Saturday, January 17, 2009

“Private labels will rule the retail world”


Recently, an interesting thing happened in the UK retail market. Tesco, regarded as the worldwide pioneer of own brand private labels, suddenly started introducing ‘phantom’ private label brands in its stores. For the first time, Tesco was abandoning its policy of only offering own labels under its own name. The move is important as Tesco has been at the vanguard of the three-tier private label strategy (‘good, better and best’ approach) which is now adopted by most of the world’s leading grocers.

This surely indicates that the growing power of retailers across the globe and their growing focus on private labels, which offer higher margins and a point of difference over rivals, means that private labels are becoming increasingly important in almost every market. In fact, in developed markets, private labels are moving beyond their original price and functional benefits, to more sophisticated tools for promoting retailers’ ethical credentials. Private labels generally need a highly developed retail environment to succeed with high levels of concentration, consumer trust in retailers and the presence of international players. For these reasons, the share of private labels is highest in Europe, where private label penetration has reached 53% in Switzerland. In contrast, the private label share in a fragmented market such as China is under 5%.

In immature retail markets, penetration of private labels tends to be generally lower. This is due to the fact that retail markets are usually quite fragmented, consisting of a large number of smaller retailers where price competition is less intense. Smaller retailers also generally have less control over the supply chain. Having a grip on the supply chain is an important requirement for launching private labels.

So keeping all these in mind, launch of phantom is a nice strategic move by Tesco. However, it remains to be seen how consumers will react. Will they be happy to see more variety or will they be even more confused now?

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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