Are Brands Dead?

The Economist magazine observed that every industry has its golden age. For brand manufacturers it was the middle of the 20th century, when distribution channels were fragmented and the media was consolidated. Powerful brand manufacturers like Coca-Cola, General Mills, Nestlé, Procter & Gamble and Unilever would delight their customers by launching one new product after another.

We are now in a new era where the retailers have power and have used it to transform the competitive brand landscape. With the rise of giant retailers like Aldi, Carrefour, Costco, Gap, Home Depot, IKEA, Staples, Limited Brands, Target, Tesco, Wal-Mart and Zara, there has been a private label revolution over the past two decades. This revolution has important implications for consumers, retailers and manufacturers. 

The Consumer Wins

An overlooked story in the private label revolution has been the impact on consumer welfare. The mega retailers have used their negotiating power to push brand manufacturers to reduce their prices. Rather than pocket all these negotiating gains, retailers have ploughed a large part of them into price cuts for the consumer. There is little doubt that consumers have benefited from the price pressure global retailers like Costco, H&M, Lidl and Metro have put on other retailers as well as brand manufacturers. A McKinsey study estimated that, over the second half of the 1990s, Wal-Mart accounted for 12 percent of the productivity gains in the U.S. economy.

The private label revolution can also claim credit for increased quality, product choice and price-value combinations available to consumers. The only way for manufacturer brands to compete against private labels is by launching innovative products and constantly improving quality. In the attempt to beat private labels, brand manufacturers have had to invest more time and money in doing so than they otherwise would have. Today, there are more products-and of better quality-because of the private label revolution.

To tempt consumers to try new products as well as store brands, most manufacturers and retailers now offer a money-back guarantee with no questions asked. This has considerably reduced the risk for consumers to adopt new products and brands, thereby enhancing real choice. The private label revolution has helped empower the consumer. 

Driving Innovation

As private label share grows, the competitive landscape requires a new approach by manufacturer brands. Growth in the developed markets will be hard and depends primarily on the ability to launch successful new innovative products and concepts. Given the resources needed to support ambitious new product programs, only brands with adequate size and share can be supported. The rationale to keep weak brands, those without top market share positions, is hard to see in most categories.

Continually finding new products is a challenge for the best of companies. Traditional models of innovation have limitations in producing the required number of new products, and in any case, large companies have never been great at innovation. In 1970, 5 percent of global patents were issued to small entrepreneurs, while today the number is around one-third and rising.

Recognizing this, P&G saw that its old model of purely internal innovation was suboptimal. Why not tap these entrepreneurs and scientists? Therefore, P&G launched the "connect and develop" model of open innovation.

With the open innovation model, P&G recognized that it was competing to pick up these ideas for readymade global distribution with other brand manufacturers as well as retailers. Nabil Sakkab, head of R&D at P&G, observed, "My biggest competitor is a person with an idea. ... I have to find them before Wal-Mart does." To succeed, P&G had to offer inventors the ability to develop and market their products quickly and better. As CEO A.G. Lafley noted, "Anyone in a garage anywhere in the world can come up with an idea that could be important to one of our businesses. We want them to bring it to us." The resulting change in the P&G attitude toward intellectual property was described as moving from the Kremlin to the Acropolis. 

Acquiring Minds

Beyond innovation, top-line growth will have to come from either acquisitions or growth in emerging markets. In general, large acquisitions do not lead to the desired results for the shareholders of the acquiring firm.

And the acquisition may even deflect the acquirer from focusing on the challenges faced by its existing brands and businesses. As Neville Isdell, CEO of Coca-Cola, said, "People tell me we should make an acquisition and I say, €˜Fine, but you're telling me that we're not running our own business very well. What makes you think we can run someone else's business better than they can?'"

The best growth opportunities for brand manufacturers are the emerging markets in Asia, Eastern Europe, Latin America and Africa. Population growth and economic growth are typically much higher than in Western countries, while the retail trade is fragmented. In these markets, brand manufacturers face challenges at which they have typically excelled, such as brand building, advertising and sales management. Although private labels are also slated to grow in these markets, they will remain a minor presence for the foreseeable future (see table, left).

Increasingly, aspiring managers will seek to work in these countries to make their mark. Consider the reaction of a South African manager of a large consumer packaged goods company when he was invited to run operations in Europe. He preferred to continue working in emerging markets. That was where the "action" was. 

The Private Revolution

Unlike what is sometimes believed, the increase in private label share in industries ranging from consumer packaged goods and apparel to home furnishings, office supplies and do-it-yourself is not a pendulum that will swing back and forth. In every annual survey since 1999 by Progressive Grocer magazine, supermarket executives ranked "Stress Private-Label" first out of the 26 priorities most important to them.

Similarly, in the consumer packaged goods industry, the worldwide share of private labels is expected to increase to 22 percent by 2010. By 2020, with increasing globalization and consolidation of retail, private label share should hit the 25 to 30 percent range. In fact, Western Europe is expected to reach the 30 percent mark by 2010. And this development is not restricted to packaged goods-witness the success of private labels in other industries. For example, U.S. share of private labels in apparel is predicted to increase from around 40 percent today to 60 percent in 2020. By 2010, an additional $100 billion to $200 billion per year will be lost that otherwise would have gone into the pockets of brand manufacturers.

In the United Kingdom, private labels now represent about 40 percent of sales in supermarkets. One could argue that the U.K. will no longer be an anomaly in private label development. Indeed, private label share at Wal-Mart is estimated at 40 percent compared to less than 10 percent two decades ago. By 2020, private labels in the U.S. could approach U.K. levels of share and profitability. If that happens, all of the projections above will turn out to be conservative.

Within any particular category over some period of time, one may see brand manufacturers win battles against private labels and increase their share. But it is hard to imagine any scenario in the war between manufacturer brands and private labels that could lead to a decline in the overall private label share between now and 2020. 

Winning at Retail

While all of the above seems great news to retailers, there are some pitfalls along the way that retailers must tread carefully. To be successful with private labels, retailers must remember when private labels add value they should "fill a void in the category" either in price or value. Private labels add real value in three situations:

1. In a category that is dominated by one or two brands, with little price competition. Here a copycat brand can give consumers a real choice where there was previously none.

2. When the retailer creates a dramatically lower priced private label by re-engineering the value chain and product, à la Aldi. This helps expand the market by providing good quality at low prices for the masses.

3. By introducing new products and concepts that are not offered by brand manufacturers. As a Wal-Mart executive remarked: "If we can come up with private label items that can bring something different, unique or new to a category, that allows us to be a better agent for our consumers."

Retailers, especially mainstream retailers, can overstress private labels from the consumer's perspective. In this respect, Sainsbury cola was a watershed for Sainsbury. It did significantly bite into Coke's market share, but Sainsbury lost share of the total cola market. Now Sainsbury realizes that it needs to sit down with Coca-Cola and design its cola so that it is complementary, not cannibalistic to leading brands. It took years for Sainsbury to learn that the role of the private label is not just to offer the same quality at a lower price, but to give a choice of different qualities at different prices. Too much stress on private labels at mainstream retailers, where consumers expect to see choice, can turn shoppers away.

In conclusion, retailers should stress private labels that add real value. Since manufacturer brands from a retailer's perspective are commodities available everywhere, it is understandable that retailers wish to emphasize their own private labels. But retailers need to be careful that this does not deflect them from their real mission, which is to "sell what the consumer wants, rather than what a retailer would wish to sell." In other words, there is an upper limit to private labels for mainstream mass retailers like Albert Heijn, Carrefour, Metro, Tesco and Wal-Mart of around 40 to 50 percent. However, have manufacturer brands planned for a future when this is true?