GCC grocery retailers and consumers alike are missing out on a feature of the grocery experience that is common in the US and Europe: the private-label brand. Private-label products are those that stores market under their own brands - a store by the name of "ABC Supermarket" would sell ABC-brand paper tissues competing with branded tissues such as Kleenex and Fine.
Such products account for as much as a quarter to nearly half of grocery sales in some European countries. In the GCC, however, private labels represented just 3 per cent of grocery sales among large retailers in 2009.
The development of private labels would offer benefits for grocery retailers as well as their shoppers. Retailers increase gross margins without increasing prices, since they do not have to share the profits on sales of private-label items with manufacturers. Retailers are also able to promote themselves as "value" chains without reducing prices on branded products.
For GCC retailers, the field is wide open in areas such as personal care and food categories that have traditionally been dominated by multinationals. Retailers could achieve private-label market share of 15 to 25 per cent of grocery sales, which would represent a market size of US$5 billion (Dh18.36bn) to $9bn and a net margin increment of 1 to 2 per cent.
A private-label strategy is not without its hurdles, however. Finding manufacturers to create private-label products is an especially significant challenge in the GCC.
Meeting consumer needs is another challenge: A heterogeneous consumer environment makes it difficult for retailers to understand and address the needs of different segments. At the same time, consumers' strong loyalty towards branded products and first entrants makes it difficult to enter certain categories.
One of the biggest problems is retailers' failure to customise their private-label strategy to their customer profile and value proposition. Too often, retailers focus solely on value items rather than determining where there are gaps in their assortments.
To develop a successful private-label strategy, retailers must consider their offerings holistically. This strategic approach includes four distinct elements.
First, the private label strategy should be integrated into a retailer's company vision, supporting the chain's overall strategy in pricing, promotions, supplier relationships and category management. The private label should be a key pillar of a retailer's vision, consistent with the overall positioning of the retail banner across all categories and should be driven from top management in order to ensure success.
Second, private-label products should have strong appeal and be a compelling proposition for consumers, and be priced appropriately. A retailer needs to prioritise its private-label investments by examining its assortment of goods, determining what categories would support a private-label brand in line with the company's overall value proposition, then deciding what product can be developed to fill in that piece of the puzzle. It will be critical to make sure the product adequately balances price and quality: for it to do so, a retailer will need a deep understanding of customers' needs in both regards. The company can mitigate the lack of data in this space using in-store surveys, product trials and sales analyses of existing category offerings. Executives should be looking to define the role of the private label in each category.
Third, a retailer must implement the private-label value proposition consistently across categories, being pragmatic about where opportunities exist. Generally, a retailer's range of private-label products should include at minimum a "good" and "better" segmentation, with some speciality retailers examining additional offerings. At this point, however, GCC private-label offerings focus almost exclusively on the value segment, overlooking potential categories such as child-centric, healthy and gourmet, and organic.
Fourth, retailers need to ensure a day-by-day focus on private-label management. Given the importance of the private-label concept to retailers' overall strategies, they should carefully manage its execution, including pricing, promotion and quality assurance.
It is crucial to keep products consistent from a quality and availability perspective, and to make sure that invoice costs reflect input costs and sustain margins. This is why, once an overall strategy is in place, a retailer may want to set up a dedicated private-label management team that will take full responsibility for category management activities (range development, sourcing, pricing, promotions), while shelf optimisation and supply-chain activities can continue to be managed by the relevant departments.
With sound private-label strategies, retailers can boost their revenue and customers are more likely to find the products that are right for them at prices they are willing to pay.
Gabriel Chahine is a partner, Davide Valenti a principal and Karl Nader a senior associate at Booz & Company
