence that consumers are willing to pay more.
Ashton D'Souza, sales manager of Kuwait Danish Dairy, says nothing private label has done so far frightens him.
"There is a threat, maybe 10% of the market could be affected," he explains, "But when I see what they've done over the past year I don't see a problem for us. We don't come cheap. Our customers are paying for a reason: the product attributes."
This is bullish talk, but it is unlikely to frighten the major retail chains. Carrefour, Geant and Panda all have ambitious plans for new hypermarkets across the region (Saudi Arabia alone is down for 40-plus new stores), these will be backed up by a larger network of supermarkets from second-tier retail brands. Branded convenience stores are also a possibility. Bottom line, in three years time more of the consumer grocery spend will be in the hands of fewer retailers.
"Private label awareness and acceptance in Asia and other developing markets will, in part, go hand in hand with the growth of modern trade in these areas," says Mathur.
"In some countries, where the retail landscape is highly fragmented, a lot of shoppers are only just getting used to visiting supermarkets and hypermarkets regularly for their groceries, and private label is still a relatively new concept for them."
The longer consumers have been exposed to private label in terms of years in the market and how highly penetrated it is as a percentage of total category sales, he says, the better they think about them. In markets where private labels are less developed, consumers know less about them, and assume from their packaging and price that they are of inferior quality and aimed at people who can't afford the bigger brands.
"The success of retailers in Europe and North America clearly demonstrates that investments into building up private labels and educating consumers about their value can produce rewarding results in terms of shopper loyalty and bottomline," he adds.
Vipul Bahl argues that, today, consumers tend to shop in different stores - Spinneys one day, Choithram the next - and they stick to brands they recognise. If the market trends are saying retail brands will be widespread, then this won't apply. It will be easier for retailers to launch - and communicate - own-label.
The benefits of own-label to retailers are three-fold. The first, potentially, is margins. On high volume lines with little need for brand investment they present a more attractive prospect than branded products. Secondly, done well, private label can also create a point of difference for the retailer. Taken together these can keep branded suppliers on their toes and inspire category innovation.
Private label development usually starts in commodity categories where consumer loyalty to brands is marginal. For example - foil, garbage bags, plastic wrap film, domestic chemicals, dairy, etc. Traditionally, the most difficult categories to penetrate have been baby food and decorative cosmetics, categories with a real or perceived need for quality.
Entry-level will be the start of it (and could prompt a new category of all-discount retailers in the same vein as Aldi or Lidl in Europe) but if global trends are to be trusted this will just be the thin end of the wedge. In the Middle East, where consumers have been less exposed to brands than, for example, Europe, private label could spring up in virtually any category. If consumers trust the retailer's name, chances are high they will trust their own label products.
The AC Nielsen study found the Refrigerated Foods category (containing Milk, Cheese and Complete Ready Meals) grew by 9%, the most of any category. This increase backed up a steady trend of retailers worldwide: pushing private label products into premium segments that go beyond low price-high volume. Comparing the average price differential between branded and private label products within 14 product areas, Refrigerated Foods had the smallest differential at 16%, compared to a global average of 31% across all categories.
The Refrigerated Complete Ready Meals, where retailers provide consumers with all the ingredients for a complete meal in a variety of packaging, styles and recipes, now commands 49% of overall category value sales.
"Strategically, retailers worldwide seem to be placing more and more of an emphasis on branding and marketing their private label wares to match the lifestyles and values of their shoppers," notes Jane Perrin, managing director, AC Nielsen Global Services. "From the Tesco Healthy Living range of products to (Canadian company) Loblaw's President's Choice expansion into organics and health-oriented lines, retailers are expanding their brands far beyond a singular focus on low price points. We are even seeing retailers leverage the equity of their private label brands outside of fast-moving consumer goods into areas such as personal finance, insurance and telecommunications."
The point Perrin is making is that the private label of the future will retain its price advantage but come with dedicated brand support. A recent study by Information Resources Inc in the US supports this view. It says a new generation of own-label products is forcing retailers to raise their game.
"The image of private label has changed in consumers' minds from purely a low-price option to a set of products that offer quality and value," said Janet Eden-Harris, global CMO for IRI in Chicago. "As these products are increasingly being stocked and promoted within value channels, traditional retailers must begin to look for ways to stay ahead and even reposition their house brands as the best of both quality and value."
The added pressure on grocers could result in a cross-channel fight for shoppers' radar and the study predicts that grocers will attempt to stave off competition with ramped-up marketing and a greater product variety could include branching out into fresh foods.
The knock-on effect on branded suppliers is more daunting. Despite the bravado of Bahl at FSL, he admits the revamped business has rationalised its product roster from 15 to eight lines, to back its winners. Of these eight, it has since gone on to get behind just three categories - honey, jams and tuna. The rest are under constant review: cereals may be axed with olive oil coming in as a replacement.
Bahl says the challenge is to find categories that don't have one dominant brand (Kellogg's, he says, has proved just too powerful) and to find a point of difference. He says private labels will struggle to do this without the dedicated marketing support.
"A store could launch into many categories but they would all need supporting," he argues. "And in each category they're competing with four or five different brands." His inference is that private label might be too much of an effort for all but the totally dedicated.
There is also the possibility that branded suppliers will move into standard commodity brands. In this region the dairy sector is already oversubscribed with branded players, as is water. In contrast, bakery and fresh produce is light on power brands. In the UK, despite the prevalence
of instore bakeries, the branded bread market accounts for 65.3% of the market, according to TNS Superpanel for the year to September 2005. Kingsmill, Hovis and Warburtons dominate.
Interestingly, MBM Produce, a division of Premier Foods, has launched Potato Lovers, the UK's first fresh-potato brand. It will compete with retailers' standard, loose product. MBM Produce maintains it can deliver higher margins and better negotiating options with the supermarkets. It also adds interest to the category. The risk, of course, is that the supermarkets will be quick to copy should Potato Lovers take off, but the same argument could be applied to Aquafina, Arwa and Masafi in the water category.
The determining factors will be brand equity and product innovation. As private label grows, expect branded suppliers to spice up their marketing and deliver more product benefits. For those that don't, the retail brands will be waiting to pounce. For avid watchers of the bin bags and bleach market, the next few years should provide interesting viewing.
Line of defence
Sophisticated private label can pre-empt new competition.
Just as Whole Foods Market prepares to open its first UK store in London, Tesco has added a Wholefoods range to its already extensive Healthyliving range.
While the Healthyliving range includes more than 400 products aimed, says the retailer, "at making healthy eating effortless", the Wholefoods range will offer wholefood products that have not had any natural features taken away or any artificial substances added. According to the retailer, the decision was provoked by increasing sales of natural foods over the past 18 months.
Tesco commercial director Carolyn Bradley stated that customers are becoming more interested in health and eating natural foods and thus the ability to buy wholefoods at Tesco, and at Tesco prices, would open up the market.
Tesco has seen an increase in sales of products such as nuts, seeds and lentils. Additionally, sales of dried food have increased by more than eight times at its stores. Products offered at Tesco include quinoa, mung beans, soya beans and black turtle beans.
© Gulf Marketing Review 2006
