Private Labelling in the Gulf
18/03/2004
Private Label has experienced mixed success in Europe, the US and Australasia during the past 10-15 years. Successful case stories are the UK and Germany while in France private label has experienced little success. In the Gulf, however, Private Label remains a relatively new concept with few retailers carrying their own in-house brands, eg Carrefour, Co-op, and Spinneys using the Tesco brand. According to MEMRB, Private Labels account for approximately 1.5% of the retail market in KSA and UAE. With the pending arrival of several international retailers to the Gulf, several argue that in the next few years the region will witness the growth of private label. Converse arguments also exist sighting low critical mass in the region, comparatively higher spending levels especially in KSA and UAE, high import and shipping costs and related logistical problems (eg. local packaging).
The primary advantages of Private Label to retailers are both the high-profit margins if execution is successful and second the leverage it provides with FMCGs. The later is especially critical during negotiation with FMCGs for both additional discounts and shelf space. Private Label can act as a safeguard for the retailer by providing an alternative on the shelf if in the worse case scenario a manufacturer refuses to accept a retailer’s conditional terms and decides not stock their product.
For FMCGs, Private Label may not necessarily be a direct competitor in the same sense that other FMCG brands are but nonetheless provide equally key challenges and problems, for example, increased retailer discounts and space and category management strategies of retailers. The later may result in the reduced desired shelf presence/allocation of an FMCG brand even if they are market leaders. Moreover if the Private Label proves to be very successful, FMCGs could be forced to revise (reduce) their retail prices and consequently profit margins are reduced.
However, the success of Private Label is not necessarily measured by how much they sell volume-wise. In many cases, Private Label does not necessarily contribute to category growth but rather often results in cannibalisation. This is both frustrating to FMCG players and for the retailer “who may sell huge volumes” but may lose out on profit (value) as private label is significantly cheaper than FMCG brands. The obvious direct beneficiary here is the consumer for whom private label translates into a cheaper alternative and possibly reduced prices for FMCG brands.
The FMCGs frustration is further compounded by the “mimicing” of their products by retailers’ private labels. FCMGs spent huge amounts on R&D and related advertising and promotional campaigns for new products, line extensions, package/flavour types and of course assume all the risks involved. By comparison, retailers spend marginal amounts on R&D and in many cases play a “wait and see game” to see how successful are the new launches. If successful, retailers may mimic the product, spend significantly less on advertising, have the advantage of deciding its shelf space, and sell at a lower-price point resulting in higher net profit.
Currently in the Gulf, Private Label remains predominantly conceptual with very few retailers carrying their own private labels and almost all being imported from overseas. Herein lies a key challenge for Private Labelling in the Gulf – logistics. For Private Label to be profitable local packaging is required because of the excessive costs and problems associated with shipping and importing products to the Gulf. Another important factor effecting the success of Private Label in the Gulf is the comparatively low critical mass levels.
While the discussion of whether Private Label will succeed in the Gulf is debatable, what is certain is that with the expected arrival of additional international retailers more private labels will appear in the next couple of years.
Anna Latzias
Group Account Manager – Gulf Region
MEMRB Retail Tracking Services
P.O Box 6097, Sharjah, UAE
www.memrb.com
The primary advantages of Private Label to retailers are both the high-profit margins if execution is successful and second the leverage it provides with FMCGs. The later is especially critical during negotiation with FMCGs for both additional discounts and shelf space. Private Label can act as a safeguard for the retailer by providing an alternative on the shelf if in the worse case scenario a manufacturer refuses to accept a retailer’s conditional terms and decides not stock their product.
For FMCGs, Private Label may not necessarily be a direct competitor in the same sense that other FMCG brands are but nonetheless provide equally key challenges and problems, for example, increased retailer discounts and space and category management strategies of retailers. The later may result in the reduced desired shelf presence/allocation of an FMCG brand even if they are market leaders. Moreover if the Private Label proves to be very successful, FMCGs could be forced to revise (reduce) their retail prices and consequently profit margins are reduced.
However, the success of Private Label is not necessarily measured by how much they sell volume-wise. In many cases, Private Label does not necessarily contribute to category growth but rather often results in cannibalisation. This is both frustrating to FMCG players and for the retailer “who may sell huge volumes” but may lose out on profit (value) as private label is significantly cheaper than FMCG brands. The obvious direct beneficiary here is the consumer for whom private label translates into a cheaper alternative and possibly reduced prices for FMCG brands.
The FMCGs frustration is further compounded by the “mimicing” of their products by retailers’ private labels. FCMGs spent huge amounts on R&D and related advertising and promotional campaigns for new products, line extensions, package/flavour types and of course assume all the risks involved. By comparison, retailers spend marginal amounts on R&D and in many cases play a “wait and see game” to see how successful are the new launches. If successful, retailers may mimic the product, spend significantly less on advertising, have the advantage of deciding its shelf space, and sell at a lower-price point resulting in higher net profit.
Currently in the Gulf, Private Label remains predominantly conceptual with very few retailers carrying their own private labels and almost all being imported from overseas. Herein lies a key challenge for Private Labelling in the Gulf – logistics. For Private Label to be profitable local packaging is required because of the excessive costs and problems associated with shipping and importing products to the Gulf. Another important factor effecting the success of Private Label in the Gulf is the comparatively low critical mass levels.
While the discussion of whether Private Label will succeed in the Gulf is debatable, what is certain is that with the expected arrival of additional international retailers more private labels will appear in the next couple of years.
Anna Latzias
Group Account Manager – Gulf Region
MEMRB Retail Tracking Services
P.O Box 6097, Sharjah, UAE
www.memrb.com
