Private label products are taking increasingly more space on store shelves and winning the trust of consumers to a greater extent than some time ago. The first private labels of retail chains were created in the 1970s. Intensive development and the high growth dynamics of this market segment fell during the 1990s. In recent years, the share of private labels in retail in certain European countries has increased substantially. In 2003, the share of the private label sector out of the entire market totalled 30 percent in only a few countries. Based on the data published by plmainternational.com, this figure has now increased by almost two thirds. Switzerland, where private labels constitute up to 54 percent of the retail market, is the record holder.  A 48-percent share of the market held by private labels is recorded in Great Britain, whereas in Belgium and Germany, the share totals 40 percent. Private label markets are also doing well in Spain (39 percent), Slovakia (37 percent), Austria (37 percent), France (34 percent) and Portugal (34 percent). Private label products have taken an average share of 24 percent in the remaining states included in the research study. Only in Italy, Greece and Turkey does this sector have a market share below 20 percent. In Poland, the own products of retail chains constitute 21 percent of the market; hence, we occupy one of the lowest places in the European ranking.

“The private label market is growing all the time in Poland. It has not reached the same levels as in the countries of Western Europe or North America, but that is because it has not been fully saturated with private labels so far. Their popularity is growing together with the development of trade in retail chains. Discount stores are the places which offer the widest selection of private label products in all FMCG market segments”, says Ewa Tomaszewska from the Marketing Department at Spoldzielnia Pracy Cukry Nyskie. Products from the private label sector have become a tool used by producers and distributors in the battle for customers. Both groups manage their brands successfully in an attempt to take first place in the awareness of potential consumers. There is nothing to suggest that the standing of large chains of supermarkets, hypermarkets, department stores or shopping centres would be reduced and, thereby, private labels should continue to gain in importance. “The private labels market is promising because of its tendency for growth. In Poland, it has grown several times in recent years. Additionally, a problematic economic situation worldwide may be its driving force. More and more consumers who are looking for less expensive products will turn to private labels”, says Dorota Weres, PR Manager at Eurovita. Moreover, according to trade and commercial experts, every third product will be under a private label in the not too distant future. Therefore, we can assume that these products will squeeze the goods of local producers out of the market soon. Consumers will be able to choose either well-known global brands or private labels.

Private label production – is it profitable?

In Poland, alongside the political restructuring, the methods of the distribution of goods have changed as well. Back in the 1990s, trade and distribution were based on small shops, markets and fairs. There were many small producers with strong local brands. When international supermarkets and hypermarkets entered the market in Poland, the process of the gradual disappearance of some local brands and their replacement by recognisable international brands started. Polish producers who did not have a strong national brand were left with two options – sell their brand to a foreign producer or start production of a distributor's brand. Companies which decided on the production of brands for retail chains were usually small in size, had a limited portfolio of products as well as extensive production facilities, yet were not strong enough to meet the needs of prominent producers. “A producer of private label products should be flexible and able to adjust its range to suit market needs and consumers' requirements quickly. If a consumer is looking for a cheaper product, production costs should be reduced. However, it is not that simple to reduce production costs and at the same time maintain the same quality of goods. We pay special attention to the quality of our products; we would never agree to offer poorer products even in the case of private labels. They are always of the same quality as the branded goods produced by our company”, says Ewa Tomaszewska. According to Marcin Ciecierski, owner of FHU Excellence, a producer of private labels should, above all, possess efficient production machines, specialised personnel, a head office located near logistic centres, its own transport means in order to guarantee quick deliveries and have low production costs. Private labels are an important supplementation of business for many companies.

“For many years, we have been a big player on the Polish chocolate bar market. Production and distribution of chocolate products has been the core of our business. Based on many years of experience as a producer of most prominent private labels, we are able to compete on this market and win tenders”, says Dorota Weres. “Besides the production and distribution of Terravita, Terravita KIDS, Cocoacara and Alpinella chocolate products, we also specialise in the production of private labels (mainly chocolate bars) both on the Polish market as well as abroad for such well-known partners as Makro, Real, Auchan, Kaufland and Eko. We also manufacture occasional goods, such as bars or figurines, under private labels.”

However, based on the experience of recent years, not only small and medium-sized companies, but also market giants have decided to work in partnership with retail chains. For example Unilever, owner of such brands as Rama, manufactures Wyborna margarine for Biedronka. It may seem to be a strange decision, because it is no secret that retail chains take away some of the producer's margin and become its competitor the moment they begin marketing private label products. However, this very important player on the FMCG market is not afraid of such forms of competition. “Unilever is a producer of branded goods. The production of one private label (margarine) has a strategic purpose and is connected with the desire to improve utilisation of productive capacity”, says Wojciech Tomczak, Unilever Poland's Press Spokesperson. “Branded products bring stable and high quality guaranteed by a well-known and reliable producer, constant innovations, state-of-the-art technologies, the feeling of security as well as a specific image and status. Private labels obviously cannot provide consumers with such a combination of properties at the same time.” Smaller and less powerful producers do not have a sufficiently strong market position to fulfil the requirements of supermarkets. Their brands are not embedded in the consciousness of consumers as compared to global brands. Therefore, it is often the case that the only option such a company has is to start production for a retail chain. Introducing less expensive products to stores leads to a situation where customers abandon relatively cheap and good local brands and decide to purchase private labels. Sometimes, brand cannibalisation takes place when two similar products from the same factory are occupying store shelves and differ only in the fact that a private label is less expensive. For that reason, many serious players on the FMCG market decide against private label production. It is based on another assumption – producers make generally less profit on private labels than on their own branded products.

The level of market penetration by private labels changes depending on the product category and country. These differences are based on many elements, including the product type and its production technology, the stage of the product's life cycle, market size and its development dynamics, market
structure, in particular the presence or lack of a particular producer's leading brand, the consumer's sensitivity to a brand, shopping preferences and consumers' behaviour. A market with a lot of producers yet without a leader in a dominant position is most beneficial for product brand development. With such a highly fragmented market structure, producers' brands can be easily replaced with private labels. On the other hand, if a market is dominated by very strong producers, retail chains find it much more difficult to take over significant parts of such a market. Leading producers, whose brands have strong market positions, always invest a lot in research and development as well as in promotion. Hence, it is extremely difficult for private labels to reduce and weaken such an advantage. Consumer sensitivity to a brand is additionally dependent on the role a given product plays in the shopping preferences and habits. Increased awareness of well-known producers' brands undoubtedly hinders promotion of private labels. The important role of private labels is mainly noticeable in two product categories – food products and chemical agents. Fast-food (ready meals, vegetable and fruit preserves, frozen products, etc.), beverages and sweets are the most frequently purchased and most popular private label products. On the other hand, toilet paper,
cleaning agents and paper towels are the most important private labels among home products.

Consumer: I pay less, I buy wisely

There is still a conviction lingering on in the awareness of consumers of private labels on the Polish market that these products represent lower quality than branded products. Therefore, many customers still prefer to pay more for a branded article. “A private label in Poland is still associated with a cheaper and, hence, lower quality product. Such a conviction has its roots in the times when large retail chains were entering the Polish market and did not have the proper tools for supplier selection and control. As a consequence, products that could have shaped the image of a private label in a negative manner appeared on store shelves”, says Marcin Ciecierski. “At present, the system of supplier selection is very strict and demanding. A supplier is audited many times before cooperation is established. Controls and verifications are also performed during cooperation.” Such a change in situation affected the attitude of consumers towards private label products. “The private label market in Poland has evolved drastically in the last decade. The quality of products has improved a lot. Many private labels are produced by leading and well-known producers. As a result of these changes, the perception of products by the customer begins to change as well. Based on our observations, customers are more willing to reach for a private label product if they are sure that its composition and packaging does not differ too much from widely available brands and the price is lower”, adds Marcin Ciecierski.

According to the data presented in a report entitled “Private brands of retailers in Poland 2009 – Market analysis and development projections for 2009-2011” compiled by PMR in September of the previous year, current perception of private labels is changing and their original image, i.e. the image
of low-quality products, is gradually disappearing from sight. Buying private labels is no longer treated as a method for shopping cheaply (66% of responses), but a way of buying articles wisely and smartly (56%). More than two fifths of the respondents declared that they buy retailers' products more often than a year before and 27% claimed that private labels constitute a significant part of their shopping. “Price awareness is beginning to play an increasingly important role in the shopping preferences of the Polish consumer and, at the same time, private label products are no longer associated with lower quality. A thinner wallet, caused by increased unemployment, forces consumers to buy less expensive food and the fast pace of life has a substantial influence on the consolidation of the shopping process – we choose places where we can buy all the necessary products in one point of sale. A conscious and economical selection of consumables proves the thrift of Polish society”, says Ewa Tomaszewska.

A change in the perception of private labels has taken place not only in Poland; their role in Europe has been altered to a large extent as well. The former conviction that a private label is worse than the brands of well-known producers is being supplanted by much more balanced and positive assessments. Private labels are more and more often perceived as products whose level of quality is comparable to producers' brands. The factors which affect the change of perception of private label products to such an extent include, most of all, very clear quality improvement of products marked as private labels and reduced innovativeness of producers in the scope of launching new and better products. “Presently, more attention is paid to the quality of private labels. They are no longer distinguished by a low price thanks to the reduction of quality, but by good quality with a relatively low
price”, comments Dorota Weres.

The latest trends concerning private labels are repeatedly based on an attempt to reposition product brands and build new positions in the categories of medium-priced and expensive products. It seems that with a generally positive evaluation of private labels, this strategy may turn out to be effective. In a wider range of goods – European markets are full of low-price, average and premium products, whereas private labels in Poland are still associated with the cheapest products only. “During our
collaboration in the scope of private labels for retail chains so far, we have classified our goods in the low and medium price level. It is a mid-range level for our distributors. However, private label products are generally cheaper than the branded articles of a given producer”, says Ewa Tomaszewska. According to Marcin Ciecierski, we can distinguish two price segments among private label products. “They include the so-called initial price products and the so-called leading brands. A leading brand is usually a product close to or better than a market leader in terms of quality. On the other hand, initial price products, as the name suggest, need to be cheaper, which does not mean worse.”

Building a new image for a private label

In recent times, a tendency towards stronger marketing support for private labels has been increasingly apparent both worldwide and in Poland. The main objective of intensified promotional activities is to change the image of this type of product and reach new groups of consumers that were previously not interested in purchasing the articles offered under the private label of a retail chain. The first step towards the execution of the above-mentioned objectives are changes in the range of private labels – improving and keeping the quality of initial price segment products, introducing mid-range products and the premium segment as well as making a range of goods more appealing by adding special niche lines. “The fundamental aim of our company is to supply customers with high quality products. Thus, we provide customers with the ammunition enabling them to stand up to the popular and extensively promoted brands. Private label products are usually not advertised in the media and consumers need to be convinced to buy them by quality and the proper price”, says Marcin Ciecierski. Communication and paying attention to consumers is the second step. So far, these actions have not been intensive and far-fetched as in the case of branded products. All of the currently known and applied marketing tools can be used to build a brand. However, at the same time, it is important to be aware of the target one has set. Frequently, retail chains look for odd or peculiar methods of promoting their own brands that go beyond the beaten tracks of promotional leaflets. Product placement – a mechanism of placing a product in mass media in such a way that it appeals to the subconsciousness of customers and encourages them to make a purchase without the use of an obvious and open advertisement – is an example of such activities. Moreover, changing the approach to how such products are packaged may turn out to be helpful when building a new brand image. Currently, more attention is paid to the aesthetics of packaging – the way private labels are packaged needs to be similar to the appearance of branded goods.

Taking special care of the consistent quality of offered goods, both on the part of producers as well as the retail chains, is another important element in the process of building a positive private label image. Therefore, various types of quality control systems are implemented. “We use the same quality control system for private label products at our company as for our standard branded goods. We do not lower the quality of private labels just to reduce their price. We have been given a BRC Certificate, implemented an HACCP System, have a Quality Assurance Department which is in charge of the constant supervision of goods produced. Product research is carried out according to the Goods Control and Research procedure”, says Ewa Tomaszewska. Meanwhile, Eurovita has implemented quality assurance systems based on the ISO 9001 standards and HACCP food production safety systems. Additionally, retail chains commission independent laboratories to perform product quality research studies. Excellence operates according to the BRC 5 standard. It is one of the systems which guarantee safety and the constantly high quality of products. The system was designed based on the needs of large retail chains. “A company which operates a BRC system (or IFS) must meet all of the requirements specified by its customer. It needs to be remembered that domestic and EU legislation regulations are not the only requirements; the demands of a particular chain have to be taken into account as well. Obviously, quality and safety are the two most important aspects, but the requirements can also include a trade ethics policy. This element is supposed to ensure that customers’ suppliers or their supplier's suppliers do not exploit children or support slave labour. The private label producers’ obligation is to audit and verify all suppliers in order to have full knowledge about their operations”, says Marcin Ciecierski. By launching a private label, retail chains deliberately sharpen their requirements to be certain that a product will be able to compete with leading brands in the future and will not influence the general perception of a given chain in a negative way.

Modern retail chains more frequently exploit private labels in the process of competing with producer brands. A private label is an inherent part of the low price strategy practised by large retail chains. It is an important instrument in chain positioning and image shaping. Such a form of positioning is much more distinct if a private label name is the same as the name of a chain. Customers' trust towards a chain is transferred to its flagship mark almost automatically. At present and in the future, the scale of this phenomenon will increase. Research studies show that the dynamics of private label sales growth are and will remain higher than the dynamics of producer brands in the years to come. Retail chains use their private labels to effectively compete with branded products for a consumer who is very sensitive to prices. Having a strong private label allows retail chains to exert more pressure on producers of private labels during negotiations and agree on more favourable transaction conditions. Thanks to such operations, private labels have a very distinct advantage over producer brands. Therefore, we are and will be in the foreseeable future, the witnesses of intensified movements in the field of marking goods both by producers and distributors. Both of them look for the opportunities provided by this marketing instrument – higher turnover and a bigger number of loyal customers. This instrument may turn out to be very effective; however, to make it happen, it needs to be managed and operated very skilfully. “From our own experience we know that high demand for private labels causes increased pressure on much lower prices (exerted most of all by retailers), which consequently leads to the drop in the profitability of goods. Increased sales of private label goods does not necessarily mean higher income, therefore we have to be very careful when planning the policy of private label development. The essence is to find the proverbial “golden mean” between profitability-generating turnover and the retail chain's pressure on maintaining the low price of a product”, says Ewa Tomaszewska. One thing is certain, the production of private labels must be thoroughly analysed and worked out. There is a lot to think about because, based on many premises, the market of private labels will continue growing in the future. It may result from the fact that private labels in Poland, as compared to Western Europe, have a very small share in the market, hence an enormous potential. Moreover, the Polish retail chain market is poorly consolidated; consolidation means trade modernisation and modern trade is the reason for the increase in the share of the market of private labels. It is a serious challenge for the producers of branded goods who will have to fight with private labels for their share of the market.

Author:
Aleksandra Syrtow,
a.syrtow@foodfrompoland.pl

Maja Swiecka,
m.swiecka@foodfrompoland.pl