How mainstream retailers in Europe seek to drive shopper loyalty and category growth.
Value-added private labels (VAPLs) have become important within the private label architecture of retailers across Europe. Apart from margin improvement, they are crucial to differentiate from the competition. It allows retailers to take unique initiatives to meet specific consumer needs, helping to build shopper loyalty.
In our definition VAPLs include Premium, Organic, Free From, Eco-Friendly and Regional private labels. At IPLC we wanted to better understand and define the position of VAPLs in the private label architecture and strategy of retailers.
During the period of January to April 2018 we researched the market in Europe. We started with an analysis of a range of academic papers published over the past few years and relevant to the subject. We followed this with store checks at 27 retailers in nine countries. Then we conducted interviews with senior managers in the private label industry. Finally, we added our own local experience and knowledge as retailer brand specialists in an effort to create some transparency in the discussion. This enabled us to draw conclusions and to hopefully make meaningful recommendations.
Over the past decade, discount retailers have put enormous pressure on the prices of standard private label (SPL) across Europe. As a result, mainstream retailers have been forced to respond by lowering their prices in order to reduce the value gap. In most cases this has resulted in a serious deterioration of margin. To compensate for this, they have reviewed their strategies in order to mitigate the pain, and VAPLs have turned out to be a powerful instrument in their toolbox.
The private label purchase intention of a shopper is heavily influenced by his or her perception of price and quality of the product. However, the perception of store image also plays a vital role and is not one to be underestimated. A key factor in store image is the way in which a retailer takes its social responsibility and addresses sustainability issues. Consumers respond positively to initiatives in the fields of the environment, animal welfare, regional supply, or food intolerance. If all three influencers in the perception (price, quality and store image) are addressed appropriately it will have a positive impact on shopper loyalty to the store.
Based upon these two key strategies, retailers undertook innovation efforts in private label to address consumer interests. Almost every major retailer across Europe launched separate ranges in segments such as: Premium, Organic, Eco-Friendly, Regional and Free From.
Conclusion & recommendations
Our research revealed that retailers price their VAPLs at average price indices ranging from 192 to 248 compared to their SPL. VAPLs may be more profitable for retailers since they typically require marginal additional production and marketing costs compared to SPLs. Simultaneously, they allow for setting considerably higher selling prices, resulting in higher margins. A potential cannibalisation of established SPLs or national brands by more profitable VAPLs may be beneficial to category profitability of the retailer. Moreover, by offering a range of private labels that focus on consumer interests, retailers demonstrate their social responsibility, as well as taking sustainability issues seriously. This will help build shopper loyalty to the store.
For suppliers of private label, VAPL categories offer new opportunities. Retailers are looking for suppliers to bring innovation in these key areas. A proactive attitude as well as commitment to support retailers in driving category growth through VAPL may lead to deeper engagement with their retail clients.
Given the size of their assortment, mainstream retailers may be in a better position to launch a number of SKUs responding to consumer interests and lifestyles compared to limited assortment discounters.
We expect this report will provide unrivalled insight for all participants in this market sector. Not only where it stands today but also in identifying areas of growth and opportunity for the future.
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