The recent years turned out to be challenging for the Russian economy as a whole and retail in particular. Declining real incomes of the Russian population and increasing purchasing prices had a negative impact on the state of the country’s retail. However, there are sectors that continue to grow – the crisis served as a nutrient medium to them, and the decrease in incomes and consumers trying to save became a catalyst for growth and evolutionary processes. One of them is the private label segment.
Private label products are goods produced by companies on request, usually for retail networks. There are, however, other types of customers, such as brand holders (producers lacking their own production facilities for the given product type on the given territory), distributors, trade houses, restaurants, cafes and others.
The essence of private labels is lowering the costs due to the manufacturer decreasing marketing expenses – as a result, the customer gets a product of similar quality at a lower price. The manufacturer is not responsible for promotion and only deals with the goods and production. At times networks order goods similar to already existing brands, priced 20-30% lower. However, today more and more often retail chains look for partners for joint development of recipes and packaging. In any case the producer gets a stable production load, the possibility of parallel development of its own brands, prospects of development of innovative technologies in production, a cause to pay increased attention to quality and the organization system in production, as well as loyalty of the retail chain assuming the terms of the contract are followed.
Today, private labels are a necessity dictated by the economic situation formed. As the purchasing power has been declining, the consumer has started switching to discount stores. Consumption of ‘cheap calories’ has increased, and consumption of healthy food products rich in proteins has been declining.
Retailers chose to expand their private label portfolios in the given conditions. The market used to demonstrate significant interest in private labels in the past. Over 6 years, from 2008 to 2014, the share of private label products in Russia increased, reaching 10% in physical terms. However, during the past 2 years (2014 through 2016) the share of private labels in monetary terms in the total volume of sales in the FMCG market grew by almost 1.5 times from 3.5 to 5%. Experts at “Nielsen”, “GfK” and “RBC” agree that the share of private labels will continue to increase until 2018.
What will happen next? Is it possible that consumers will stay loyal to private labels, or will they start switching back to regular brands? Market analysts believe that there is potential for growth of private labels in Russia, and how it will be fulfilled depends fully on retailers. Looking at the global situation, in developed Europe the share of private labels varies from 20 to 55%, which means that the Russian market is far from reaching saturation. India, China and Brazil demonstrate similar dynamics – the share of private labels in these countries does not reach 5% yet but keeps rapidly growing as retail trade consolidates and retail networks expanding throughout the countries’ regions.
According to research data by “Romir” holding for March 2016, two thirds of respondents reported having purchased private label goods in categories such as dairy products, meat and poultry, groats, confectionery, drinks and others over the past 3 months. At the same time 31% of purchasers tried private label dairy products, and 17% tried private label goods in the poultry category. The vast majority of private label buyers (over 90%) are satisfied with the quality of said goods.
Why are Russian manufacturers hesitating in terms of private label development? Unfortunately, there are still cases of disdainful attitude towards consumers by retail chains and attempts to negotiate the lowest price possible at the cost of product quality. To be fair, these situations are not massive and are more of an exception than a rule. Experts, including analysts at more developed European markets, state that the main goal for retailers is not to replace popular categories and brand positions randomly, but to grow strong brands with prospects for the future. It should be noted that the future of each brand, being young consumers and those who are ‘raised’ on private labels, will very likely remain loyal to private labels in the future. Therefore retail networks with a responsible approach to their work and the consumer have a chance to maintain a large share of private labels in consumers’ receipts during the period of economic growth.
An interesting approach to private label development can be observed by “Azbuka Vkusa (The ABC of Taste)”. The chain supports small farms and sells their products both under private labels and under their own brands. Cooperation with the network provides farms with guaranteed sales, assistance in establishing business processes, audit and control. The retail chain plans to choose the best farms, conduct an audit and switch all the products to “Azbuka Vkusa” private labels. This will increase the product quality and will contribute to the development of farm collaboration. Elena Vorontsova, head of the farm product department at “Azbuka Vkusa”, notes, ‘The farmer should produce the goods rather than be concerned with marketing, packaging and logistics. Our aim is to free the producer from problems having to do with product realization to the maximum extent, and to provide an opportunity to concentrate on quality. In addition, the network takes over part of the financial costs and offers assistance in the production process, which makes the product cheaper’.
Industry events help make the market more ‘civilized’. The International Private Label Show (IPLS) is one of the young and rapidly developing sites for private label product manufacturers and customers; the exhibition, held for the first time in 2014, now takes place in Moscow every spring, attracting the business elite of private label professionals and contract manufacturers. For the latter, the exhibition serves as the key to getting started with work in this field, searching for partners and getting new contracts. Unlike other industry exhibitions, the IPLS is focused exclusively on private labels, which is achieved by visitors being prepared for negotiations on private labels in particular, and maximum concentration of private label experts in one place – 90% of all visitors participate in making decisions on private label orders.
* Information used: “GfK Rus”, “Nielsen”, “Romir” research holding, interview by “Kommersant” publishing house, “Retail.ru”, research data by “IPLS” exhibition.