The GCC Private Label: An Untapped Opportunity for GCC Retailers

Today, although many Grocery retailers in the Gulf Cooperation Council may offer their own private label products, few are making them part of their overall company strategy— missing out on a significant opportunity. GCC grocery retailers are overlooking the fact that the mere offering of a private label range does not guarantee its success. Instead, private label strategies need to also be effectively defined.

 

Globally, retailers’ own brands, also known as private label (PL), are growing at a faster rate than traditional consumer goods brands. It is surprising, then, that the development of private label in the GCC—in countries such as the United Arab Emirates, Kuwait, and Bahrain—is still lagging far behind the U.S. and Europe.  A PL needs relevant scale to ensure a competitive offer can be developed for the consumer. However, we believe that based on the current maturity of the GCC retail market, retailers could achieve at least a share of 15%.

 

Certainly, the retail landscape in the GCC is evolving. In Saudi Arabia, for example, modern trade retailers captured more than 40 percent of the food market in 2009, and are making even greater inroads in the UAE, where they achieved more than 70 percent share in 2009. Modern trade retailers (i.e., retail chains) across the region have relied on a combination of both organic growth (mainly new store openings) and acquisitions. For example,

-         EMKE / Lulu has opened around 100 hypermarkets / supermarkets across the region over  the past 10 years (organic growth only)

-         Panda has reached a total of 130 stores, relying on organic growth and recent acquisitions (Giant stores in 2007 from Al Muhaidib and Geant stores in 2009 from Al Hokair)

The market is steadily consolidating with the top five retailers accounting for 13 percent of market share in Saudi Arabia and 36 percent in the UAE. This could include Mergers and acquisitions as well as organic growth, however in this case we are implying that modern trade (retail chains) is gaining share from traditional trade (e.g., bakalas)

 

“Retailers are capturing ever-larger pieces of a rapidly growing pie: The GCC grocery market is growing at 11 percent per year, from $43 billion in 2005 to $72 billion in 2010,” said Gabriel Chahine, partner, Booz & Company.

 

To maintain their position in this shifting landscape, regional retailers are making moves to gain scale, gradually shifting the balance of power away from multinationals. These efforts to gain scale position retailers for strong plays in private label, just as the need for them to make such plays becomes more urgent. Growth in retail sales still outpaces GDP growth, but it has begun to slow down, leaving retailers focusing more intently on cash flow and profitability. Still, thus far, however, private label is not yet a critical focus for regional retailers. In the GCC, private label accounted for just 3 percent of 2009 total grocery sales. Although retailers recognize private label’s potential, they have not effectively tapped into its benefits. Why not? There are a number of reasons why GCC retailers have not effectively tapped into the benefits of PL – to name a few:

 

-         Business priorities: business focused on growth, de-prioritizing PL (mainly a margin play). We have noted a certain evolution in 2010/11, with GCC retailers increasing their focus on bottom line and hence increasing their PL ambitions

-         Capability gap: Absence of capability to lead the development of a PL offering from strategy to in-store execution

-         More specifically, sourcing challenges: not finding cost effective sourcing alternatives to produce quality products

-         Absence of a strategic approach to the development of a PL offering: Limited ability to customize and adapt their private label offerings to fit the needs of their diverse shoppers

-         Strong prevalence of national brands across the GCC (GCC consumers consider branded products to be symbols of quality, trust, and influence): This leads to a hesitant approach from retailers in their Private Label development plans

 

“The opportunity for GCC retailers in private label is clear,” said Karl Nader, senior associate, Booz & Company.

 

 

 

THE BENEFITS AND CHALLENGES OF PRIVATE LABEL

There are several key reasons that GCC retailers should pursue a private label strategy. A strong private label brand offers retailers the following significant benefits: increased profitability, optimized assortment mix, strong brand image and customer loyalty. However, putting a private label strategy in place is not without its hurdles. Sourcing and meeting consumer needs are especially significant challenges for the GCC. However the biggest is retailers’ failure to customize their private label strategy to fit their overall positioning, value proposition and target customers. “Too often, retailers focus solely on value items, rather than determining where there are gaps in their assortment and how they can use private label to meet customers’ needs,” said Chahine.

 

Retailers focus mainly on low cost / priced items as opposed to finding the real gaps in the assortment – Customers are not necessarily looking for a “cheap” Private Label item, instead they look for value for money items. A gap should be interpreted as an opportunity for a retailer to develop its PL – it’s when the national brands do not have a sufficiently strong claim on the category, where the price/quality ratio provides an opportunity for the retailer to develop its own product. The incentive for the retailer is significant – it allows it, to:

-         Optimize the assortment on offer in the category, removing the low performing brands / products

-         Put pressure on the national brands that will fight for the remaining shelf space

-         Strengthen its margins (PL products generate higher margins than national brands for the retailer)

-         Improve its price image and improve shopper loyalty

There are a number of risks retailers face in the development of their PL: Product recalls (quality), intellectual property infringement (packaging), product availability, and others. These can be mitigated and addressed through a careful selection of PL providers, resilient quality control mechanisms/processes, and strong collaboration with the PL providers, among others. As a pilot, a retailer could consider launching its PL offer under a different brand name – A strategy pursued by a number of regional players.

 

 

 

 

A FOUR-PRONGED FOCUS

To develop a successful private label strategy, retailers must consider their offering holistically, taking into account the company’s overall objectives and their customers’ needs. This strategic approach includes four distinct elements.

 

1. The private label strategy should be integrated into the retailer’s company vision. It should:

  • Be consistent with the retail chain strategy
  • Provide concrete contributions to the retailer’s goals and a method for creating value for its customers
  • Be fully synergistic with key category strategies

2. The private label range should have a strong appeal and a compelling proposition for consumers, and be priced appropriately. Retailers need to prioritize their private label investments by examining their assortment, determining what categories would support a private label brand in line with the company’s overall value proposition, and then deciding what products to develop to fill in that piece of the puzzle.

 

3. The private label value proposition should be implemented consistently across categories. Retailers need to be pragmatic about defining where opportunities exist. Generally, a retailer’s range of private label products should include at minimum a “good” and “better” segmentation, with some retailers examining additional specialty offerings, such as organic, health and kids ranges. Retailer’s private label ranges compete with known brands. Actually over time the brand structure has shifted – Private Labels can compete with ‘A’ brands with their super premium store brand (e.g., Tesco Finest), ‘B&C’ brands compete with the normal PL brand (e.g., Tesco Value). Typically, ‘B&C’ brands are the ones that end up losing space and sales following the introduction of PL.

 

4. A day-by-day focus on private label management is paramount. Given the importance of private label to retailers’ overall strategies, they should carefully manage its execution, including pricing, promotion, display, and quality assurance.

 

CONCLUSION

GCC grocery retailers have made great progress in developing their private label business. However, there is still room for more growth. There are only a few categories in which GCC retailers have achieved parity with their peers in the U.S. and Europe—primarily commodities such as salt, sugar, disposable paper products, and food wrap. These categories have been a good launching pad for GCC retailers’ efforts in private label, because consumers are less selective about them, they require little advertising and marketing, and suppliers for these categories are widely available. There is room for further growth in these categories, and the field is wide open in other areas, such as personal care and most food categories, which have traditionally been dominated in the region by multinationals. In frozen food, for example, the private label share in the GCC is just 3 percent, compared to 34 percent in Europe; in ready meals, too, GCC private label’s share is 3 percent versus 16 percent in Europe. In consumer electronics, specialist retailers such as eXtra in Saudi Arabia, Sharaf DG in the UAE, can and will build on their scale to start developing their  own retail brand in domestic appliances, and more consumable categories.

 

Retailers can further boost profitability and consumer loyalty, as customers will welcome and purchase private label products of good quality at the right price point. In order to ensure customer loyalty and repeat purchases, retailers must fine-tune and optimize their category range, making sure they have the right mix of entry-level, midrange, and premium-range selections. They must also perfect their retail execution, ensuring that those products are in stock and that their quality remains consistent. This will require thoughtful customer research and alignment between retail strategy and customer needs. Private label offerings must be at the center of a retailer’s vision, and complement and inform all strategic decisions. When this happens, retailers can see a boost in revenue from private label brands as well as existing key brands. “Based on the current maturity of the GCC retail market, retailers could achieve private label share of 15 to 25 percent of grocery sales, which would represent a market size of $5 billion to $9 billion, and could translate into a net margin increment of 1 to 2 percent,” concluded Nader.

 

About Booz & Company

Booz & Company is a leading global management consulting firm, helping the world’s top businesses, government ministries, and organizations.

Today, with more than 3,300 people in 61 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. www.strategyand.pwc.com 

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