Brands versus own label - what next?
Sandra Ridley of IRI InfoScan discusses the future of brands. In light of the increase in own label fmcg products, are there any products left in the 'brands only' domain?
MUCH HAS been written on the continued development of own label and the issues facing brands. The current situation is that there is little 'soft' growth to be had in the grocery trade, where the key accounts have about 80 per cent of the market, with the small operators squeezed almost to the point of extinction. The potential imminent price war between the giants to win the battle for supremacy makes the outlook for these small players even bleaker.
However, in the health and beauty (HBA) market, although the key accounts (top five grocers plus Boots and Superdrug) have a highly significant share of the market, there is potential for further natural growth, not just from the obvious target of independent chemists, but also from Boots and Superdrug which remain part of the high street and are not the focus of the main grocery shop. The abolition of retail price maintenance (RPM) would also mean that a natural increase in the sales of medicines would occur and those able to compete on price would benefit.
What is evident from the data in this article is that the size of the threat from own label depends on a number of factors. Own label is very developed in the grocery trade (in the grocery markets measured by IRI, the top ten brands are own label) where the main proposition in the past has been price. But this is no longer sufficient and in many cases, own label is under-performing. The answer to this has been investment in creating 'retailer brands' (defined as advertised and supported in their own right) which are premium priced and have real brand values.
Within the HBA markets, there are just two own label lines in the top ten brands. Image, credibility and trust are more important factors than in food. Boots has a strong healthcare heritage but this is not the case for Tesco et al. The potential in HBA is understood and significant investment has already been made, for example, stand-alone in-store HBA sections. But an example of how far retailers are prepared to go with HBA could be the launch of three major retailer brands in the oral care sector. Is this a warning shot across the bows or a trial to gauge how far the Safeway and Sainsbury brand values can be pushed?
So what can the manufacturers do to protect their brands? Even guidelines issued by the Institute of Grocery Distributors on 'copycat' branding appear from activity in the last few months to be seen not as a framework within which to work but as a boundary to be pushed as far as is possible by retailers until someone squeals.
An analysis of the top ten grocery, toiletry and medicine markets measured by IRI shows that sterling growth is coming from food items (seven per cent) and medicines (11 per cent) while toiletries growth is only a little higher than inflation (five per cent). On a volume basis, the top ten toiletry markets are static, with medicines and food sales for the top markets growing by four per cent.
There are significant differences in the development of own label between HBA and grocery lines.
In the major toiletry markets, own label has captured 24 per cent of volume and just 16 per cent of value sales, while in grocery its share is around 36 per cent of volume and value sales (if the yoghurt and dairy desserts category, which is more than 80 per cent own label, is excluded then the figure is closer to 26 per cent). What is interesting to note is that own label is growing its share of the top grocery markets while brands in toiletry markets are holding their own. So are toiletries an opportunity for retailer focus, and should alarm bells be sounding for manufacturers, or is the bigger opportunity for own label still in food?
The major packaged grocery markets analysed in this article include: yoghurts and dairy desserts, cereals, fabric detergents, yellow fats, frozen seafood, cat food, frozen ready meals, tea and ice cream. The average own label share is 26 per cent (excluding yoghurts) with own label under-performing in share terms in cereals, fabric detergents, yellow fats and cat food (it also under-performs in dog food). The opportunity for retailers if they achieved just an average own label share in these four categories is a staggering £264 million per annum, or around £400 million if dog food is included. Small wonder that we have seen the issue of copycat branding in at least two of these categories, and the launch/relaunch of retailer brands in others. Given that all of these categories are essentially 'must buy' and therefore not subject to much increase in demand, the future risk to branded sales from own label is high. It is also worth noting that own label is growing faster than the category in all of these markets (except yellow fats). Evidence would suggest that manufacturers have done well to maintain the position they have to date.
What characterises these markets is first, the presence of very strong brands - Kellogg's Corn Flakes, Weetabix, Persil, Aerial, Whiskas, Felix; second, manufacturers' investment in new product development using technological advances to stay ahead - I Can't Believe it's not Butter, concentrated fabric detergents; and third, heavyweight media campaigns. But this may not be enough when the retailers hold the major cards. They are the ultimate decision-makers regarding shelving plans, number of facings, promotional slots, and with advance notice required of new products to be listed, have an opportunity to launch own label products almost simultaneously.
Retailers have clearly spotted the £70 million plus opportunity in catfood and have flexed their muscles with the relaunch of Paws and Tiger in the mainstream catfood sectors. With retailers continuing to offer a lower-priced own label option in a relatively static category, branded lines have suffered in terms of items listed. However, Felix has grown its share in spite of the retailer brand activity (Exhibit 1).
It is perhaps not surprising that 23 per cent of stock-keeping units (SKUs) account for 80 per cent of sales, but consider the 77 per cent of SKUs which account for just 20 per cent of sales. Even allowing for the consumer's demand for choice, there is potentially room for rationalisation in the lines carried when space is at a premium. The main target is likely to be branded lines: 43 per cent of the own-label SKUs account for 80 per cent of own-label sales. However there is also a 'tail' of own-label lines - the bottom 25 per cent of SKUs account for just five per cent of the sales. Multiply the number of brands by the number of forms by the number of flavours and presumably there are more permutations than the average moggy wants or needs.
One tool in the manufacturers' arsenal is in-store promotions, ie temporary price reductions, in-store printed materials, secondary displays or any combination of these. It is a rare week that one would not find catfood on promotion, a delight for the 'promotion junkies', but obviously the cat has the final say in what is consumed! On average, 32 per cent of canned catfood sales are through in-store promotion - compare that with about half of Whiskas sales, a quarter of Felix and one-third of own label. On average, own label is only on promotion half as many weeks as some brands but is more likely to receive high quality support, in the form of displays, than any of its branded competitors.
Most responsive to in-store activity is own label, doubling its sales when promoted. An increase in volume of the biggest brands in the market could not necessarily be expected to match the increase in smaller brands but ensuring that sales are truly incremental rather than what would have sold anyway at full price is critical. Constant promotion of Whiskas is undoubtedly expensive, has not prevented its brand share slipping and is almost certainly eroding its brand equity. Perhaps a strategy of everyday low pricing, combined with understanding what cats like to eat is the key in this type of category (Exhibit 2).
The major risk to manufacturers has to be that other retailers will follow with their own retailer brand. Depending on the form and the cat's preference, a further decline in the fortunes of minor brands and even Whiskas might be the outcome.
REVERSING THE TREND
But all is not doom and gloom for the brand. There are grocery markets where brands are making inroads on what has traditionally been the domain of own label, for example yoghurts and dairy desserts and frozen pizza. Continued new product development, the extension of big name brands (Cadbury into chilled desserts, Heinz Weight Watchers into pizzas) into these sectors and the emergence of new brands have fuelled the strong growth of the category and brands within it. Retailers have a lot to lose in these categories. The yoghurt and dairy dessert category is worth £830 million and is growing at eight per cent per annum, with own label having a massive 83 per cent share. Frozen pizza sales are at £235 million, of which own label accounts for almost half.
The major toiletry markets include: personal wash, disposable nappies, deodorants and body sprays, sanitary protection, male toiletries, toothpaste, shampoo, razors and blades and facial skincare. With negligible volume growth coming from these categories (most are 'must buy' items), manufacturers are having to develop premium priced lines which are differentiated by quality or proposition from own label and other brands. To date, they have been successful, but an average own label share of 16 per cent across these toiletries categories compared to 26 per cent for packaged grocery (excluding yoghurts) demonstrates the threat/opportunity which exists. Just achieving that average 16 per cent share in all of these ten categories would generate an additional £76 million for own label and cause a huge dent in manufacturers' sales.
Categories where own label is under-performing in share terms include disposable nappies (very strong number one brand taken on by a newcomer and everything else is squeezed), deodorants (highly fragmented market with a number of strong brands), male toiletries (heavily dominated by fragrances), razors and blades (technology is important and brands are strong and heavily supported), toothpaste (but not toothbrushes which may be more of a commodity item) and sanitary protection. So far in HBA, the retailer brand response has been less prevalent. The reasons for this may be many, but trust and credibility are important - particularly in categories such as sanitary protection and toothpaste, where brand loyalty also tends to be strong.
Undeterred, forays have been made into these sectors - three major retailers have launched 'brands' in the last 18 months, recognising the £11 million opportunity in toothpaste alone. Their new ranges have been comprehensive and have generated own label growth of 22 per cent in toothpaste and 18 per cent in toothbrushes. This has been fuelled by an increase in the number of own label SKUs, offset by a decrease in leading branded lines (including special or promotional packs),see Exhibit 3. Overall, about 46 per cent of own label SKUs account for 80 per cent of the volume sales, but this does vary significantly by account, from 27 per cent of SKUs to 57 per cent. In the total market, 24 per cent of SKUs account for 80 per cent of sales. The proliferation of lines suggests that rationalisation will occur in the future. Just how much choice does the consumer need?
With such strong own label growth in a category which is barely growing in volume terms, it is encouraging for manufacturers to see the major players have all made share gains in the last 12 months. It is the minor brands which are being squeezed.
The reason for the continued success of the major brands is that they are driving the growth sectors as people 'trade up' in oral care. Exhibit 4 shows the growth of whitening and all-in-one products at the expense of baking soda products, tartar control and anti-stain pastes and powders. The bulk of the market continues to be in the middle-of-the-road family packs but there is no growth in this area. Colgate-Palmolive's Total is now the top-selling brand in the toothpaste market and a new freshmint striped variant has added to the brand rather than cannibalising sales. Meeting the consumer's needs through continual innovation, differentiation from the competition, maintaining the brand heritage and playing the trust card are likely to yield the best long-term prospects.
Toothpaste in general is a heavily promoted category (27 per cent of volume is sold on deal) and responds well to promotion (the average promotional uplift is 82 per cent). Again it is own label which is likely to receive the highest quality support but selective promotions will enhance the performance of the brands. Interestingly, one specialist line - Sensodyne - has performed very well, driving the sensitive sector, due no doubt to its relaunch and TV support. But although a large amount of Sensodyne has been sold on deal, this has not resulted in significant volume increases, suggesting that a product which treats a specific problem is not particularly responsive to price cutting. Mechanisms for encouraging trial and ensuring the product promise is delivered are the key.
In contrast, sanitary protection does not respond so well to promotions. The proportion of promoted volume is relatively low in the loyal sector - tampons - but higher in the discretionary sector - towels and pant liners - where response to promotions is marginally higher, but not in line with that of many other toiletries markets. A deep price cut is likely to generate a response, probably from loyal buyers, but the levels of increase in sales attributable to in-store promotions are significantly lower than toothpaste. Brand loyalty is usually handed down from generation to generation and is difficult to win.
Sanitary protection is one of the few HBA categories where own label is actually declining and where the market is barely keeping pace with inflation. Like toothpaste, trust among consumers is critical. The opportunity for retailers (or risk to manufacturers) is relatively small compared to other markets (about £5 million with own label share at 14 per cent) but if retailers persist in developing brands, this could well be a sector for focus. Its profile fits that of previous cases, namely just a few well known brands and limited natural growth potential (in tampons in particular).
In the last twelve months, lines from the key manufacturers have been delisted in favour of significant gains to own label. In this category, 39 per cent of SKUs account for 80 per cent of volume sales, so rationalisation would again seem a possible consequence. What is interesting is that sales of key tampon lines have not declined as a result of the loss of listed lines. The consumer will not necessarily choose own label because there are more facings, etc. Continued focus on the quality of the products and the impact on the shelf are essential elements of the enduring success of brands.
Manufacturers face a number of threats. If retailers continue to develop strong own brands with real values and a sound proposition, then brands will lose in terms of lines listed, shelf space and ultimately brand share. The biggest risk of this is likely to be within the packaged grocery sector where new growth is harder to win. But HBA will not be far behind. Although it is a sector where brand image is particularly key (what sits in the bathroom needs to be far more aesthetically pleasing than what is stored in the kitchen cupboard), by establishing brand values for Tesco and J Sainsbury (and it has been done before with St. Michael), retailers will be able to move into previously prohibited territory. Coupling this investment with use of their loyalty card, retailers have a strong weapon with which to build commitment to their brands. And using brands to effect store switching (recent nappies promotions have included 'buy one get one free') may generate additional volume for the retailer, but will do little for margins or long-term brand equity.
But all is not lost for brands. Some of the examples cited prove that with the right product range, real product innovations which differentiate themselves from the competition, being first in the market-place, strong brand heritage which is protected over time and selective in-store promotions with clearly defined objectives (building loyalty, gaining trial, encouraging extra consumption), brands can maintain their position or perhaps even improve on it.