Bart van Dijk

Johannesburg, October 10, 2012

Presentation

Private Label: How both retailers and brand manufacturers can seize the opportunity

Consumer Goods Council of South Africa

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Some quick facts about A.T. Kearney

■ Management consultancy firm, founded in 1926 by Tom Kearney

■ 57 Offices in 39 countries (including Johannesburg, South Africa)

■ Serves all major industry segments and large accounts within

■ Consumer Goods & Retail is a key focus area and accounts for >25% of our global revenue

■ Our clients recognize us for being collaborative, authentic and forward thinking

“Our success as consultants will depend upon the

essential rightness of the advice we give and our capacity for convincing those in authority that it is good.”

Andrew Thomas Kearney

(1892-1962)

A.T. Kearney 82/09.2012/27970 3

Agenda

■ What is happening on the shelf?

■ Is South Africa following this trend?

■ How to go from here?

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Traditionally Private Label was meant to be aggressive on price

UK Example

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Now Private Label is conquering the prime spots on the shelves

UK Example

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Private Label is conquering the prime spots on the shelves

Dutch Example

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Private Label is started to use packaging as a differentiator

Dutch Example

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Private Label is becoming more exclusive, also in price

Dutch Example

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Private Label is becoming more exclusive, also in price

Dutch Example

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Source: A.T. Kearney research and analysis

Now retailers go beyond packaging design and move into special interest as well

Fairtrade

Allergic

Low emission

Healthy

Country specific

Organics

Kids

Serves One

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Clearly Private Label penetration levels differ between categories but growth is observed in almost all of them

Private label penetration per category, 2010-2011 (%)

11

18

49

50

59

65

11

18

46

49

58

63

Dish-wash

Beer

Milk

Cheese

Paper Hygiene

Personal Care

Source: Nielsen Markettrack (Informa)

2010

2011

+2%

+2%

+3%

+6%

+1%

-2%

German example

Annual Share Growth

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Private Label can be found in all tiers of the assortment and expected to grow, especially in the higher value segments

15%

70%

15%

% of total Private Label sales

Source: A.T. Kearney research and analysis, previous projects

Premium

Basic

Value

Illustrative

PL brands are shedding their image as cheap imitations, 29% of consumers worldwide believe that

private label brands are as good quality as branded goods

Private label brands are becoming a differentiator itself, increasing customer loyalty to the (retailer) brand

In Western Europe and the US PL products

accounted for nearly all of the growth in packaged food, beauty and personal-care, and home-care categories from 2000 to 2010

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Agenda

■ What is happening on the shelf?

■ Is South Africa following this trend?

■ How to go from here?

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Private label penetration in food retailers in South Africa is much lower than Europe and half of the global average

4

5

7

11

13

13

26

29

41

47

Russia

China

Brazil

South Africa

India

Hungary

Canada

France

UK

Switzerland

Source: Planet Retail, A.T. Kearney Analysis

Private label share of market share by value (2012 estimate)

World Average = 22%

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Private Label has the highest penetration in highly concentrated markets, South Africa still seems to have a gap to fill

Market share of top 5 retailers vs. private label penetration

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Russia

UAE

US

Spain

Switzerland

Kuwait

France

Germany

UK

South Africa

Belgium

Japan

Italy

Australia

New Zealand

Canada

Mexico

Brazil

China

India

Market share of top 5 retailers1

PL

mark

et

sh

are

1. Collective market share in US $ value (adjusted for PPP) of the largest 5 retailers in each country Source: Planet Retail, Nielsens, Havard Business Review, Private Label Magazine, A.T. Kearney Analysis

What is the reason for the below fair share of private label in South Africa?

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Especially the large low income segment is loyal to brands

Low Income (< 3,000)

83

17

High Income (>20,000)

71

29

Middle Income (3,001-20000)

75

25

High Low

Levels of brand loyalty relative to income (2010)1

5%

40%

High income > 20000 rand

Low income <3000 rand

Middle Income ,3000 - 20000 rand

55%

Monthly Income distribution (% of population)

1. Monthly income of individuals in South African Rands Source: African Journal of Business Management, Nielsen, A.T. Kearney Analysis

However, income levels in South Africa are expected to increase

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Whilst the appetite for Private Label has grown stronger, local suppliers seem to miss capabilities to fulfill the needs

South African retailer quotes illustrating issues with PL supply

“Currently, local manufacturers are unable to supply in sufficient quantity for private labels and therefore we are looking for opportunities to source offshore”

“We give our SA suppliers the first right of refusal to produce a private label product and will even assist them to bring their costs down, but if they can't get the price right we will go the import route”

“The food catalogue was made up primarily of our private label goods, the advantages of which were brand integrity as the company worked directly with suppliers and jointly assumed responsibility for product development, production, marketing and distribution. However, not all suppliers are able to deliver on this from the start”

Source: A.T. Kearney Analysis

But suppliers will start developing these capabilities

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The retail market has grown significantly across categories in recent years

CAGR Sales last 4 years (in %) in main retail segments

Source: A.T. Kearney Analysis,

Overall 9,7%

Household &

Furniture -2,9%

12,7%

Specialised

food retailers 6,6%

Fashion 10,2%

12,3%

Hardware

Pharmacy &

Drug stores 11,1%

General Retailers

Total General Retailers Segment size in 2009: 206 R bn

Possible price wars and stagnating category growth could change this picture in the near future

Sales growth in selected categories (’10-’11)

Pasta 4%

Canned Fish 4%

20%

Soups 5%

Sauces 8%

14%

Maize

Dressings 10%

Cooking Oil

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Agenda

■ What is happening on the shelves?

■ Is South Africa following this trend?

■ How to go from here?

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Four Strategic Business Segments…

Differentiated Product Offering

Mainstream Product Offering

Multi-Retailer Labels Retailer Specific Labels

“True A-

Brands”

“Retail specific- Brands”

“Mainstream Brands”

“Mainstream- Private Labels”

Source: A.T. Kearney

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…with clear historic domains

Brand

Manufacturers

Source: A.T. Kearney

Differentiated Product Offering

Mainstream Product Offering

Multi-Retailer Labels Retailer Specific Labels

Private Label

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Retail consolidation and increasing Quality image fuel Private Label growth…

Differentiated Product Offering

Mainstream Product Offering

Multi-Retailer Labels Retailer Specific Labels Source: A.T. Kearney

Brand

Manufacturers

Private Label

• Retail consolidation

• Improved quality image

• Discount channel increase

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…which in turn “exposes” a part of the branded manufacturers businesses

Private Label

Differentiated Product Offering

• Brand equity no longer sufficient

• Scale and operational excellence required

Source: A.T. Kearney

Brand

Manufacturers

Multi-Retailer Labels Retailer Specific Labels

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Private Label also attacks the core domain of the A branders

Source: A.T. Kearney

Differentiated Product Offering

Mainstream Product Offering

Multi-Retailer Labels Retailer Specific Labels

• Retailer marketing

• Innovation capability

• Supplier development

Private Label

Brand

Manufacturers

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What to do: Branded manufacturers need to be creative and focus on new sources of true innovation

Brand

Manufacturers

Private Label

Branded Manufacturers must tap into new sources of innovation

!

Source: A.T. Kearney

Mainstream Product Offering

What can we expect:

• Focus on real innovation

• A clear split between innovation and mainstream roles

• Supplier Value Creation

• Extended Co-branding

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What to do: Further scale and operational excellence creation are key for branded manufacturers

Branded Manufacturers must tap into new sources of scale and operational excellence

Brand

Manufacturers

!

What can we expect:

• Internal Shared Services

• Supply Chain Pooling

• Outsourcing and off-shoring

• Entering Private Label manufacturing

Private Label

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What to do: Retailers will be moving into new areas and segments with their Private Label proposition

Brand

Manufacturers

Private Label

Retailers will have to leverage PL offering with innovation and differentiation

!

What can we expect:

• Penetration in more categories

• Introduction of more exclusive private labels

• More retail driven innovation

• Supplier value creation

• New formats

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What to do: Retailers and Manufacturers should look into extensive collaboration opportunities

Brand

Manufacturers

Private Label

!

Retailers and Manufacturers must explore joint innovation with tailored innovations and services

What can we expect:

• Retail exclusive product launches

• Joint shopper insight development

• Tailored promotional support

• Shelf consumer testing

• Customized supply chains

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Collaboration today only scratches the surface – a broader, more strategic approach is required

Source: A.T. Kearney

Collaboration today… …game changing collaboration

• Collaboration becomes an exercise to “re-distribute” value between partners

• Objectives are narrowly defined and address tactical cost requirements

• Partners selected from existing suppliers/customers based on established relationships, large spends

• Collaboration is focused on increasing the value

created by partners

• Objectives directly support each partners’

objectives – growth, risk management, capital

productivity and cost / structural advantage

• Partners selected based on capabilities and

resources – suppliers, customers, peers, competitors

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In the most advanced level, collaboration reflects the notion of a “joint” value chain … what if we were one company

Source: A.T. Kearney

Manufacturer

Retailer

New Product Development

• Leverage joint insights and resources as part of a retail category strategy that results in breakthrough innovation

Distribution • Optimize the assets throughout our distribution network

warehouse/transportation) to reduce total delivered cost

Supply/ Manufacturing

• Pool resources and share best practices to improve procurement processes, and apply excess manufacturing capacity and streamline production planning to reduce total product cost

Merchandizing / Store Operations

• Collaborative in-store execution to reduce out-of-stocks and drive improvement in merchandizing programs/new launches

Planning • Collaborative Business Planning (CBP) to link strategic business planning

with execution across both organizations

How could we jointly …

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Besides this short presentation, we have additional reading that covers Private Label related topics

…visit www.atkearney.com or contact our Consumer Industries and Retail experts

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