Private labels first appeared in the Russian Federation in the late 1990s – early 2000s under the influence of similar practices abroad. Promotion of private labels in Russia today lags behind that in other countries considerably; nevertheless, in the near future they are expected to develop in accordance with trends currently prevailing in the West.
The main difference between private labels in Russia and abroad is the stress being made exclusively on the price in case of Russia: 80% of private labels in the country belong to the base and middle segments. Among the reasons of private label good purchases, most consumers primarily list their low prices.
According to studies for 2017 – early 2018 conducted by “Advanter Group”, 75% of Russia’s million city residents purchase private label goods. The share of said consumers in Moscow equals 78%, whereas in Saint Petersburg it reaches 88%. It should be noted that the private label market has been developing more rapidly than the FMCG market, and with the recovery of pre-crisis consumer purchasing power levels, the competitiveness of private labels with manufacturer brands will only continue to grow.
The idea that a lower price implies lower product quality has been a widespread opinion for many years in Russia. However, the 2014 crisis led to a significant decline in purchasing power, thus changing consumer behaviour. Buyers became pickier in their product choices: they ask questions, read information on the package and no longer believe that cheap products necessarily have lower quality. Due to the lack of resources to afford familiar goods, consumer loyalty to manufacturer brands has been decreasing. Considering that private label products tend to be similar in quality to branded goods, they stop being perceived as a low-quality option. However, as the economic situation improves, lower prices will lose their relevance and value, and therefore private labels need their own unique development strategy.
For a rather long time, private label goods in Russia had the image of cheap low- and middle-quality products. There was a reason for this mindset: domestic retailers happened to make a number of strategic mistakes while introducing private labels to the market, including the following:
* insufficient quality control;
* excess SKUs as a result of extensive growth in volumes of private labels (blurred product ranges featuring a large number of duplicate items, resulting in low sales per item);
* low difference in prices between the private label good and its well-known branded competitor despite the ‘best price’ competition strategy. The difference in prices for private labels and brands in Russia is approximately 15%, whereas abroad it reaches 30–40%, while the quality of foreign private label goods is comparable to that of manufacturer brands, and their packaging and positioning are perfectly competitive as well;
* pressure on suppliers and the failure to provide any guarantees to them (e.g. in the case of the supplier refusing to lower the price for their brand, retail chains threaten to replace it with their private label);
* lack of feedback and communication with consumers (‘low prices’ is virtually the only aspect of communication between private labels and the consumer – as a result, consumer trust in private labels is low, as consumers are not aware of what products the range includes, where they are from and who supplies them);
* ineffective organization of supplies, retailers running out of stock.
Research by “Nielsen” has shown that the dynamics of growth in private label sales in the Russian Federation outpaces the development dynamics of modern trade. In 2017, the increase in sales of private label goods amounted to 11.4% in value terms compared with 2016, whereas the market on the whole grew by 5.8%.
The main sales channel for private labels in the Russian Federation is discount store chains, which account for approximately 80% of all sales. Consumers in the low-price segment are more loyal to discount stores compared with consumers in the mid-price segment. At the same time, the share of private labels in Russia is around 8–10%, which is significantly lower than abroad, as has been mentioned above: in Great Britain said indicator equals 41%, whereas in Germany and in the US private labels occupy 34 and 19% of the market respectively. In the medium term, their share will be growing, and private labels themselves are expected to grow and evolve.
One of the features of private label goods in Russia is their ascetic design. While manufacturer brands tend to rely on positioning, a message to the consumer present on the package, private labels barely display anything but the product name and a logo. Russian private labels do not have a goal of competing with manufacturer brands and focus on the price and guaranteed spots on the shelf in a given retail chain instead. In turn, manufacturer brands have to compete with other brands while conducting research and monitoring sales. Private labels benefit from copying strategies of their branded competitors, and what the retailer has to do is to monitor which goods are sold more frequently and to place respective ones on the shelf.
As has been noted above, growth in purchasing power will encourage consumers to buy products of manufacturer brands. Due to this, the main trends that currently exist abroad and are likely to become relevant in the Russian market should be considered.
1. The global leading private labels have switched from being the challenger or the follower to being the leader, having evolved into full-scale brands with their own position. Said private labels have a unique packaging design, position and marketing strategy while keeping their prices lower than those of manufacturer brands. Turning into a brand is the only viable option when a recovery of purchasing power is in question.
2. Design is regarded as an essential tool for market entry and competition with brands.
3. The strategy of the private label updating and developing into the final position (said trend already exists abroad but has not reached Russia just yet) – this implies the private label working out its long-term strategy, which involves changes in its positioning every 2–3 years on average. For instance, upon the product’s entry its low price may be highlighted; after 2 years both its price and naturalness are in focus; in 4 years only naturalness remains most relevant; in 6 years the strategy of ‘unique naturalness’ is focused on. Foreign private labels tend to update their package design from time to time, in accordance with the position of the trademark. This way private labels turn into solid brands.
Development of private labels in Russia is affected by slightly different factors. One of today’s trends having an impact on the modern generation of consumers in Russia is the trend for trust, implying brand openness, its unique, clear and fair history, and package design reflecting this. An example of the use of this trend would be the dairy product brand “Chislo Mu (The Number Moo)” developed by “Labelmen”. Its packaging contains the main information about the product, indicating that the good truly is natural. The consumer expects to receive true information about the product they see on the shelf; today they only trust trademarks that make it clear where and how the goods were produced. Information has to be open and clear, and therefore the standard marketing tricks are becoming increasingly ineffective.
The above is a great opportunity for private labels. Right now they have the image of simple and fair brands, and therefore they can pick up on this trend for consumer trust and develop it further.
At the moment, private labels in Russia are competing with manufacturer brands in the low-price segment while already having a number of similarities with them. If the consumer has to choose between a low-price brand and a private label, they are likely to choose the brand even if the prices of the two are the same, due to the low-price segment brand having a clear position and promising product quality. If the market keeps developing, however, private labels will become self-sufficient trusted brands. In 2016–2017, “Labelmen” carried out a study which revealed the key consumer expectations from brands in the low-price segment – below is the list of them, in order from most important to least important:
2. stable quality;
4. bright, attractive design;
5. visibility on the shelf.
Private labels in Russia have a lot of opportunities and prospects for growth. Whether their development is successful or not largely depends on consumer trends and how they are followed, development of a unique position and strategy, work with package appearance, and competitive advantages of private labels compared with manufacturer brands – that is, their accessibility and fair price – clearly conveyed to consumers.
“Labelmen” Branding Agency