Executive Briefings

Private-Label Sales Another Hurdle for CPG Manufacturers in This Recession

Consumer goods were once believed to be as recession-proof as any industry can be. Shoppers might not be able to afford Rolex watches and Champagne during a downturn, the theory ran, but everyone still needs staples such as soap and toilet paper. Yet sales have fallen in this downturn, thanks largely to growing competition from stores' own brands, or "private labels." Private-label goods tend to cost about a quarter less than branded ones, and so appeal to penny-pinching consumers. Some shoppers are also forgoing altogether items that they used to consider staples, such as air fresheners or special detergents for sensitive skin. The big brands' recent, ill-timed price hikes of as much as a fifth in response to rising commodity prices have accelerated the trend.

Retailers have also been giving more shelf space to their own products, on which they earn better margins, further squeezing the big brands by making them less visible. Jan-Benedict Steenkamp, a marketing expert at the University of North Carolina, estimates that the share of private-label goods is now 20 percent at Wal-Mart and 35 percent at Kroger, two huge American retailers.

In the past year private-label sales have grown by around 9 percent in America and 5 percent in Europe, gaining market share from branded goods in many categories. Middle-market brands, measured by price or sales, are particularly vulnerable to competition from private labels; even in countries like Germany, where private labels now account for almost 40 percent of sales, the best-selling and most expensive brands have not lost much ground.

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Consumer goods were once believed to be as recession-proof as any industry can be. Shoppers might not be able to afford Rolex watches and Champagne during a downturn, the theory ran, but everyone still needs staples such as soap and toilet paper. Yet sales have fallen in this downturn, thanks largely to growing competition from stores' own brands, or "private labels." Private-label goods tend to cost about a quarter less than branded ones, and so appeal to penny-pinching consumers. Some shoppers are also forgoing altogether items that they used to consider staples, such as air fresheners or special detergents for sensitive skin. The big brands' recent, ill-timed price hikes of as much as a fifth in response to rising commodity prices have accelerated the trend.

Retailers have also been giving more shelf space to their own products, on which they earn better margins, further squeezing the big brands by making them less visible. Jan-Benedict Steenkamp, a marketing expert at the University of North Carolina, estimates that the share of private-label goods is now 20 percent at Wal-Mart and 35 percent at Kroger, two huge American retailers.

In the past year private-label sales have grown by around 9 percent in America and 5 percent in Europe, gaining market share from branded goods in many categories. Middle-market brands, measured by price or sales, are particularly vulnerable to competition from private labels; even in countries like Germany, where private labels now account for almost 40 percent of sales, the best-selling and most expensive brands have not lost much ground.

Read Full Article