Last week I had the pleasure of visiting with one of our specialty retailer customers. During one of the sessions, we were warming up a review session with their CMO by exchanging thoughts on current trends in retail. We got into a fascinating conversation about private brands and started sharing views and (publicly available) information on how we each saw the positioning of private and national brands around different retailers in different verticals.
On the flight home, I started thinking more about this topic, in part because we deal with it a lot at Revionics. We see a lot of focus around how retailers choose to position their private and national brands across different categories. Revionics supports a key component of retail price management in what is sometimes called “brand gap tiering”. By defining rules that specify an inter-product difference such as price, price %, or profit, retailers can ensure that there is proper “distance” in price between private brands, national brands or any combination of the two.
The original and probably most common application of brand gap tiering is the classic “good, better, best” situation. Pick any one of the tiers as the “leader” and then define the gaps above or below as needed. Voila: everything stays in step from a price-perception standpoint.
Historically, I would have interpreted “good, better, best” like this:
Good = “private label value brand”
Better = “economy national brand”
Best = “premium national brand”
I started digging around and found some interesting research on the topic. In a 1996 article from Harvard Business Review, John Quelch and David Harding laid out some perspectives that I think would still resonate with most of us nearly 20 years later. Though the article is written more from the perspective of a manufacturer contemplating their private label production strategy, the key points hold from a retail perspective too. They argued that the popularity of private label brands vary with economic conditions, based on that premise that we trade up to premium when times are good and look for a bargain when times are bad. Here’s a quote from the same article (remember this is from 1996):
…private-label strength generally varies with economic conditions. That is, private-label market share generally goes up when the economy is suffering and down in stronger economic periods. Over the past 20 years, private-label market share has averaged 14% of U.S. dollar supermarket sales. In the depth of the 1981–1982 recession, it peaked at 17% of sales; in 1994, when private labels received great media attention, it was more than two percentage points lower at 14.8%.
So this is familiar stuff, right? Fast forward a bit closer to the present and we see similar results. Nielsen reported results from their 2014 Global Survey of Private Label, and some interesting results emerge. From a publicly available summary of the report, Nielsen outlined the survey of around 30000 Internet responders in 60 countries. The United States had 17.5% private label share according to the study – compare this to the historical results (from a different source) above.
Globally, private label share is 16.5%
So how do the results vary globally? Here’s a chart built based on the survey for 2014:
Here are some interesting highlights (all quoted or summarized from the same study summary)
- 67% of Americans and 61% of Canadians feel private brands are at parity with national brands
- Switzerland has the highest private label share of 45%, followed closely by the U.K. and Spain at 41% each
- Australia’s store brand growth is at 6.6%, as compared to national brand growth of 2%
- Regionally Asia has the lowest overall penetration of private label – the highest share in Singapore at 8.1% is only half the global share
Here’s a specific quote from the Nielsen summary on how Asia-Pacific consumers do not yet see much value in private label:
Asia-Pacific has the highest percentage of respondents (58%) who believe name brands are worth the extra price—10% higher than the global average, 20% higher than North America and 26% higher than Europe. Nearly six-in-10 respondents in Indonesia (59%), the Philippines (58%) and Thailand (56%) believe they risk wasting money when they try new brands. Instead, shoppers prefer to buy the trusted brand advertised on TV every week, especially now that it is increasingly offered at a discounted price.
Now, back to those wooden barrels. How much have you thought about balsamic vinegar (aceto balsamico in Italian)? We use it a lot at home, and even have our little “good, better, best” range of bottles depending on how we are using it. “The good stuff” comes out in certain special sauces, on cheese, or on my wife’s roasted brussel sprouts (mmm…), while we use the “everyday stuff” to finish vegetable sautes or add to everyday salad dressings. As I happened to be using some the other night, I realized that this was a product where there were LOTS of private label examples.
Quoting from the Wikipedia article on balsamic vinegar:
The original, costly, traditional balsamic vinegar ( Aceto Balsamico Tradizionale), is made from a reduction of cooked white Trebbiano grape juice, and used as a condiment. It has been produced in Modena and Reggio Emilia  since the Middle Ages, being mentioned in a document dated 1046. Appreciated in the House of Este during the Renaissance,  it is highly valued by modern chefs and gourmet food lovers.
And, as you might expect, there are lower cost alternatives. I checked my pantry, and indeed we had a bottle that said Aceto Balsamico di Modena (Balsamic Vinegar of Modena). Then I did some more searching (see this article on Fine Cooking’s site – look for the buying guide at bottom, or see this Huffington Post article) and soon had my wife telling me to do something normal instead of reading incessantly about balsamic vinegar.
So what’s the point? Here I began to realize why there was an opportunity for private label with this product. The product and its quality measures can be really confusing, at least to Americans like me who don’t grow up with the heritage. Here are some selected “real” products:
- $11.96 for a 250ml (8.5 oz) bottle of Fini Balsamic Vinegar at Williams-Sonoma (made in Modena from white Trebbiano and Lambrusco grapes, aged a minimum of 12 months). I’ve tried this one and it is awesome!
- $103.96 for 100ml (3.380z) of Cavalli Room 19 Aged Balsamic Vinegar at William-Sonoma (this is “the real thing” from Reggio Emilia as quoted above, aged a minimum of 12 years)
Meanwhile in the grocery aisle or online, you can find the lower cost alternatives:
- $3.44 for a 500ml (17oz) bottle of Colavita Aged Balsamic Vinegar at Walmart
- $2.88 for a 250ml (8.5oz) bottle of Alessi di Modena Balsamic Vinegar at Walmart
By the way, I have the Colavita in my pantry – there is absolutely nothing wrong with it. It just isn’t the barrel-aged, syrupy “flavor bomb” that the Aceto Balsamico Tradizionale brands represent.
So, I was putting together some ingredients (pun intended) then for a good private brand.
Here we have a case of an incredibly wide quality range, withrelatively little consumer awareness(again at least where I live). Grocers who build their brands on trust and credibility, then, had an opportunity. If the shopper trusts him or her, then there would be a great opportunity for marketing a product like this under the trusted retailer brand. I know this isn’t new – it just hit me when thinking about the discussion above. Let’s see what is out there with a few grocers around the US:
What’s happening? In my opinion, the grocers have an opportunity to build the brand when the shopper trusts them. As I continued researching, I started seeing another pattern – the grocers who built these products out were able to createtheir own tiers. This makes sense – if the shopper trusts them for one grade or level of product, why not for a range of options? This is an example of where the power of the brand has pulled from the manufacturer to the retailer.
I might roughly translate the “good better best” tiering in the real world for a product like balsamic vinegar in the States as:
Good = “I have no idea what this is, but it isn’t expensive”
Better = “At least it sounds Italian”
Best = “I trust my store brand and saw it in a cooking demo. This stuff must be good”
Cynical? I don’t mean it to sound that way at all. I see opportunity here – lots of it. Retailers who take the time to build trust with their customers earn the ability to sell a premium product on their own label and on largely their own terms. I’m not claiming any sort of originality in this idea. I am just pointing out that it is happening! I’m willing to bet you that credibility in these speciality food products is bought through all those recipes and in-store demonstrations that a good grocer puts into their marketing. Private label brands have potential not only to be fillers or volume runners, but also to be flagship brands. And I don’t think this applies just to grocery. If I am at an outdoor specialty retailer, I am going to feel much better about buying a deer stand or some high fencing if I think the people selling it actually use the product and live the way I want to live.
Keeping my research to information that everyone can validate on the Internet, here’s my last image for this post. My local HEB in Austin has a premium flag called Central Market. Take a look at this recent screenshot and look where their house brand balsamic vinegar is positioned:
This is getting to the central point of my little note here. HEB has positioned their premium Central Market brand as the “best” offering. I could bore you all to tears with more details about how they have at the store multiple grades and prices in the store for the product. What matters, I think, is the point that really brought the lesson home to me. HEB earned the right to take the best spot. Their vinegars rock! Are there even better offerings out there? Maybe. But, if you trust your local market and you are buying something relatively unfamiliar, I think we see the power of a brand at work. Put a great product on the shelf, back it up with a story and demonstrable quality, build positive experiences through imagery and demonstrations, and then you end up in the premium spot!
Here’s my takeaway from this little journey (other than the observation that Aceto Balsamico Tradizionale poured on top of some real Parmigiano-Reggiano really does turn out to be out of this world):
- The overall brand image must establish trust and credibility through experience, accessibility, and imagery that is both familiar and aspirational to the buyer.
- Customers will spend more on brands they trust.
- In Europe, private brands have nearly half the market in many countries. But, in Asia, global brands still have the sway because retailers and local manufacturers haven’t yet convinced their customers of their quality across the board. Elsewhere, the private labels have a strong showing but have more room to grow.
- Products that are bought infrequently or have unfamiliar characteristics for measuring quality are excellent candidates for establishing premium brands. If I don’t understand much about what I am buying, I will look to a brand I trust. Nothing new about this one!
Maybe it just because of what I do, but I think it is really cool that the good/better/best strategy that we all know is so open to innovation. Anyone can earn the right to that best spot, I think, if he or she is willing to take the time to build credibility and trust with the customer. The next time you find yourself in the oil & vinegar aisle at the local market, stop and think about all the opportunities there are to create trust and show the power of a positive experience. The pricing guy in me just thinks it is cool that anyone can win that top spot in the brand gap tier!
Also check out more of the excellent Nielsen study too – it is great reading!