Nirmalya Kumar on private labels

interview by Des Dearlove & Stuart Crainer  |  first posted: 29 May 2007

From Carrefour to Wal-Mart, Tesco to Best Buy, Zara to Ikea, retailing has never been sexier or generated so much money — and column inches. But, says Nirmalya Kumar, amid the competitive ferment there is one area whose continuing rise in importance has been consistently overlooked: private labels.

Kumar is professor of marketing and co-director of the Aditya Birla India Centre at London Business School, before which he was professor of marketing at IMD, and visiting professor of marketing at Harvard Business School.

His experience includes working with 50 fortune 500 companies including IBM, Sara Lee and Akzo-Nobel as well as IT companies such as AOL and Siebel Systems.

His new book, Private Label Strategy (authored with Jan-Benedict Steenkamp) takes the lid off the unexplored phenomenon of private label brands. Nirmalya Kumar goes shopping with Stuart Crainer.

Why a book on the subject of book private labels?
Most business books are written by American academics who see private labels as being cheap and nasty, for historical reasons, rather than seeing them as valuable. They did not see the new type of private labels we're seeing in Europe. In the UK, Switzerland, Germany, and France, they have gone beyond just being cheap knock-offs of manufacturer brands.

Look around in Europe and you see two different types of new private labels. The first is what we call premium private labels, which actually sell at a price higher than manufactured brands, like the Tesco Finest brand.

The other kind of private label, which is also very much a European phenomenon, is what we call value innovative private labels, which go for a very cheap price and the functional quality of the manufacturer brands — think of the Ikeas or the Aldis of the world.

So we found there were two kinds of private labels that are not getting attention because of the American focus of most business research. We tried to dispel the view that private labels are a cheap and nasty substitute for the real thing.

How come best practice has evolved in Europe?
American retailing is very fragmented. Until Wal-Mart came along, there was no truly national supermarket chain in America. At a national level American retailers had very low market shares; whereas in Europe, in Germany, France, even Italy to some extent, and especially the UK, the large retailers have national chains with very large market shares.

Why is this important?
Because you can only invest in a very good private label programme if you have national scale. To invest and develop a private label and to actually advertise it as a brand requires you to have a footprint that is big enough to compete with national manufacturers. So, in the UK, Tesco can compete with Procter & Gamble UK and Coca-Cola UK in terms of advertising and innovation because its market share is so large.

In contrast, in the United States the manufacturers tend to be very large while the national retailers are very small and cannot utilize the same resources to promote private labels.

Which are the main private label companies in Europe?
In Europe the best private label companies are, of course, Tesco and Sainsbury in the UK. In France it's Carrefour. In Germany it's Aldi and Lidl. In Switzerland it's Migros. All of these companies have a very well-articulated national presence as retail chains and, as a result, they are very well-articulated private labels.

How are the manufacturer brands making an impact?
Manufacturers have been retaliating against these private labels for a long time in Europe, but they haven't made any headway. The market share of private labels keeps going up every year. And one of our most interesting findings is that we cannot see anywhere where the total level of private label market share will go down over the forthcoming years.

What kind of market share are we talking about?
Today, in the UK, private labels account for about 40 per cent of the total market, whereas in America private labels are only 20 per cent of the total market. In Switzerland private labels are about 45 per cent of the total market.

Within any category we can see manufacturer brands being able to beat private labels for a certain period of time. But, overall, we cannot see a situation in which private labels' share in the future will be lower than manufacturer brands.

What about the European retailers you mentioned, like Zara and H&M; which of them do you particularly admire? Which of them is doing particularly interesting things?
Zara, H&M, Ikea, Tesco — there are lots of very, very interesting retailers out of Europe. Aldi is incredible for being able to build such a big retail empire based solely on private labels. Lidl is very interesting because it is trying to mix 60 per cent private labels with 40 per cent brand names, while still having a simple format like Aldi.

Who is going to be tomorrow's Zara? Which companies are doing really exciting things that people haven't quite heard of or grasped?
In America there is Trader Joe's which is very good. In retailing, after some time you have to change your format and bring it up to date, otherwise it starts looking old. So all retailers face the problem of having to continuously refresh their assortment or they become like Benetton, yesterday's story. In retail, sooner or later there is a turnaround situation in every chain.

Best Buy in the States has been particularly good at renewing itself.
It has done an incredible job of replenishing itself. Circuit City has also done an incredible job by doing some really smart things online. The way American retailers are ahead — if you take out Tesco — is in integrating the Internet experience with their stores. At Circuit City you can order on the Internet and be promised that, within 24 minutes, the item will be ready to pick up. You don't have to get out of your car. So the expensive delivery process doesn't come to you, you go to them.

Which marketing practitioners do you particularly admire or think are making a real difference?
The best marketing practitioners tend to be CEOs who really believe in the customer. They have got to the CEO position and still believe marketing is key and believe serving the customer is the most important thing. So you see people like Peter Brabeck at Nestlé who believes in the customer. If you talk to Vindi Banga, the head of President Food at Unilever, he really believes in the customer.

The job title of Chief Marketing Officer now seems unfashionable.
People believe, even if you're not a marketer, you know enough about marketing. People don't see it as a deep discipline like finance or IT, where every company now has a CIO and a CFO. Every company has a CEO, because people believe if you don't have deep capabilities you can't be an expert in that area. Whereas people believe if you have good common sense you can be a great marketer.

So, from your point of view, what is the attraction or lure of marketing?
The lure is that in the end companies exist because they're serving customers. The outcome of serving customers well is that you get good shareholder value.

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OLDER COMMENTS

while we work on importing them to the new system!

Has the professor never studied "Kenmore" the high quality, low price Sears private label brand started in 1927? How about "Craftsman" the Sears tool brand? Quality private label in retail has been around a long time in various configurations in the mattress business, home electronics, department stores, etc. in America. I a big fan and of IKEA, Zara and others mentioned but to claim this something totally new is to shortchange history IMHO.

laurence haughton www.laurencehaughton.com

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