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July/August Management Briefing - The Private-Label Drinks Market - Part III

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What is the attraction of drinks’ own brands or private labels for the retailers? After all, if consumers are happy with commercial ‘national’ brands then retailers can make money. “They exist because supermarkets are trying to build their supermarket values and their own relationship with their customers,” says Richard Hall, chairman and founder of international food and drink consultants Zenith International. “There’s also a straight economic driver for supermarkets to have their own brands”. But this can go only so far perhaps. “I think that the leading brands would say that the real investment in innovation and communication comes from big independent brands. Supermarkets can’t be as successful in the long term if there isn’t some understanding of other brands being encouraged to pioneer new concepts and benefit from the proceeds of these concepts. Otherwise these new concepts will lack incentive,” he told just-drinks.

Where the market share of own-brand drinks will eventually settle down is unclear and may differ markedly from market to market. In recent years, own-brand retailers have done relatively well in long life fruit juice but less well in cola for example. Hall says one of the factors affecting own-brand growth is the relative strength of the leading brand in the market.

But continuing economic difficulties in many European countries could impede the advance of own brands in some markets. In soft drinks, for instance, “when there are price pressures in the market place, as there are at moment, then the own-label sector feels it even more strongly than branded products. Brands have an additional dimension in their appeal to the consumer which by their nature own-label products don’t have,” said Richard Laming, communications director at the British Soft Drinks Association.

That said, gone are the days when private label equalled cheap knock-off. “As share grows, most retailers are employing a more sophisticated private brand tier system.” said Neil Stern, senior partner at US-based retail consulting firm McMillanDoolittle. “Where private label was simply once ‘equivalent product at a lower price,’ it has now also evolved with premium brands ‘better or unique product at a similar price,’ value ‘less quality, much lower price,’ and also niches: natural, organic etc.”

For example Meijer, a popular Midwest chain store, re-launched its ‘Meijer Gold’ brand late last year in a bid to place the product line in an even higher tier. The collection of drinks and food products touts original family-owned recipes and one-of-a-kind products.

Their European sparkling drink collection is promoted as following the recipe from a family in France’s Lorraine province, for instance.

According to Stern the impact of drinks private labels varies by category. “Private labels can vary from non-existent (alcoholic beverages, for example) to majority of the category (milk is a majority private label). He adds: “This puts more pressure in general to be more innovative – to resist private-label copying – and price competitive, to limit the price discount between brands.”

On the manufacturing side, there are benefits to securing a store brand contract. “Private label provides volume but typically at lower margins for the supplier,” said Stern. “It really depends on a specific suppliers’ business -- what market share they have in the category, shelf space, etc. And, importantly, what kind of capacity they have from a manufacturing standpoint.”

So finding a willing manufacturer is a key to private-label success, but selling these products is not necessarily easy, despite the captive markets enjoyed by big retailers.

Some Chinese stores, for instance retailers have found selling private brand drinks tough going. China’s Centurymart still only offers two private-label drinks – mineral water and soda water – compared with a variety of private-label foods ranging from fresh food materials to confectionaries.

Centurymart’s spokesman, Sun Ming, admitted the chain focuses more on private-label foods than drinks. The reason, said Chen Wei, an analyst at Hefei-based consulting company Pindao Group, is that being a copycat is a fatal disadvantage in the drinks market.

“For PB [private brand] drinks, you have to create your own star products,” he said, adding that Chinese consumers are very ‘brand-conscious’ due to the heavy advertising by manufacturing companies.

“Hence if a consumer wants to buy a bottle of iced tea, he goes for President or Master Kong without hesitation,” he said, referring to the two Taiwanese-owned companies.

It may be the reason why drinks manufacturers do not see private-label orders from retailers getting bigger.

Chen Lianggen, director at the Zhang Jia Gang-based Xin-Mao Beverage Food Factory, which makes carbonated drinks and juices, said orders from supermarkets only account for 5% of its total orders.

Xin-Mao received its first private-label order from France-based Carrefour in 2004, and it is now working with a string of retailers in eastern China, including French rival Auchan and Rt-Mart.

The majority of Xin-Mao’s orders come from Coca-Cola, which approved it as one of the four bottling plants in the country to manufacture Xue Fei Li, a brand of Coca-Cola created exclusively for the Chinese market two decades ago.

However, although working with retailers definitely does not bring Xin-Mao huge profits, Chen said their orders are still welcome. “Their orders are steady and easy to handle, and we think they might increase in the future,” he explained.

But that is not likely to happen if retailers stick to the current strategy, said Li Wei.

“I think the outlook of PB drinks in China is pretty gloomy if retailers continue to be a copycat,” he said.

There is a different situation however in deflationary Japan. As price competition continues to intensify in the shrinking Japanese beverage market, own-label brands are one of the few relatively healthy sectors that are experiencing any growth. For manufacturers meanwhile, it is a way of keeping volumes up with minimum risk of doing damage to their own brand image.

“In each beverage area, while the number one and two regular brand will be safe, those ranked from third onwards are likely to struggle to survive going forwards,” predicted Yoshiyasu Okihira, a food and beverage sector analyst for Credit Suisse in Tokyo.

”One advantage for both retailers and manufacturers is that there are almost no competitors in the private-label segment,” said Okihira, “although the price difference between private-label and regular brands is narrowing.”

This increasingly competitive environment is driving manufacturers to keep their volumes up through supplying own-label lines, according to Okihira. Nevertheless they remain a small portion of manufacturers’ overall business. “Most manufactures don’t release figures for their private-label operations, but even for Ito En, which is heavily involved in the sector, it probably accounts for less than 5% of its total production,” explained Okihira.

Retailers are, however, keen on using reliable major manufacturers as suppliers because it is their brand name, and therefore reputation, that is printed on the packaging.

“Most retailers don’t put the supplier’s name on the products, so they have to guarantee them, deal with any customer complaints, and so on, themselves,” said Taneo Moriyama, managing director of Insight Inc, a food and retail market intelligence specialist.

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