RESEARCH – PRIVATE LABELS 2006

'The advantage of private labels is price, whereas the advantage of brands is quality'

A review of survey results collected during the Private Label Forum held in Zagreb, 14.02.2006
Observing the results of research carried out at our Private Label Forum, it is interesting to note that the standpoint of the majority of participants (66%) is that the leading motive for introducing own-private labels is greater profitability for the retailer, and increasing production capacity for the manufacturer (55%). Hence, private labels seem to be a very logical and practical solution for improving the retailer-manufacturer relationship, considering most of the respondents feel that manufacturers which produce private labels have greater negotiating power than those who do not. 

Regardless of the pragmatism involved, the future of private labels will be dictated, more than anything else, by the attitude of the end consumer.  In fact, 46% of respondents agree that the greatest influence on the market is generated by consumers, with retailers coming in second place with 44%.  From these results, we can conclude that retailers have, to a great extent, taken over communication towards the end consumer, creating a general sense that retailers are running the game.  It is to be expected that as soon as competition amongst retailers increases, their individual role in impacting the free market will significantly decrease, giving rise to end consumer influence. 

The respondents (managers working in the FMCG sector) feel that price (56%) and a more favourable relationship between price and quality (33%) are the main advantages for consumers when it comes to private labels.  The strength of the brand is reflected in the guarantee of quality (61%), greater availability (26%) and innovation (11%).  The challenge for the manufacturers is introduced with the attitude shared by the majority of respondents – in time, the perception of quality or the difference in quality between regular brands and private labels will decrease (43%), whereas the price difference will only increase (35%).  This indicates that consumers will be more prone to buying private labels, a trend stemming from the belief that they are buying the same level of quality (or greater) for less money.
 
Advertising is, alongside quality, the most significant factor in determining the success of a brand (mind-space), with price and shelf space contributing most to the sales of private labels.  This assessment should be viewed in relation to current market developments, seeing as most participants believe in the success of retailer branding (76%); similarly, they believe that retailers will be able to differentiate themselves through own private label development (46%).  In order to gain a complete picture when it comes to expectations in the industry, it is important to consider that most participants feel that in the next 3-5 years, we will see differences between brands and private labels depending on store format (56%).  Only a small number believes that the market will be dominated by retailers selling primarily private labels (21%).
At the moment, retailers are equally enthusiastic in employing 2 strategies -- the ‘umbrella’ strategy, and the strategy of individual private labels (31% each).  They show less enthusiasm when it comes to tying the private label to the name of the chain store (23%), and considerably less in expanding the private label with dependence on category or market segment.

There is no prejudice among retailers when it comes to country of origin of the chosen private label manufacturer – another finding that dispels some stereotypes present in the pubic eye.  And although most retailers choose local manufacturers (41%), there is a significant number of those that favour regional manufacturers (23%).  The most important aspect in choosing a manufacturer is an optimal relationship between price and quality (64%), followed by price and conforming to retailer demands (15% each).
The respondents are significantly divided when it comes to quality control – a little over half believes that quality control by the retailers is a viable concept, while the rest believe that retailers controlling manufacturers is not a strategy destined for success.

‘Private labels will grow faster than regular brands’ is the sentiment shared by 65% of participants, while only 11% believe that the opposite scenario is likely.  It is interesting that a relatively small number of respondents (11%) believes that manufacturers are likely to avoid the production of private labels, which suggests that we are in for a new and interesting phase in the retailer-manufacturer relationship, in which the retailers will be granted an opportunity to form a new bond with the end consumer – accompanied by a greater level of risk, considering the end consumer will also be the measure of success.