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Eleven risks for consumer products companies - 7. Retailer power and private label growth - EY - Global

Eleven risks for consumer products companies

7. Retailer power and private label growth

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Working with retailers

Key questions for consumer products companies include:

  • How can we leverage collaboration with retailers to drive faster growth?
  • Are we maximizing our deep category and consumer behavior insights to change the game with retailers?
  • How can we ensure that highlevel planning translates into shop-floor action?
  • How can we protect brand premium against private label threats — particularly at the quality end of the supermarket?
  • How can we improve communication of our total service proposition to encourage stronger consumer engagement?

Retailers often outsource retail category management to chosen suppliers on whom they rely for strategic recommendations and insights—a practice known as "category captainship."

Consumers' search for value is changing the way companies do business. Retailers are putting greater pressure on manufactures and consumer product companies are competing against their own brands.

Manufactures face a squeeze on several fronts

Retailers are putting pressure on manufactures in several ways:

  • Rationalizing product ranges to reduce complexity
  • Simplifying the shopping experience
  • Freeing up shelf space for their own private label ranges
  • Negotiating harder with consumer products companies to help achieve global customer relationships (i.e., a single price for a product across markets)
  • Pressuring supply chains to cut inventories
  • Requesting sustainability information on products

Working with

Value-seeking behavior is here to stay

Consumers want value. But remember, value extends beyond pricing to include wider aspects of consumer interactions and the shopping experience.

Some companies aim for value by accepting returns of sale products in exchange for credit towards the purchase of a new product

Collaboration is the counterbalance to retailer power

Retailers require consumer products manufacturers to share the pressure they are facing from value-seeking consumers.

In turn, the response from manufacturers is increasingly to invest in collaboration, as part of combined efforts with retailers to deliver overall category growth.

Consumer collaboration can mean different things to different people. A recent joint study by McKinsey and Nielsen, for example, tracked 50 manufacturers engaged in 37 collaborations with 28 retailers, which included co-promoting category growth, jointly reducing supply chain costs and exploring mutually inclusive benefits associated with the customer experience.1

Outsourcing category management – the new symbiosis

Despite the emergence of direct-to-consumer channels, manufactures still need retailers for their market presence. And because retails carry so many SKUs, they need manufactures to provide information about customer interaction with particular brands.

Retailers often outsource retail category management to chosen suppliers on whom they rely for strategic recommendations and insights—a practice known as "category captainship."

The manufacturer, in turn, gains the advantage of a closer relationship with the retailer and access to the retailer's shopper experience and insight.

We expect this trend to continue.

Steady march of private label

Retailers are competing directly with those brands with their own private label offerings.

In the US, for example, private label accounts average nearly 23% of unit sales and just over 18% of dollar sales, according to Symphony IRI Group's annual review of the consumer products sector for 20102. In other highly developed markets, private label share is even higher, the UK and Germany for example.

However, recession recover has affected consumers spending habits. Overall, across consumer products goods categories, private label's share of unit sales fell by 0.5 percentage points in 2010, according to Symphony IRI, although its share of dollar sales increased by 0.2 percentage points.

Yet, we don't expect this dip to signal the end for private label spending.

Private label share is the highest in the grocery segment. Retailers there plan to increase market share.

Historically, private label penetration has been lower in emerging markets than in the developed world. However, it is set to increase as global retailers with their own brands move to emerging markets.

Manufactures' response – investment and innovation

Consumer products companies are increasing advertising to help their brands.

But as consumers continue to see value in private labels, manufactures face pressure to do more than the usual advertising to support their brands.

New strategies include increasing consumer engagement with the brand.

Gaining in-depth consumer insights, such as how they engage with the companies' products, are an increasingly necessary part of meeting consumers' desire for greater, and more broadly defined, value. This is equally true when engaging with retailers collaboratively as when going head-to-head competitively.

1The 2010 Customer and Channel Management (CCM) Survey, Winning Practices on Strategic Customer Collaboration: consumer/winning-practices-on-strategic-customercollaboration/ 

2Symphony IRI report, Times and trends, CPG 2010 Year in Review: out of turmoil rises opportunity, p15. 

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