the future of private label

The Future of Private Label

Euromonitor International : Strategy Briefing

February 2005

Strategy Briefings World

Euromonitor International Page i

List of Contents and Tables1. Introduction and Background............................................................................................................................ 11.1 Definitions ........................................................................................................................................................... 12. Executive Summary............................................................................................................................................. 22.1 the Changing Definition of Private Label............................................................................................................ 22.2 Impact of Economic and Retail Environment ...................................................................................................... 3

Chart 1 Penetration of Supermarkets/Hypermarkets 2003.............................................................. 3Chart 2 Penetration of Discounters 2003 ........................................................................................ 5

2.3 the Private Label Market..................................................................................................................................... 5Chart 3 Share of Private Label in Core Retail Sectors 2003 ........................................................... 6

2.4 Leading Private Label Markets ........................................................................................................................... 7Chart 4 Breakdown of Private Label Sales by Country 2004 ......................................................... 8

2.5 Retailer Strategies ............................................................................................................................................... 82.6 Marketing Strategies ........................................................................................................................................... 92.7 Sourcing Strategies.............................................................................................................................................. 92.8 Producer Strategies ........................................................................................................................................... 102.9 Outlook.............................................................................................................................................................. 10

3. Retail Sales Trends ............................................................................................................................................ 103.1 Total Retail Sales............................................................................................................................................... 10

Table 1 Total Retail Sales and Growth by Market 1999/2003 ...................................................... 113.2 Supermarket Penetration................................................................................................................................... 12

Table 2 Penetration of Supermarkets/Hypermarkets by Market 1999/2003.................................. 133.3 Growth of Discounters ...................................................................................................................................... 14

Table 3 Penetration of Discounters by Market 1999/2003............................................................ 14

4. Leading Retailers............................................................................................................................................... 154.1 Overview of Retailers ........................................................................................................................................ 15

Summary 1 Selected Retailers in Order of Total Size 2004 ................................................................ 154.2 Retailer Concentration ...................................................................................................................................... 19

Summary 2 Major Mergers, Acquisitions and Disposals in the Retail Sector 2000-2004................... 205. the Private Label Market.................................................................................................................................. 205.1 Global Trends.................................................................................................................................................... 20

Chart 5 Private Label Value Breakdown by Region ..................................................................... 21Table 4 Global Private Label Share in Selected Categories 2001-2004........................................ 22

5.2 National Market Trends .................................................................................................................................... 23Chart 6 Leading Private Label Markets by Value 2004................................................................ 24Chart 7 Fastest Growing Private Label Markets by Value 2004................................................... 26Chart 8 Share of Private Label in Developed Markets by Value 2004 ......................................... 28Chart 9 Share of Private Label in Emerging Markets by Value 2004........................................... 30

5.3 Sectoral Trends.................................................................................................................................................. 30Table 5 Private Label Share of Packaged Food by Country 2001-2003........................................ 32Table 6 Private Label Share of Pet Food by Country 2001-2003.................................................. 33Table 7 Private Label Share of Selected Soft Drinks by Country and by Sector 2002.................. 34Table 8 Private Label Share of Selected Alcoholic Drinks by Country and by Sector

2003 ................................................................................................................................. 36Table 9 Private Label Share of Selected Cosmetics and Toiletries by Country and by

Sector 2003 ...................................................................................................................... 38Table 10 Private Label Share of Disposable Paper Products by Country 2001-2003 ..................... 40


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Table 11 Private Label Share of Selected Household Care Products by Country and bySector 2003 ...................................................................................................................... 42

Table 12 Private Label Share of Selected OTC Products by Country and by Sector2003 ................................................................................................................................. 44

Table 13 Private Label Share of Large Kitchen Appliances by Country 2001-2003 ...................... 46

6. Private Label Retailers and Suppliers ............................................................................................................. 476.1 Overview............................................................................................................................................................ 47

Summary 3 Advantages and Disadvantages of Private Label 2004 .................................................... 486.2 Brand Strategies ................................................................................................................................................ 51

Summary 4 Selected Retailers and their Brands 2004......................................................................... 52Summary 5 Co-branding Initiatives 2004 ........................................................................................... 55

6.3 Packaging Strategies ......................................................................................................................................... 566.4 Retailers Pricing Strategies ............................................................................................................................. 57

Chart 10 Price Differential Between Manufacturer Brands and Private Labels byMarket 2003..................................................................................................................... 58

6.5 Retailers Product Strategies............................................................................................................................. 596.6 Advertising and Promotion of Private Labels.................................................................................................... 676.7 Sourcing of Private Labels ................................................................................................................................ 696.8 Suppliers and Their Strategies........................................................................................................................... 72

Summary 6 Major Private Label Suppliers 2004................................................................................. 747. Outlook............................................................................................................................................................... 777.1 External Demand Factors ................................................................................................................................. 77

Table 14 Forecast Penetration of Supermarkets/Hypermarkets by Market 2003/2008 ................... 78Table 15 Forecast Penetration of Discounters by Market 2003/2008 ............................................. 79

7.2 Private Label Demand....................................................................................................................................... 80Chart 11 Forecast Penetration of Private Label by Sector .............................................................. 81

7.3 Challenges and Opportunities ........................................................................................................................... 82Summary 7 Opportunities and Threats for Private Label Retailers ..................................................... 84


Euromonitor International Page 1

THE FUTURE OF PRIVATE LABEL

1. INTRODUCTION AND BACKGROUND1.1 Definitions

Private label definition

Private labels (also sometimes referred to as own labels, in-house brands, dealer owned brands, store brands,corporate brands) are defined as product lines that are owned, controlled, merchandised and sold by a specificretailer in its own stores or via direct selling methods.

Private labels in developed markets have come a long way from their original image as the poor relation ofnational brands, and their definition has developed significantly over time. Private label brands were originallyseen as generic product offerings that competed with their national brand counterparts mainly on price. This isstill largely the case today in emerging markets, and in some sectors of developed markets. However, many oftodays private labels have become synonymous with quality and innovation, rather than simply being seen ascopy-cat products. Nowadays, private labels are carefully managed and marketed in order to contribute to theretailers overall image and improve its competitive edge and growth prospects.

As private labels were traditionally seen as being of inferior quality to branded products, they often sufferedfrom a lack of trust and confidence on the part of consumers. They also lacked innovation: since retailers carriedout little research of their own into consumer needs and preferences, they tended to emulate the products ofnational brand manufacturers, selling their products on the back of the advertising, packaging etc carried out bymajor national and multinational companies.

From the beginning, private labels were advantageous to retailers, not only because they offered a chance towiden their product ranges and draw customers to the store, but also because they produced higher margins andtherefore greater profitability than branded products, and involved little or no marketing effort. Therefore,retailers began to introduce private label products into more and more categories. However, the proliferation ofme too products had the effect of commodifying certain categories. It often forced brand manufacturers tolower their prices in order to compete with private labels, thereby reducing margins all round and dampeninginnovative activity.

Nowadays, private label retailers are working together more with major manufacturers to develop categoriesrather than simply trying to undermine branded products. Category management has become an increasinglyimportant part of merchandising activity in developed markets, and private label has a significant role to play inits development, in terms of creating a higher degree of interest and excitement within a particular sector.

As retailers have begun to treat their private labels as brands in their own right, they have expanded into non-traditional areas that have in the past been dominated by national brand manufacturers. Private labels are alsonow subject to the same developments as those seen among branded products. Retailers are focusingincreasingly on aspects such as packaging, advertising, positioning, segmentation, cross-branding andpromotions in order to achieve closer parity with branded products, and to dispel their image as poor relations.Indeed, as branded products are now omnipresent, retailers are being forced to use private labels as their majorpoint of differentiation from competitors; in other words, private labels are now designed to fit the overall imagethe retailer wants to convey, be it one of value, quality, diversity, etc, as a way of drawing consumers into itsstores.

Data

Some of the figures in Section 3 (specifically, those relating to global private label sales and shares by country)are derived from published studies by ACNielsen, which collects data across 36 countries and covers 80categories. These include categories within the areas of food, drink, OTC healthcare, cosmetics and toiletries,pet food, household cleaning products and disposable paper products only. As such, they exclude private labelclothing, housewares, electrical goods and other non-food items.



ACNielsen collects its data from supermarkets, hypermarkets, some drugstores and pharmacies and massmerchandisers, with the exception of Wal-Mart. As the latter is a major force in the US market, Euromonitor hasmade estimates for Wal-Marts private label sales where necessary. The data do not include sales from suchchannels as department stores and mail order companies.

Most data in this report are, however, derived from Euromonitors own databases and global reports whichprovide information on private label shares. These include areas such as packaged foods, OTC healthcare, thevarious cosmetics and toiletries categories, disposable paper products, pet food, alcoholic drinks and soft drinks.

Types of private label retailer

Private label products are available through several different types of retailer, which Euromonitor identifies asfollows:

Grocery multiples

Chains (mainly supermarkets/hypermarkets) which offer a mix of private label and branded products, egTesco and Carrefour;

Chains (mainly discounters) which offer almost exclusively private label products, eg Aldi and Lidl; Franchisers/buying groups (mainly convenience stores) which offer a mix of private label and branded

products, eg Spar and Intermarch.

Mixed merchandisers

Chains which offer a mix of private label and branded products, including mixed retailers such as Wal-Martand Target, and department stores such as Sears Roebuck and Quelle-Karstadt;

Chains which offer almost exclusively private label products, eg Marks & Spencer.

Non-food specialists Chains that offer some private label lines alongside branded products, such as the DIY chains Leroy Merlin

and Home Depot, and some electronics chains.

Chains that sell only private label, eg furniture retailer Ikea, and clothing retailers The Gap and H&M.

Mail order companies

Companies that sell a mix of private label and branded products, eg La Redoute and Quelle. Companies that sell exclusively private label products, eg Avon and Yves Rocher;

2. EXECUTIVE SUMMARY2.1 the Changing Definition of Private Label Todays private labels are a far cry from the generic, copy-cat products that were originally developed to

compete with national brands on the basis of price alone.

In developed markets, private labels have become synonymous with quality and innovation, and arecarefully managed and marketed in order to contribute to the retailers competitive edge, profits and growthprospects.

Private label retailers are now working together more with manufacturers to develop categories in terms ofcreating interest and excitement, rather than simply trying to undermine branded products.

Retailers now apply the same marketing techniques to private labels as those used by major brandmanufacturers, in order to convey a desired image and draw customers into stores.

Private label products have penetrated almost all types of retail outlet, to varying degrees. For example,while they account for virtually the entire product mix of hard discounters, clothing retailers and furniture



retailers, they may form only a small percentage of the total offer in some supermarkets, department storesand certain types of specialist stores.

Most retailers in fact offer a mix of private label and branded products, which tends to represent between20-40% of their sales.

2.2 Impact of Economic and Retail Environment Private label growth is no longer necessarily linked to economic performance, as modern day consumers

tend to seek bargains and value-for-money without sacrificing quality, regardless of their level of income.

Moreover, private label are perceived in some developing markets as being superior to national products asthey are found mainly in foreign chains, which have a reputation for quality.

Nevertheless, it is also the case that hard discounters which have virtually exclusive private label policies- have thrived in countries that have experienced economic downturn (such as Germany), as consumershave sought better value for money.

More relevant than economic growth is the level of penetration and consolidation achieved by large groceryretailers. Due to their significant economies of scale, private label is often used as a competitive tool incountries where retailing has reached a sophisticated level.

Hence, private label development is very advanced in countries such as France and Switzerland, which havethe highest penetration of supermarkets and hypermarkets, at 37% and 32% respectively, and also a highlevel of concentration among major retailers.

Similarly, the markets which are seeing increasing penetration by foreign retailers, such as those of EasternEurope, tend to be those in which private label sales are growing the fastest.

The US has a relatively low penetration of supermarkets, due to the importance of mixed merchandiserssuch as Wal-Mart and Target. Furthermore, the US supermarket trade is still fairly fragmented, which hashindered private label development.

Chart 1 Penetration of Supermarkets/Hypermarkets 2003



Source: Euromonitor InternationalNote: Top 25 countries only, according to supermarket/hypermarket penetration

The expansion of discounters has a significant impact on the development of private labels in manymarkets, as these retailers tend to offer private label on an exclusive basis.

Discounters are traditionally very strong in Northern Europe. The largest chains, such as Aldi and Lidl(Schwarz Group) are of German origin, while others, such as Netto, are Scandinavian.

The discounter concept has not been successful in all markets, however. In the UK for example, the retailmarket is highly sophisticated and consumers are used to a high level of service from supermarkets.

Furthermore, the European discounter model is virtually nonexistent in the US, due to the prevalence thereof mixed merchandiser discounters such as Wal-Mart and K-Mart, and in Australia, where mostsupermarkets already have a strong policy of discounting.



Chart 2 Penetration of Discounters 2003

Source: Euromonitor InternationalNote: Top 25 countries only, according to supermarket/hypermarket penetration

2.3 the Private Label Market The private label market for grocery products was valued by Euromonitor at more than US$106 billion

globally in 2004, having grown by around 6% in current terms in that year.



Most of the worlds private label sales are concentrated in Europe and North America, with respectiveshares of 59% and 37%. Throughout most of Latin America and Asia-Pacific, private label is still in itsinfancy, though it is growing strongly in many cases.

The global market for private label has been driven not only by grocery retailer development andconsolidation, but also by trends towards more expensive, value added private label products.

Despite its expansion into almost all product areas, private label penetration is still highest amongcommodities such as disposable paper products and some packaged foods. Its share tends to be much lowerin areas where brand image is very important, such as spirits and beers, and those that are highly technical,such as consumer electronics.

In some subsectors, such as carbonated drinks, baby foods and confectionery their dominance by majorglobal brands (eg, Coca-Cola, Nestl and Mars) make it very difficult for private label products to gain asignificant share.

Furthermore, a large proportion of confectionery and soft drinks sales are impulse sales which take placeoutside supermarkets and hypermarkets. Due to the convenience factor, consumers are more prepared topay a premium for branded products in these categories.

In the case of baby food, consumers are discerning due to safety concerns, and tend to prefer brandedmanufacturers such as Nestl or Numico. However, this is changing as confidence in the standard ofretailers products grows.

On the other hand, ready meals provide retailers with an excellent opportunity to offer value added productsand generate high margins, and these have reached particularly high shares in the UK and Switzerland, at71% and 69% respectively.

Products associated with luxury and prestige, such as cosmetics, fragrances and jewellery, have traditionalalso been difficult for retailers to penetrate, as have copyrighted products such as books and CDs. Again,this is changing as retailers are introducing innovative marketing strategies, premium products and co-branding initiatives.

Chart 3 Share of Private Label in Core Retail Sectors 2003



Source: Euromonitor InternationalNote: % volume in all soft and alcoholic drinks sectors, and appliances

2.4 Leading Private Label Markets In absolute terms, the US is the worlds largest private label market with a value of some US$31.1 billion,

despite being less developed than some European markets in terms of the share of sales accounted for byprivate labels.

Three other major developed markets for private label, in terms of absolute value, are Germany, the UK andFrance, as these countries have particularly well developed and sophisticated retail markets that lendthemselves well to private label.

While being a small market in absolute terms, by share of retail sales Switzerland is by far the worlds mostdeveloped market for private label, with a penetration rate of 39% in 2004. This is due to the power of thetwo leading retailers, Migros and Coop.

Other small markets with a high percentage of private label products are Belgium and the Netherlands.Retailers in the Netherlands have recently stepped up their private label activity considerably, in response tofierce price wars among the major chains.

By contrast, private label penetration is below-average in Scandinavia, as well as in smaller markets suchas Austria, Ireland, Portugal and Greece, where small chains do not have the means to invest heavily inprivate label production.

The strong Italian tradition of culinary quality and a perception that private label products are low budgetrather than flavoursome has hindered development in that market.



In Japan, too, private label development was hindered in the past both by the fragmented nature of thesupermarket trade, and by the fact that Japan is a very brand conscious society. This has changed asconsumers have become more price sensitive.

In developing countries the share of private label is generally less then 5%, and the market consists mainlyof low value and copycat brands. Nevertheless, as foreign chains increasingly infiltrate many of thesemarkets, they are expected to hold the strongest growth potential in the future.

Chart 4 Breakdown of Private Label Sales by Country 2004

Source: Euromonitor International

2.5 Retailer Strategies Many retailers are currently increasing the proportion of private label products on offer within their stores,

partly as a way to seek differentiation through means other than price discounting, convenience and service.

The pressure from discounters, which are expanding worldwide, is also forcing existing supermarkets tocompete by expanding their private label offer.

Most retailers use their own name as an umbrella brand, along with various sub-brands to representdifferent categories or positionings. This is the case of Tesco in the UK, for example, whose ranges includeValue, Finest, Healthy Living and Organic.

Sometimes retailers choose to use their own name across all goods, with very little use of sub-brands. Thisis the case of Spar, whose eponymous brand is used across all products and all countries, with the exceptionof some regional brands.

The single brand strategy is much more common in the clothing retailing industry, where retailers oftenattempt to build up one global or national brand associated with their image, such as The Gap of the US,H&M of Sweden or Marks & Spencer of the UK.

Other retailers prefer to use fantasy brand names, with packaging that does not feature their own name atall, or only in the small print. This is common practice in Italy, for example, where private labels still sufferfrom a negative image in the eyes of consumers.



Some retailers operate a two-tiered brand strategy, whereby they have a value range and an upmarket rangeof private labels. This is the case of Wal-Mart, with Great Value/Sams Choice, and Loblaws of Canada,with No Name/Presidents Choice.

In an attempt to bring their private label products more upmarket and add value, retailers in some ofdeveloped private label markets have developed relationships with owners of brands, celebrities, or theowners of cartoon character licenses in co-branding initiatives.

Packaging has become an increasingly important marketing tool for private label retailers. Wal-Mart hasbeen particularly successful in creating private labels that are perceived by consumes as being brands intheir own right, such as its Ol Roy range of pet foods.

Retailers efforts to upgrade private labels to compete more closely with branded products and improve theimage of their stores have meant that, in general, the price differential has narrowed in recent years.

The price differential between branded and private label products varied greatly according to productcategory, being over 40% for toiletries and OTC healthcare, and less than 20% for cosmetics and chilledfoods.

There has been a clear shift in the private label industry towards developing premium products, which hasserved to raise margins for retailers, and elevate the image of private label products, and indeed the storeitself, for the consumer.

As consumers have begun to pay more attention to healthy lifestyles, retailers have taken advantage of thesetrends to introduce their own ranges of healthy, natural, organic, fair trade, low-carb and free from foods.

Grocery retailers that have reached an optimum level of private label supply in the traditional areas of food,drink and household goods have looked to non-traditional categories for expansion, including clothing,furnishings and jewellery.

Some retailers are also experimenting with offering private label services within their stores. These includefinancial services, pharmacies, opticians and photo departments.

2.6 Marketing Strategies Grocery retailers tend not to use above-the-line advertising techniques for individual private label brands or

lines, as such campaigns are not justified by the sales of individual items. This is their main disadvantagecompared to brand manufacturers.

Nevertheless, the large retailers often run corporate TV advertising campaigns, which indirectly benefittheir private labels. This is the case of Sainsburys in the UK, which is endorsed by celebrity chef JamieOliver.

The use of loyalty cards by retailers has become an increasingly common marketing tool in developedmarkets, and can be used to promote sales of private label products.

The location of products in the store, and where sale prices are located on the shelves are also essentialfactors in the marketing of private labels. On shelves, private label products are often placed in prominentpositions.

Leaflets, or circulars, distributed in Sunday papers or consumer magazines, through direct marketing or in-store, are also a popular and cost-effective way for retailers to advertise their private label products.

Celebrity endorsement of private label brands has become popular in the area of clothing, and is intended toraise the perception of grocery retailers brands from their rather downmarket image of the past to that ofpremium fashionwear.

2.7 Sourcing Strategies With regard to the sourcing of private label products, retailers may have their own manufacturing plants, or

they may source from third party suppliers. Many operate a mixed strategy, owning some productionfacilities for basic products, and using external suppliers for other.

The general trend among retailers is to contract private label products out to third parties, as this allowsthem the flexibility to terminate agreements with suppliers that do not confirm to requirements, while stillallowing them a certain level of control.



Some retailers join buying groups that deal with sourcing of private label products on their behalf, which isespecially effective for smaller retailers.

n general, the supplier base for private label products is shifting from high cost countries such as France,Italy and the Netherlands to countries with lower labour and material costs, such as those of Eastern Europeand Asia.

Increasingly, multinationals such as Nestl, Philip Morris and Groupe Danone are entering the private labelarena. This demonstrates the changing perception of private labels and the shift in power to the advantageof retailers over manufacturers.

2.8 Producer Strategies Private label suppliers are consolidating, enabling them to achieve better economies of scale in raw material

supplies, marketing costs etc, and allowing them to expand into related product areas.

Most private label producers strategies centre on providing high quality, innovative products, combinedwith a high level of customer service, in order to attract and retain the custom of leading retailers.

Many companies now offer dedicated customer relations, logistics, sales and marketing services, includingmarket and trend analysis to enable retailers to gain a better understanding of their position within themarketplace, and of customer needs.

The development of new products and technologies is highly important to private label suppliers, asretailers are increasingly demanding more innovative products in order to maintain a competitive edge overother retailers private labels and branded products.

2.9 Outlook The major factor affecting growth of private label around the world will be the increased penetration and

consolidation of supermarkets and discounters, especially in emerging countries such as those of EasternEurope.

The worlds largest non-food chains, which are also highly active in the private label market, are alsoexpanding rapidly into new markets. These include clothing retailers, electrical stores, DIY stores andfurniture stores.

The market is expected to grow by a further 6% in 2005, fuelled by the continuing strength of the globaleconomy and efforts by retailers to increase their private label offer and to raise the value of private labelproducts through innovation and sophistication.

Retailers are also likely to focus on introducing value ranges at the other end of the scale, in order tocompete with discounters and attract budget-conscious consumers.

3. RETAIL SALES TRENDS3.1 Total Retail Sales

Private label growth and the economy

Studies have shown that, contrary to popular belief, growth in the private label market is not particularly linkedto underperformance of the economy. This may have been the case several years ago, when private labels wereseen as the poor relations of branded products and were priced much lower than their counterparts. In thesetimes consumers may have turned to private label products when seeking to reduce their weekly expenditureduring times of economic hardship. It is also the case that in some markets, such as Germany, discounters havethrived as consumers have sought better value for money in a depressed economy. As discounters tend to sellmainly and sometimes exclusively private labels, this has boosted private label value in these markets at theexpense of branded products.

However, a study by US research company Hoyt & Co showed that the growth of private label acceleratedduring the strong economy of the 1990s. It also showed that private label penetration increased most forhouseholds considered comfortable/affluent, and was strong in professional/white collar households and



homes without children. Indeed, with the increasing sophistication of private labels in most developed markets,the small price differential between these and branded products has meant that their growth has been linked witheconomic prosperity rather than recession.

US and Japan outweigh other retail markets

The US is by far the worlds leading retail market, with sales worth US$2,205 billion in 2003. Furthermore,retail sales in the US grew by almost 17% over the review period, although this represented a slowdowncompared to the boom period experienced during the 1990s. Consumer spending was affected after 2000 bynegative factors such as the tech-stock meltdown, the events of 11 September 2001 and the ensuing wars inAfghanistan and Iraq, and soaring energy costs. Nevertheless, low inflation rates and the boom in theavailability of credit helped to support retail sales growth. Indeed, throughout the review period consumer creditbalances in the US grew at much faster rates than did consumer incomes or GDP, indicating that a significantportion of retail spending gains were underwritten by increased debt loads.

Japan is the worlds second largest retail market, although the private label there is relatively underdeveloped.Sales in Japan fell by nearly 13% between 1999 and 2003, to US$1,102 billion, largely as a result of decliningconsumer confidence as Japans recession continued. As unemployment rose, trends towards increased housingdensities raised the costs of basic services, and consumers looked to reduce their retail spending accordingly.Retail sales value in Japan was further curtailed by price deflation, and consumers became increasingly priceconscious. While many outlets were forced to close, other retailers and manufacturers responded by engaging inprice discounting.

Europes largest retail market is Germany, with sales of almost US$570 billion in 2003, although this markethas also suffered from economic weakness, and sales grew by only 7% over the review period. Retail sales inthe UK, France, Italy and Spain were far more buoyant, with sales in the latter increasing by 35% in the fiveyears to 2003. Growth in Spain was driven by the countrys growing population and increased prosperity: overthe review period real (net) disposable income in Spain increased by 14.9%.

China and Russia see strong growth

China enjoyed rapid growth in retail sales between 1999 and 2003, bringing it almost on a par with Germany,with sales of US$542 billion. Although the Chinese retail industry was greatly impacted by SARS in the firsthalf of 2003, total retail sales still maintained strong growth in that year, as the Chinese government institutedemergency policies to support the retail industry, such as the elimination or reduction of taxation.

The countries of Eastern Europe also demonstrated strong growth in retail sales over the review period. Russia,in particular, saw sales rise by 63% to US$139 billion, making it the worlds 12th largest retail market in 2003.This was the result of the stabilisation of economic development in Russia, and also the strengthening of thepresence of large international retailers, which was indicative of a real increase in income among the Russianpopulation. The main trend is the move to organised retailing by local and international operators. Indeed,retailing in Russia still has great potential, with more than 50% of sales still accounted for by unorganisedretailing (street markets, street stands and halls).

Table 1 Total Retail Sales and Growth by Market 1999/2003

US$ million1999 2003 % growth

1999/2003

US 1,891,204 2,205,076 16.6Japan 1,262,433 1,102,361 -12.7Germany 531,734 569,504 7.1China 378,268 541,776 43.2UK 381,727 478,254 25.3France 362,018 442,534 22.2Italy 277,331 318,417 14.8Spain 137,639 185,354 34.7India 139,323 173,302 24.4Canada 128,828 169,045 31.2Mexico 118,957 155,342 30.6



Russia 85,540 139,358 62.9South Korea 93,370 122,020 30.7Australia 91,058 116,472 27.9Netherlands 73,336 96,853 32.1Brazil 86,793 74,428 -14.2Turkey 59,984 68,430 14.1Switzerland 58,817 68,381 16.3Belgium 50,568 60,379 19.4Poland 39,468 59,798 51.5Sweden 48,279 57,208 18.5Taiwan 48,807 53,966 10.6Austria 45,639 53,556 17.3Indonesia 31,508 48,036 52.5South Africa 41,501 47,476 14.4Greece 25,808 38,946 50.9Saudi Arabia 33,538 38,585 15.0Thailand 22,526 36,529 62.2Norway 27,157 35,144 29.4Philippines 30,405 34,937 14.9Denmark 28,912 34,513 19.4Finland 25,075 31,446 25.4Portugal 26,724 31,102 16.4Colombia 28,529 27,736 -2.8Czech Republic 18,968 27,357 44.2Venezuela 35,016 27,176 -22.4Ireland 15,551 23,214 49.3New Zealand 15,613 22,154 41.9Hungary 13,314 21,294 59.9Israel 18,010 20,538 14.0Hong Kong 21,319 19,818 -7.0Morocco 15,830 19,604 23.8Egypt 24,240 18,339 -24.3Chile 18,391 16,551 -10.0Argentina 44,683 16,460 -63.2Vietnam 11,788 15,559 32.0Malaysia 11,000 12,653 15.0Romania 10,444 11,964 14.6Slovakia 7,364 10,565 43.5Singapore 10,561 9,758 -7.6Source: Euromonitor International

3.2 Supermarket Penetration

Consolidation fuels growth of private label

Private label development is strongly linked to the growth and consolidation of hypermarkets and supermarkets,as the economies of scale of these large groups make them most suited to the development and distribution ofprivate label products. Hence, the markets which are seeing increasing penetration by foreign retailers tend to bethose in which private label sales are growing the fastest. Strategies by retailers to grow their private labelbusinesses has even been the reason behind some acquisitions and mergers in the supermarket sector in recentyears.

It is perhaps surprising to note, however, that the penetration of supermarkets and hypermarkets is highest in theLatin America markets, where private label has so far made little progress. While supermarkets/hypermarketsaccounted for over 40% of retail sales in Mexico and Colombia in 2003, and over 30% of retail sales in Chile,Brazil and Argentina, private label penetration is only at 2% or less in these markets. This is in part due to thefact that most supermarkets in the region are still small or independently owned, and do not have the means todevelop their own private labels. Nevertheless, large chains are growing throughout Latin America, and thissuggests that there is plenty of potential in these markets for the further development of private labels.

Retailer concentration breeds high private label activity



Apart from the Latin American markets, France and Switzerland show the highest penetration of supermarketsand hypermarkets, at 37% and 32%, respectively. Notably, these are two of the markets where retailerconcentration is at its highest. The Swiss retail market is heavily dominated by two retailers (Migros and Coop),and also has the highest level of private label penetration. The French market is also dominated by large retailchains, which pioneered the hypermarket concept and were also among the forerunners of private labels notably Carrefour with its Produits Libres.

The US has a relatively low penetration of supermarkets, with only 20% of retail sales derived from this channelin 2003. This is partly due to the importance of mixed merchandisers such as Wal-Mart and Target, which alsooffer a wide selection of groceries. Indeed, these can be considered as the US equivalents of the Europeanhypermarket concept, as they sell everything under one roof, while supermarkets rarely sell much other thanfood. Furthermore, the US supermarket trade is still fairly fragmented, which has hindered private labeldevelopment.

Emerging markets hold strong growth potential

The lowest penetration rates of supermarkets are found in several emerging markets in the Middle East andAsia-Pacific. Retailing in these markets is largely unorganised, and consists of small local outlets and marketstalls. For example, in India, supermarkets accounted for just 0.3% of retail sales in 2003. In this market,traditional retailers benefit from low operating costs and overheads, proximity to customers, long opening hours,and additional services to customers (such as home delivery). Nevertheless, supermarket sales are expandingrapidly in India. Greater numbers of higher income Indian consumers prefer to shop at supermarkets due to theirconvenience, higher standards of hygiene and the attractive ambience. This could open up significantopportunities for private label operators in the future.

Table 2 Penetration of Supermarkets/Hypermarkets by Market 1999/2003

% value sales1999 2003 % point

growth 1999/2003

Mexico 44.3 44.2 0.0Colombia 37.3 40.4 3.1France 36.7 37.1 0.4Chile 28.6 34.8 6.2Switzerland 29.0 32.3 3.3Brazil 30.8 32.3 1.4Argentina 40.5 31.6 -8.9Hungary 24.8 29.3 4.5South Africa 27.8 27.5 -0.3Denmark 27.8 26.3 -1.5UK 28.8 26.1 -2.7Finland 27.2 25.6 -1.7Japan 28.5 25.3 -3.3Malaysia 18.2 25.0 6.8Sweden 23.3 24.5 1.2China 23.0 24.0 1.0Spain 22.4 23.2 0.7Portugal 18.0 21.9 3.8Netherlands 23.1 20.7 -2.5Australia 24.2 20.5 -3.7Israel 15.7 20.4 4.7Venezuela 18.8 20.2 1.5US 20.5 20.1 -0.4Germany 19.7 19.5 -0.2Czech Republic 11.7 19.5 7.8Italy 18.5 19.3 0.8Poland 12.3 19.3 7.0Ireland 17.3 18.3 1.0Belgium 15.3 17.7 2.4Norway 20.3 17.4 -2.8Greece 13.6 16.9 3.4



Singapore 13.4 16.5 3.1Canada 17.1 16.5 -0.6Austria 20.6 16.4 -4.2Slovakia 3.9 16.0 12.0Hong Kong 12.0 13.5 1.5Taiwan 11.8 12.2 0.4Thailand 11.0 12.1 1.1Turkey 8.2 11.1 3.0Saudi Arabia 4.1 8.6 4.5Morocco 4.6 6.1 1.4Philippines 4.7 6.1 1.3Russia 1.9 5.4 3.5New Zealand 25.4 5.0 -20.4South Korea 5.6 4.8 -0.8Egypt 4.3 4.8 0.5Indonesia 4.0 3.7 -0.3India 0.1 0.3 0.2Vietnam 0.2 0.2 0.0Source: Euromonitor International

3.3 Growth of Discounters

The expansion of discounters has had a significant impact on the private label market, as many of these retailershave based their concept on selling either exclusively or mainly private label products. Discounters areexpanding strongly in many markets, which is leading to the growth of private label share in these markets.

Discounters are traditionally very strong in Northern Europe. The largest chains, such as Aldi and Lidl (SchwarzGroup) are of German origin, while others, such as Netto, are Scandinavian. In 2003, Norway had the highestpenetration of discounters, at almost 21%, a share which grew very sharply over the review period from lessthan 13% in 1999. In Germany too, fuelled by the economic recession, discounters gained share from almost 9%in 1999 to nearly 12% in 2003. Aldi pioneered the hard discounter concept in Germany in the 1940s, and hassince expanded all over the world. The simplicity and efficiency of its concept appeals to price-consciousconsumers, and Aldi has gained a reputation for high quality private label products.

Discounters are developing rapidly in Eastern Europe, as both Aldi and Lidl have pushed to expand outside theirdomestic market. In both Poland and Russia, discounters increased their market share by over four percentagepoints between 1999 and 2003. Discounters emerged as an important channel in these markets from 1999.

Whilst Polands leading discounter operator, Jeronimo Martins, has closed several of its Biedronka outletsrecently in an attempt to cut costs, the Lidl chain has made rapid inroads into Poland. In 2004, there were 77Lidl stores in Poland twice as many as in 2002. In Russia, foreign discounters have so far made little impacton the market, with the leading discounter chains, Pyaterochka, Diksi and Kopeika, being local.

The discounter concept has not been successful in all markets, however. In the UK, for example, the retailmarket is highly sophisticated and consumers are used to a high level of service from supermarkets. Althoughdiscounters such as Aldi, Netto and Lidl have penetrated this market, they have reached nowhere near the levelsachieved in other parts of Europe, and their stores tend to be frequented by less affluent consumers or thoselooking for value for money.

Furthermore, the European discounter model is virtually non-existent in the US, due to the prevalence there ofmixed merchandiser discounters such as Wal-Mart and Kmart, and in Australia, where most supermarketsalready have a strong policy of discounting.

Table 3 Penetration of Discounters by Market 1999/2003

% value sales1999 2003 % point

growth 1999/2003



Norway 12.8 20.8 8.0Germany 8.6 11.8 3.2Denmark 10.5 10.8 0.3Belgium 9.4 10.6 1.2Hungary 7.6 9.8 2.2Austria 6.7 9.4 2.8Poland 3.5 7.5 4.0Russia 0.4 4.6 4.2Czech Republic 3.2 4.3 1.2Portugal 3.6 4.3 0.7Sweden 1.8 3.9 2.1Netherlands 2.2 3.7 1.5Argentina 0.9 3.1 2.2Switzerland 2.2 3.0 0.8Slovakia 1.7 2.8 1.1Israel 2.1 2.6 0.5Italy 2.8 2.6 -0.2France 2.1 2.1 0.0Egypt 1.0 1.9 1.0UK 1.7 1.6 -0.1Greece 1.0 1.5 0.5Ireland 0.2 1.4 1.2Finland 0.0 1.1 1.1Turkey 0.7 1.0 0.3Saudi Arabia 0.3 0.5 0.2Australia 0.1 0.0 0.0Source: Euromonitor International

4. LEADING RETAILERS4.1 Overview of Retailers

The following table lists some of the worlds largest retailing groups which operate in the private label market.However, the total size of the retailer does not necessarily relate to its strength in private label. Leading USretailer Wal-Mart is by far the worlds largest retail group, with total sales of US$244.5 billion in 2003, but onlyaround 20% of its sales are currently derived from its private labels. Indeed, Wal-Mart still claims to be anational brand company first, with its private label provided to service the customer as an alternative, althoughsome of its private labels are very important to the retailer.

On the other hand, specialists such as Ikea and The Gap carry exclusively private labels. Most retailers, in fact,offer a mix of private label and branded products, which tends to represent between 20% and 40% of their sales.

Summary 1 Selected Retailers in Order of Total Size 2004

Retailer Country oforigin

Sectorinvolvement

2003 sales(US$ billion)

Principal fascia Private labelshare

Wal-Mart US Large mixedretailers

244.5 Wal-Mart,Sams Club,Asda

20%

Carrefour SA France Hypermarkets,supermarkets,discounters,conveniencestores, cashand carry

76.3 Carrefour,Champion, Dia,Ed, 8 Huit,March Plus,Promocash,Proxi, Shopi

N/a

Metro AG Germany Cash and carry,hypermarkets,supermarkets,DIY stores,department

57.3 Metro, Makro,Extra, Real,Media-Saturn,Praktiker,Kaufhof

N/a



stores

Target Corp US Large mixedretailers,departmentstores

43.9 Target,Mervyns,Marshall Fields

N/a

Tesco UK Conveniencestores,supermarkets,hypermarkets,discounters

43.8 Tesco Extra,TescoSuperstore,Tesco Metro,Tesco Express,Crazy Prices,Savia

N/a

Royal Ahold AV Nether-lands Supermarkets 43.8 Stop & Shop,Giant-Landover,Giant-Carlisle,BI-LO, AlbertHeijn,Schuitema,Etos, Gall &Gall, Albert,Bompreo,Disco, Tops

30%

ITM Group France Hypermarkets,Supermarkets,Discounters,Conveniencestores, DIYstores, Carservicing,Clothing stores

42.7 Intermarch,Ecomarch,Netto, EsapceTemps, LesRelais desMousquetaires,Bricomarch,Logimarch,Stationmarch,Vtimarch

33%

Sears, Roebuck& Co

US Departmentstores, clothingstores, DIYstores

41.1 Sears, SearsHardware,Orchard SupplyHardware, TheGreat Indoors,Lands End

N/a

WalgreenCompany

US Pharmacies/drugstores

32.5 Walgreens,WalgreensRxPress,WalgreensPharmacy,WalgreensHealthInitiatives

11%

Auchan France Hypermarkets,supermarkets,conveniencestores,discounters,DIY centres,sports goodoutlets,electrical stores,departmentstores andvariety stores

30.7 Acima,Alcampo, Atac,Auchan,Bricocenter,Elea, Jumbo, LaRinascente,Leroy Merlin,Po de Acar,RT, Sabeco,SMA, Upim

20% (food),80% (non-food)

Schwarz Group Germany Discounters,hypermarkets,cash and carry

30.7 Lidl, Kaufland N/a



Aldi Group Germany Discounters 30.6 2 Aldi 90%J Sainsbury UK Supermarkets,

conveniencestores

30.3 Sainsburys 40%

Spar Netherlands Conveniencestores,supermarkets,hypermarkets

24.2 2 Spar, Eurospar,Interspar, SparExpress

N/a%

CasinoGuichard-Perrachon

France Hypermarkets,supermarkets,discounters,conveniencestores, varietystores, cashand carry

20.8 Gant, Libertad,Extra, Exito,Optimo, Big C,Casino, Disco,Devoto, Po deAcar, Ley,Cada, Franprix,Leader Price,Barateiro,Smart & Final,United Grocers,Monoprix, PetitCasino, Vival,Eco Services,Cora,Score/Jumbo,Cash & Carry,Eletro, Konmar,Super de Boer,Edah

N/a

DaieiIncorporated

Japan Supermarkets,hypermarkets,departmentstores,discounters,conveniencestores, clothingand footwear,electronics,toiletries andentertainmentgoods

18.8 Athine, Big A,Bonte,Cordoba,Crabtree &Evelyn, Daiei,D-Mart,Gourmet City,Half & Top,Kous, Lawson,Lobelia,March,Maruetsu,Media Valley,Palex,Printemps,Robelt, Topos,Vandle, WarnerBros StudioStore, Zenon

13%

Delhaize Belgium Supermarkets,discount stores,drugstores, petfood stores,electrical stores

18.8 2 AD Delhaize,Alfa Beta,Delhaize LeLion, DelhaizeCity, Delvita, Di,Food Lion,Hannaford,Kash n Karry,Mega Image,Proxy, Sama,Shop n Go,Shop n Save,Super Indo,Tom & Co,Food LionThailand

17% (FoodLion), 30%(DelhaizeBelgium)



LoblawCompaniesLimited

Canada Supermarkets,conveniencestores, generalmerchandise

17.9 Loblaws,Provigo,Fortinos, Zehrs,YourIndependentGrocer, AtlanticSuperstore

22%

Karstadt-Quelle Germany Departmentstores, mailorder, specialistretail stores

17.3 Karstadt, Hertie,Wertheim,KaDeWe,SinnLeffers,Quelle,Shauland,WOM, GolfHaus,Wehmeyer,Runners Point,Rat und Tat

N/a

Coles Myer Ltd Australia Supermarkets,liquor stores,departmentstores, officesupplies,furniture andhouseholdappliances

16.9 Kmart,Officeworks,Target, MyerGrace Bros,Megamart,Coles, Bi-Lo,Liquorland,e.colesmyer

8% (Coles),17% (Bi-Lo)

The Gap US Clothing stores 15.5 Gap, GapKids,BabyGap,GapBody, GapMaternity,BananaRepublic, OldNavy

100%

Marks &Spencer

UK Large mixedretailers

13.5 Marks &Spencer, Kings

100%

Pinault-Printemps-Redoute

France Departmentstores,Furniture andfurnishings andhouseholdappliancesstores, leisuregoods stores,mail order

13.4 1 Conforama,Fnac,Printemps, LaRedoute,Cyrillus,Somewhere,Vertbaudet,Gucci, YvesSaint Laurent,Bottega Veneta,Sergio Rossi,Boucheron,Balenciaga,StellaMcCartney,AlexanderMcQueen,Orcanta

30% (Prin-temps)

Ikea Group Sweden Furniture stores 12.6 Ikea 100%7-Eleven Inc US Convenience

stores11.4 7-Eleven N/a

Boots GroupPlc

UK Pharmacies/drugstores

8.8 1 Boots TheChemist

35%

Source: EuromonitorNotes: 1 Includes activities outside of retailing and wholesaling

2 Sales in 2002



Private label shares are largely estimates

4.2 Retailer Concentration

One of the most prominent trends in the retail sector worldwide is consolidation, with many mergers,acquisitions and divestments taking place in recent years. This causes problems with regard to private labels,due to the increasing number of fascia and retailer types being brought under single ownership, and has causedseveral major retailers to re-think their private label strategies.

One of the most significant mergers to take place in recent years was that of the French Carrefour group withPromods in 2000, as this made Carrefour the leading European retailer and allowed it to reach the critical sizenecessary to compete in global markets with other competitors, notably Wal-Mart. Carrefours merger withPromods led to a significant reorganisation of the whole group and its brand portfolio, as it moved from asingle-format hypermarket retailer to a multi-format retail group of hypermarkets, supermarkets, conveniencestores, discount stores, and cash and carry stores. Moreover, European anti-trust legislation forced the group tosell several outlets in France, as well as in Spain, where Promods was present under its Continente fasciabrand. Carrefour subsequently gathered all its hypermarkets under the Carrefour fascia and its supermarketsunder that of Champion. In France, this evolution within some outlets led to a decline in market share, withsome customers being disturbed by the loss of their usual products and brands and the subsequent lack ofinformation on the new products sold in their hypermarket.

More recently, the most important development in the UK was the sale of the major supermarket chain Safeway.The 480-strong Safeway chain was eventually taken over by Morrisons, a transaction approved in March 2004by the UKs Competition Commission, on the condition that the new group divest some Safeway stores. Thiscame after a five month investigation, during which the competition watchdog blocked Morrisons larger rivals,Asda, Tesco and J Sainsbury, from buying the chain, stating that any such deal would operate against the publicinterest. The acquisition will allow Morrisons to become a national player, but will lead to a completely newpositioning for Safeway, traditionally an upmarket leader, given that Morrisons operates on a pile-it-high andsell-it-cheap policy. The other major UK grocery retailers have focused on buying up small supermarkets andconvenience stores in order to increase their shares in neighbourhood districts. This is the case of Tesco, forexample, which acquired Adminstore, a chain of 45 outlets in the London area; and J Sainsbury, which acquiredBells Stores, a chain of 54 convenience stores in the Northeast of England.

The most important event in the US retailing world in 2004 was the announced merger of Kmart and SearsRoebuck, two of the countrys largest retailers, in November, in a US$11 billion deal that will create thecountrys third largest retailer, Sears Holdings. Kmart was rescued from bankruptcy by pioneering investorEdward Lampert in 2002, who also took a stake in Sears Roebuck. As the latter began to expand beyond theshopping mall concept, in the face of competition from out-of-town mass merchandisers, it seemed natural toLampert to consider merging the two. The combined group will have sales of US$55 billion a year and operate2,350 main stores and more than 1,000 speciality stores. Most Kmart and Sears stores are to continue tradingunder their own names, but a few Kmart stores especially those outside shopping malls will switch to theSears banner. These will be added to the 50 Kmart stores that Sears bought earlier in 2004, which have alreadybeen converted. This could herald the start of other such mergers, as US retailers attempt to fend off thecompetition from Wal-Mart and Target.

Target itself sold off both Marshall Fields, its own department store chain, and Mervyns, a middle-marketstore chain, earlier in 2004, in order to concentrate on open-plan, warehouse-style stores. In an opposite move,another major department store operator, JCPenney, sold off its Eckerd Drug chain in order to concentrate on itscore department store business. Separate blocks of Eckerd were sold to another drugstore chain, CVS, and JeanCoutu of Canada. With the acquisition of 1,260 Eckerd outlets, CVS has become the USs leading drug retailerin terms of outlets, with more than 5,400, although total sales are still behind those for Walgreens.

Traditionally, Japans retailing industry has not been characterised by mergers and acquisitions, with manyretailers, including leading retail conglomerate Ito Yokado, opposing such moves for conservative culturalreasons. However, in recent years this has begun to change, with the threat posed by foreign retailersencouraging large Japanese retailers to expand their networks, and the financial difficulties being faced by manyretail operators making directors more receptive to the idea of merging with other companies. A high profilemerger occurred between struggling department store operators Seibu and Sogo in June 2003. The newcompany formed by the merger, Millennium Retailing Inc, is expected to become the second largest departmentstore retailer in terms of sales in Japan in the near future.



Summary 2 Major Mergers, Acquisitions and Disposals in the Retail Sector 2000-2004Retailer Country of origin Action YearWm MorrisonSupermarkets Plc

UK Acquisition of Safeway,UKs fourth largestgrocery chain

2004

JCPenney US Divestment of drugstorechain Eckerd Drug

2004

Sears Roebuck US Agreement to merge withKmart

2004

Target US Disposal of departmentstore chain MarshallFields, and Mervyns

2004

Royal Vendex KBB Netherlands Acquisition of French DIYchain Leroy Merlin

2003

Seibu Japan Merger with fellowdepartment store Sogo

2003

CVC Capital Partners US Acquisition of Europeanretail groups Han AndersGroup; Kijkshop; PerrySport; Siebel Group;Scapion; Prnatal/RoyalVendex KBB

2002

Carrefour SA France Acquisition of part ofBelgian GIB group afterits liquidation

2001

Carrefour SA France Acquisition of Promodsgroup

2000

Source: Euromonitor

5. THE PRIVATE LABEL MARKET

5.1 Global Trends

Global private label market size

The private label market for groceries alone (including food, drink, OTC healthcare, cosmetics and toiletries, petfood, household cleaning products and disposable paper products) is estimated by Euromonitor to have beenworth more than US$106 billion globally in 2004. If private label clothing were included, this value would bemuch higher. Overall, private label accounted for some 16% of total global retail sales in the sectors covered.

Most of the worlds private label sales are concentrated in Europe and North America, with the formeraccounting for as much as 59% of sales in the above-mentioned categories in 2004. Although North Americahas the largest total retail market, private labels are less developed in this region compared to Europe, due to thefragmented nature of supermarket retailing there. Thus, North America accounted for only around 37% of globalprivate label sales in 2004. Throughout most of Latin America and Asia-Pacific, private label is still in itsinfancy, although it is growing strongly in many cases. The share accounted for by regions outside Europe andNorth America is estimated to have grown from 3% 2003 to 4% in 2004.

Overall, the global private label market has been buoyant in recent years, with estimated growth of 5% in 2003and 6% in 2004. Perhaps the single most important factor affecting growth of private label has been thedevelopment and consolidation of chained grocery retailers, both in developed and emerging markets, butparticularly in the latter. International multiples, such as Carrefour, Tesco and Wal-Mart, which all operateextensive private label programmes, have expanded both within their core markets and into emerging markets,which has generally increased the range of private labels on offer. Similarly, discounters such as Aldi and Lidl,



which have very strong private label policies, are rapidly penetrating new markets around the world. This hasnot only added to the pool of private label products on offer, but has also forced local retailers to increase theiroffer of private label products in order to remain competitive. As discounters continue to expand, this trend isexpected to continue in the future.

The value of the global private label market has also been boosted by trends towards more expensive, value-added private label products. These include premium ranges, products designed to appeal to specific marketsegments, and organic and low-fat lines.

Chart 5 Private Label Value Breakdown by Region

% value

Source: Euromonitor International

Global private label shares by sector

Although private label products have penetrated most market sectors and have become increasinglysophisticated, it is still the case that their share is highest among commodities. For example, private labelreaches double-digit shares in both disposable paper products and packaged food (as a whole), whilst its share islowest in areas where brand image is very important, such as spirits and beer, and those that are highlytechnical, such as consumer electronics.

In some subsectors, such as carbonated drinks, baby food and confectionery, it is still very difficult for privatelabel products to gain a significant share. This is due to these areas dominance by major global players thathave a very strong heritage, such as Coca-Cola, Nestl and Mars. The strong brand images and high quality ofCoca-Cola and Pepsi-Cola, for example, mean that even if retailers such as Sainsburys of the UK claim to haveachieved a very similar taste to these brands, they will never be able to penetrate the subsector to a great extent.Similarly, with regard to baby food, parents are highly demanding of quality, and it seems that only long-standing suppliers such as Nestl are able to inspire complete trust.



Certain categories have not been well suited to private label in the past. This is the case of products associatedwith luxury and prestige, such as fragrances and jewellery, as well as copyrighted products such as books andCDs. Nevertheless, in some cases, retailers have managed successfully to launch private label products in thesesectors. For example, Wal-Mart and Target in the US have popular jewellery departments, and Wal-Martrecently extended this model to its UK subsidiary, Asda, which is launching jewellery under its George label. Inthe case of media products, UK retailer Marks & Spencer sells both books and CDs under its St Michael brand.

Private label retailers have also had difficulty in penetrating the cosmetics and toiletries sector as a whole,accounting for only 2.5% of value sales in 2004. However, they are gradually making inroads into somesubsectors, due to innovative marketing strategies, the introduction of premium products and co-brandinginitiatives.

Table 4 Global Private Label Share in Selected Categories 2001-2004

% value2001 2002 2003 2004

Retail disposable paper products 13.3 13.9 14.6 15.2

Packaged food 11.6 12.0 12.2 12.5 Ready meals 20.7 21.6 22.6 23.6 Chilled processed food 18.2 19.1 19.9 20.8 Dairy products 18.6 18.8 18.3 18.3 Frozen processed food 16.8 17.2 17.9 18.4 Spreads 15.2 15.9 16.2 16.8 Canned/preserved food 13.8 14.6 15.5 16.3 Pasta 13.7 14.6 15.4 16.3 Dried processed food 11.2 11.6 11.6 11.9 Oils and fats 10.5 10.8 11.1 11.4 Sauces, dressings and 8.0 8.5 9.0 9.5

condiments Ice cream 8.1 8.1 8.2 8.2 Soup 7.4 7.8 8.1 8.4 Sweet and savoury snacks 7.7 7.8 8.3 8.5 Bakery products 7.4 7.6 7.8 8.1 Confectionery 3.2 3.3 3.4 3.6 Baby food 1.2 1.4 1.4 1.6

Pet food 11.2 11.2 11.4 11.4

Spirits 1 1.4 1.4 1.5 1.5

Beer 1 1.7 1.7 1.3 1.3

Soft drinks 1 8.1 8.1 8.1 8.1 Fruit/vegetable juice 15.2 15.1 15.0 14.9 Bottled water 10.5 10.5 10.5 10.5 Concentrates 12.2 9.3 9.2 6.4 Carbonates 5.4 5.4 5.4 5.4 RTD tea 5.0 5.1 5.1 5.2 Functional drinks 1.2 1.3 1.4 1.5 RTD coffee 1.4 0.9 0.8 0.4

Hot drinks 6.6 6.6 6.6 6.6 Coffee 6.2 6.2 6.2 6.2 Tea 8.6 8.5 8.4 8.3

Household care 5.5 5.9 6.3 6.6 Chlorine bleach 14.7 16.0 16.6 17.7 Dishwashing products 9.1 9.5 10.3 10.8 Toilet care products 6.9 7.2 7.5 7.8 Surface care 5.8 6.0 6.5 6.8 Air fresheners 5.6 5.6 5.7 5.7 Laundry care 4.6 5.0 5.4 5.8



Polishes 3.0 3.2 3.4 3.6 Insecticides 1.6 1.7 1.8 1.9

Cosmetics and toiletries 2.2 2.3 2.4 2.5 Sun care 4.8 5.1 5.2 5.4 Bath and shower products 4.0 4.3 4.7 5.0 Baby care 3.7 3.9 4.0 4.2 Oral hygiene 4.0 3.9 3.9 3.8 Mens grooming products 3.0 3.1 3.1 3.2 Deodorants 2.0 2.2 2.3 2.5 Skin care 2.0 2.1 2.2 2.3 Hair care 2.0 2.1 2.1 2.2 Colour cosmetics 0.8 0.9 1.0 1.1 Fragrances 0.4 0.4 0.4 0.4

OTC healthcare 6.1 6.2 6.2 6.2 Wound treatments 11.5 13.2 13.9 15.3 Smoking cessation aids 14.8 15.5 13.3 13.0 Analgesics 8.4 8.1 8.0 7.8 Cough, cold and allergy(hay fever) remedies 5.8 5.7 5.5 5.4 Digestive remedies 6.7 6.5 7.2 7.3 Medicated skin care 5.8 6.0 5.8 5.9 Vitamins and dietary 5.1 5.2 5.2 5.3

supplements Childspecific 4.3 4.3 4.2 4.2 Eye care 3.1 3.0 2.0 1.6

Large kitchen appliances 1 6.1 6.2 6.1 6.1Consumer electronics 1 0.5 0.5 0.6 0.6Source: Euromonitor InternationalNote: 1 = shares by volume

5.2 National Market Trends

Leading private label markets

The big four

Although the US private label market is less developed than some European markets in terms of share of totalsales, in absolute terms it is by far the worlds largest private label market, with sales through grocery and massmerchandise retailers valued at around US$31.1 billion in 2004. The market for private label products in the UShas been somewhat limited in the past by the lack of consolidation in the US grocery retailing industry, and thestrength of international branded products in this market. Nevertheless, as retailers such as Wal-Mart and Targetcontinue to expand throughout the national territory, this is contributing to slow but sure growth in private label.Indeed, although private label sales (excluding those of Wal-Mart) were estimated by ACNielsen to havedeclined by around 1% in 2003, Wal-Marts private label sales reportedly continued to grow strongly in thatyear, by around 12%. These trends are likely to have continued into 2004, given Wal-Marts strong expansion.As Wal-Marts private label sales are estimated to be worth over US$5.0 billion, this is estimated to have hadthe effect of contributing to an overall rise in US private label sales of almost 1%.

The other two major developed markets for private label, in terms of absolute value, are Germany and the UK.Germany is estimated to have edged ahead of the UK in 2004, to reach sales of US$15.2 billion, while sales inthe UK amounted to an estimated US$13.9 billion in that year. Private label sales in Germany have grownstrongly, due both to the depressed economic conditions in this market, which have led consumers to seek bettervalue products, and the pressure exerted by discounters such as Aldi. This has forced supermarket operators toexpand their private label ranges in order to remain competitive. In times of economic downturn, Germanconsumers have sought high quality private labels at low prices, such as those offered by Aldi and Lidl. All themajor supermarket retailers now offer extensive private label lines, including Rewe (with more than 170 privatelabels spanning over 1,200 products), Tengelmann (with around 1,100 private label products) and Edeka.



Private label is a strong feature in the UK, due to its highly developed and concentrated supermarket network.As UK consumers tend to be very loyal to their preferred retailer brand, the competitive focus is at the storelevel, and this is where it has been imperative for retailers to create a persuasive consumer connection. In orderto accomplish this objective, UK retailers have had to elevate themselves above the competition by offeringcomprehensive product ranges, especially in categories where national brand manufacturers offerings do notsuffice. This has included the development of a large number of premium private label products, which hasadded value to the UK market. Retailers have made a conscious attempt to exploit a new generation ofconsumers with high levels of disposable income, who make more sophisticated and politically aware shoppingdecisions, and have also launched product lines designed to appeal to hard-working consumers with busylifestyles. Example of this are Tescos Finest range of premium products, worth over 500 million annually, andSainsburys Taste the Difference and dietary-led FreeFrom ranges. Private label products play an important rolein UK drugstore and chemist retailing. Boots The Chemist, in particular, is strongly reliant on its private labelbrands, which account for as much as 40% of its sales annually.

The fourth major private label market is France, with sales amounting to some US$9.1 billion in 2004. Frenchretailers were among the pioneers of private label products in the 1980s in particular Carrefour, whichintroduced its first generics in 1976 and now has over 2,000 private label food products. The development ofprivate label in France was spurred by the introduction of the Galland law, which redefined the threshold forselling branded products at a loss, and consequently encouraged multiple operators to concentrate on privatelabel merchandise as a way of increasing margins. Intermarch, with its investment in manufacturing, has thehighest ratio of private labels, which account for one third of its turnover.

Spain catching up

Behind these top four markets, only Spain achieved private label sales of more than US$4.0 billion in 2004,having witnessed growth of around 10% in that year to reach US$4.1 billion. Private label growth in Spain hasbeen fuelled by strong progress in retail sales in general, due to relatively buoyant economic conditions.Furthermore, as competition between Spains large grocery retail chains has increased, retailers have looked toprivate label as a way of remaining competitive. In the same way as the UK, Spanish private labels have becomeincreasingly segmented and sophisticated. Eroski and CC Carrefour have been particularly active in addingpremium lines and diversifying into new product sectors. The growth of hypermarkets in Spain over the reviewperiod also provided opportunities for greater penetration of private labels, in both the food and non-foodsegments.

The only other market to have recorded private label sales of more than US$3.0 billion in 2004 was Canada.Like France, its private label sales grew moderately in 2004, by an estimated 5%. Canadas strong private labelmarket is largely due to its high level of retailer concentration. The Loblaw Company, by far the countrysleading retailer, has a very strong private label policy. Not only did it pioneer private label in the Canadianmarket, it is also renowned for taking this concept to new heights with the introduction of its bargain No Nameand premium Presidents Choice brands. Presidents Choice has achieved such high consumer recognition that ithas virtually become a brand in itself, albeit one that has exclusive distribution in Canada, and is even beingexported.

Chart 6 Leading Private Label Markets by Value 2004

US$ million



Source: ACNielsen, Euromonitor InternationalNote: Based on sales of food and drink, pet food, disposable paper products, household cleaning products, OTC

healthcare, cosmetics and toiletries; includes sales through supermarkets, hypermarkets, mass merchandisers;as well as drugstores and convenience stores where available

Fastest growth markets

Philippines leads growth but from tiny base

By far the most dynamic market for private labels in 2004 was the Philippines, where sales are estimated to havedoubled in that year. However, the Philippines is an example of a private label market that is still very much inits infancy, with sales reaching an estimated level of just US$300 million in 2004. Private label is gainingpopularity among low income households, as these products are still mainly of lower quality and price thanbranded products. One of the largest private label brands in the Philippines is SM Bonus from the SMSupermarket chain, with 15 outlets.

Poland is another market in which private label is growing very strongly, with sales estimated to have increasedby some 90% in value in 2004. Again, this was from a relatively small base, with sales reaching only US$475million. The main reason for this growth is the expansion of foreign retail chains in Poland, and especiallydiscounters. The first retailer to introduce private labels in Poland was Makro Cash and Carry (owned byGermanys Metro AG) in 1997. Most of the multinational operators of hypermarkets, supermarkets and cash andcarry outlets have their own private label products. The largest private label retailer is Gant Polska, with itsLeader Price discounter label. There are already some 120 Leader Price outlets in Poland, which sell exclusivelyprivate labels, and Leader Price branded products are also sold in Gant hypermarkets in Poland. Polish retailersstarted to introduce private label products in 2002. Polomarket, which operates more than 100 medium-sizedstores in central and northern Poland, was the most active of these, and currently has about 200 private labelproducts.

Other strong growth markets for private label include the Czech Republic, Thailand, Argentina and Hungary,which are all estimated to have recorded private label sales increases of over 40% in 2004. The Czech Republicand Hungary witnessed similar developments to Poland, with growth spurred by the expansion of international



grocery retailers and growing purchasing power in these markets. Private label sales stood at US$114 million inthe Czech Republic and US$250 million in Hungary in 2004.

Private label in Thailand and Argentina is still in its early stages of development, with growth in Argentinaspurred by the strong economic recovery in 2004. South Africa also achieved significant growth in private labelsales, of 25%, and is estimated to have overtaken Canada in absolute terms in that year, with sales of almostUS$3.9 billion.

Two highly developed countries also featured in the list of fastest growing private label markets in 2004, thesebeing Japan and Sweden, with increases of 25% and 20%, respectively. Indeed, while Sweden was a forerunnerof non-food private label products, through retailers such as IKEA (furniture) and H&M (clothing), it has laggedbehind most markets in terms of private label grocery sales, and is only now beginning to catch up.

Japan lags behind

Private label development was hindered in the past in Japan both by the fragmented nature of the supermarkettrade, and also due to the fact that Japan is a very brand conscious society. However, this has gradually changed,as the deteriorating economy has made consumers more price sensitive and thus more open to lower pricedprivate label brands. Despite the fact that price discounting on branded products in Japan has narrowed the gapin price between private label brands and other brands, retailers have, on the whole, become more inclined tomarket their private label brands and allocate greater and more prominent shelf space to them as they seek toenhance their profit margins.

Chart 7 Fastest Growing Private Label Markets by Value 2004

% growth





Private label share in developed markets

Switzerland has highest private label penetration

In terms of share of retail sales, Switzerland is by far the worlds most developed market for private label,although in absolute terms it is a very small market. Private label is believed to have accounted for as much as39% of value sales in the sectors under review in 2004. This is due to the exceptional power of Switzerlandstwo largest retailers, Migros and Coop, which operate very strong private label policies. As much as 90% ofMigros product mix and 54% of that of Coop Switzerland consists of private label, with most productsmanufactured in the retailers own factories. For example, the manufacturer Mibelle is a 100% subsidiary ofMigros, and is the main supplier of cosmetics and toiletries.

The mutually exclusive policies of Coop and Migros severely restrict access to consumers, effectively cuttingout between 25% and 30% of the market for any manufacturer of branded goods. The strong position of retailersalso means that only the largest brands, or those occupying a specialised niche, will be able to secure long-termspace on the shelves, while minor brands are threatened with de-listing.

The UK and Germany rank second and third in the world with regard to the private label share of total sales, aswell as being third and second, respectively, in absolute terms. Their shares in 2004 were estimated at 31% and29% by value, respectively. However, the UK market is believed to have reached maturity, and its shareremained static in 2004, following a slight decline in share in 2003. This is due largely to efforts bymanufacturers to compete by lowering prices and introducing special offers. According to ACNielsen, privatelabel sales in the UK grew by less than 1% in 2003, while sales of manufacturer brands rose by 6%.

Benelux sees growing share

Two markets that are relatively small in absolute value terms but have a high percentage of private labelproducts are Belgium and the Netherlands. According to the Private Label Manufacturers Association (PLMA),both markets witnessed a rise in the share of private label products in 2003, which is thought to have continuedinto 2004. This was largely due to the weak economic environment, since private labels in both markets are seenas cheaper alternatives to branded products, and Dutch and Belgian consumers tend not to attach the sameimportance to brands as consumers in other European countries.

Major retailers in the Netherlands have recently stepped up their private label activities considerably, inresponse to the fierce price war that has been raging in the country since October 2003. Albert Heijn (owned bythe Ahold group) announced in September 2004 that it would further reduce the prices of around 1,000 ownbrand products by 10-60 cents, and Super De Boer (owned by Laurus NV) was expected to follow suit. Themeasures are also in response to the competitive threat posed by German discounters, which are expandingrapidly in the Netherlands. In Belgium, the PLMA reported that private label gains were particularly strong inthe disposable paper products category, and that retailer and wholesaler brands now represent more than half ofthe products sold in the frozen, paper products and pet food categories.

The only other countries to record a private label share above that of the global average were Spain, France andCanada, all of which have fairly mature and well developed private label markets. The US has an averageprivate label share of 16%, which is reflected in its comparatively low rate of supermarket consolidation.However, private label is growing in this market. According to research company Hoyt, store brands werepresent in 280 of the 289 consumer packaged goods categories in 2004. They have 100% household penetration,and the average shopper now buys private label products about 70 times per year.

Shares lower in smaller countries, and Italy

Among the remaining major economies, private label penetration is below average in all the Scandinavianmarkets, as well as in Italy, Australia and New Zealand, and smaller markets such as Austria, Ireland, Portugaland Greece. The latter markets are still mainly dominated by small, local chains, which do not have the means toinvest heavily in private label production and distribution. The Greek market is particularly underdeveloped,with private label accounting for only 4% of retail sales in the areas surveyed. Nevertheless, private labels aregrowing in Greece due to the increasing penetration of discounters such as Lidl and Dia. The latter alreadyoperates 264 outlets in Greece, and offers more than 650 private label items.



The reasons why Italy lags behind its major European counterparts in terms of private label incidence areunclear, but may be related to the strong Italian tradition of culinary quality and a perception that private labelproducts are low budget rather than flavoursome. However, it is likely that as the private label concept becomesmore widely accepted in Italy, the concept of offering the best value for money will increase in attractiveness.

Chart 8 Share of Private Label in Developed Markets by Value 2004

% total retail sales



Private label share in emerging markets

More advanced in Eastern Europe

In regions such as Asia-Pacific, Latin America and Africa and the Middle East, as well as Eastern Europe, theshare of private label is well below the global average. Indeed, in most cases, penetration reached less then 5%in 2004. As private label is still embryonic in most of these countries, it consists mainly of low value andcopycat brands, and ranges are limited. Nevertheless, as foreign chains increasingly infiltrate many of thesemarkets, they have strong growth potential for the future.

Eastern Europe is in a more advanced stage of development than either Latin America or Africa and the MiddleEast, with private label penetration having already reached an estimated 11% in Hungary and 7% in Russia by2004. This is due to the relative proximity of the large European supermarket and discount retailers to these



markets. Major retailers such as Metro, Ahold, Carrefour, Lidl and Tesco have expanded eastwards in the faceof maturing markets in Western Europe, and brought with them their established private labels.

In Hungary, private label products are effectively filling the gap between branded and no-name products,while carrying the latter types attractive prices. Hence, private label products have great potential for furtherexpansion. With German discount multiple Lidl entering the Hungarian market in 2004, the share of privatelabel products is estimated to have risen further, as the company offers a very strong assortment of suchproducts, and only plans a secondary role for traditional branded products.

The appearance of private labels on the Russian market began in supermarkets such as Ramstor and SedmoiKontinent. Unlike the case in several other emerging markets, products promoted under private labels are notessential commodities, with alcohol, fruit juices, mineral water, meat delicacies and snacks, oils and fats, frozenconvenience food, textiles, and sauces typically retailing under private label brands. Furthermore, private labelproducts are well regarded in the market as they are associated with high quality Western retailers. Prices areonly slightly lower than for branded goods, but the margins on private labels in Russia remain high. So far, themain purpose for introducing private labels in Russia has not been to offer cheaper alternatives to brands, but toincrease margins.

Private label is slightly less well developed in the Czech Republic than in Hungary and Russia, with the privatelabel share standing at an estimated 6% in 2004. The most popular private label products sold through Czechfood retailers are beverages and long-life food. Unlike in Western countries, there is less interest in private labeldrugstore products in the Czech Republic, although private label detergents, liquid soaps and paper disposableproducts are popular, due to their lower prices. A recent survey revealed that 43% of Czech consumers buyretailers private label goods, while 28% buy such products frequently. More than half of consumers visitingsupermarkets, hypermarkets and discount stores stated that they buy private label grocery goods.

Growth in Latin America linked with economic recession

In Latin America, private label has benefited from economic recession in recent years, which has forcedconsumers to seek better value for money. Argentina is one such market that is developing rapidly, even thoughthe private label share stood at only 3% in 2004. Private label sales of the top five retailers (combined) are nowgreater in Argentina than sales of the largest 20 branded manufacturers, and quality improvements are beingmade as retailers seek to compete more effectively with

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