GCC grocery retailers are overlooking the fact that the mere offering of a private label range does not guarantee its success
Globally, retailers’ own brands, also known as private label, 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 so far behind the U.S. and Europe. 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 a more than 70 percent share in 2009. 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. “Retailers are capturing ever-larger pieces of a rapidly growing pie: The GCC grocery market is growing at 11 percent per year, from US$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. The opportunity for GCC retailers in private label is clear,” said Karl Nader, senior associate, Booz & Company.
The benefits and challenges of private labels
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 but 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.
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) 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.
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.
GCC grocery retailers have made great progress in developing their private label business. However, there is still room for more growth; 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.