Brands: the game is not over, but the battle is getting furious

Jan-Benedict Steenkamp, Distinguished Professor of Marketing and Marketing Chairman at the University of North Carolina and co-author of the widely read book Private Label Strategy: How to Meet the Store Brand Challenge, explains his take on the brands versus private label war.

 While he certainly doesn’t believe the game is over for brands, Steenkamp says manufacturers have to be realistic and concede that the threats facing their brands are probably the most challenging ever in history. New strategies are thus called for.

Jan-Benedict Steenkamp

From extensive research I have done globally on manufacturers’ brands and private label products, it is clear to me that brands still have strength, although the level of strength varies widely depending on what region of the world and what category we are discussing. But there is no doubt that brands are clearly under attack.

Looking at Europe, if we consider all categories of fast moving consumer goods (FMCG) over the six years from 2006-2012 private label share has risen from 29% to 33.5%. That is a pretty big swing over a fairly short time span. This indicates a sharp downward move in brand loyalty and I think this may well be due to the very difficult economic conditions in the European zone, which are starting to look as if they are systemic rather than temporary.

A lot of people ask me what brands can do to defend their territory. I am not going to pretend it is easy but there are certainly actions that great brand managers can take to preserve market share and keep the price gap premium with private label.

Innovation is an absolute must. The first thing I think all brands need to be doing on a continuous basis is innovating. Consumers are not going to pay an unreasonable price gap for brands if the quality is not a lot better than the private label alternative which can be priced 10 or 20% lower or even more. So if you have a brand, and you are not innovating continuously to maintain a premium quality over the private label alternatives, you are going to have big trouble with that brand. Some people may say – that is obvious. Then I retort by asking them if it is so obvious, why don’t they do it? I am sorry to have to say that meaningful innovations in FMCG are few and far between. I have studied innovative activities in FMCG for many years and it is really hard to find them.

Leverage size and scope. Another thing that leading global or continental brands do right is to leverage their size and scope. Some of the world’s leading brands such as Gillette have a common brand strategy and identity across numerous countries and continents.

Gillette Mach 3 (sales $2.1 billion), Gillette Fusion ($1.6 billion) and other Gillette non-shaving products like deodorants have enormous scale and scope.

What Gillette has done with both male and female grooming is to continuously improve quality and introduce radically new innovations like the Fusion. They have advertised it a lot with strong global advertising campaigns. The store brands have never been able to get up to the quality of Gillette shaving products, so even though Gillette has been much more expensive it is a lot better and people continue to pay for it. Therefore they have leveraged their global scope, which has given them the revenue to spend large amounts of money on innovation and advertising. This is a great example of the value of innovation investments and advertising investments.

Europe is the big battleground.

Europe has been the biggest battleground between brands and private label goods. The combination of reasons that brands have had the toughest time in Europe include tough Euro-zone economic conditions with the still too fragmented national marketing approach, and strong, very strong retailers.

If you look at it on a country level retailers’ brands are as strong as or even stronger than the strongest manufacturers’ brand. In almost every European national market, a local player is the incumbent and really dominant on the market. Tesco gets most of its sales from UK, Carrefour mostly from France, Aldi, Lidl and Metro mostly from Germany. Others are Migros in Switzerland or ICA in Sweden.

In Eastern Europe, there are no dominant incumbents as yet and that’s what gives the manufacturers brands so much strength in that region. The manufacturers were earlier in with the brands than the retailers and that’s given them strength, but we also see that changing.

Pampers is another good example.

Another example of a well-run, well-leveraged brand is Pampers diapers from Procter & Gamble. Incredibly, Pampers is the largest brand of all in terms of dollar sales at P&G, generating annual sales of over US$10 billion. One of the unique strengths that has helped Pampers become a $10 billion-brand is that there is one name over the entire world.

But examples like this are very rare and brands have never been under such an attack as they are today. In the book we wrote, the theme was essentially mapping out the new private label world and what brands can do to survive and prosper in that world.

Actually, bizarre though it may seem, I am not pessimistic for the manufacturers’ brands. Even in Europe I have confidence in a number of strong pan-European brands that have been well-managed in extremely capable hands that are doing a great job. Ariel is a good example, Pampers, Dove, perhaps even best would be L’Oreal. In the beer category you have some real strong players like Heineken and Stella Artois, and foods like Magnum in ice cream and Nescafé in coffee. These are all strong pan-European brands which I feel have a very positive potential for the future.

While these are examples, let’s take a closer look at what happened in Germany in the last few years. In the period 2005-2012, which includes multiple years when Germany was going through economically challenging times, the market share of private labels grew from 32.8% to 37.9%, with especially strong growth in the tough years - which confirms other research I have done that shows that private labels grow more strongly in tough times - while the market leader and premium brands (defined as brands that sell for a price above the market leader) held their own and saw their market share even growing from 26.2% to 28.5%. So, who lost? The so-called middle brands, whose market share declined from 41.0% to 33.6%, a dramatic decrease in an industry that is often labeled as highly stable with stationary market shares.

What I am not positive about are the national brands in Europe that are only in one country and do not have the scale, and often the expertise, to slug it out with the sophisticated retailers. Of course there are some examples where there is a strong local, national brand that is burned into the psyche of the consumers in that nation, but that is somewhat rare.

Common Denominators among successful brands.

‘What do these pan-European brand success stories have in common?’, people ask me. I would summarize it by saying they excel at continuous innovation, which helps them maintain the quality gap above private label, supported by strong advertising, managed by the best expertise and brainpower one can find, with scale both as far as financial investments and leveraging pan-European learnings.

Cross-corporation learning is one of the real keys that helps a manager say in Slovakia to learn what a manager in Spain has used to deal with very similar issues. So it is not reinventing the wheel all the time.

Advertising is still incredibly powerful. We cannot get around the fact that advertising is still extremely influential in creating brand imagery. Managers need to work with this unique tool to improve the strength of their continental or even global brands.

Advertising is generally a bit more powerful in the US than is in Europe, and there are some very logical explanations for that. In the US there are economies of scale and scope which cover costs for advertising campaigns which reach the entire US, while in Europe quite frankly most of the advertising you see is terrible because it is done just for a national audience. It is locally conceived by local people with local talent with local skills, all of which are very limited.

But this is a Catch-22 because you do want to tailor the advertising to the local population, while on the other hand those smaller countries and markets cannot afford high-level advertising. Combined with this you have a situation where private label has a much higher market share than brands in Europe, so you have limited money for advertising. Advertising is often paid for as a percentage of sales and sales are lower than in the US, for example, so you have a difficult time putting on a world-class campaign.

I think what the leading players need to do is to develop pan-European campaigns paid for by pan-European money, but make it in a way where we can still have some adaptation to different countries, if that is absolutely necessary. And innovation plays a key role here as well. Studies show advertising a new product innovation is six times more effective than maintenance advertising for existing products.

Life is for learning. Learning is foolishly undervalued by some companies.

Quite often everyone assumes that everything is different in different countries. Instead of just accepting this and trying to work around it, what is much more valuable for a learning organization is to see what we can learn from each other, because there’s a lot which is the same.

I’m not saying everything is the same but there are a large number of similarities that are often overlooked by the organizations that are less prone to cross learning.

Companies that have the most successful pan-European brands are working hard to improve pan-European organizational learning.

If anyone anywhere thinks he or she knows it all and doesn’t need to learn anything more, they might as well go home.

The game is over for them. * 

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