PL scenario How UK uses Private Label for Innovation or as a Competition Tool

UK – Using Private Label

for Innovation or as a Competition Tool

The UK, with a private label share of over 50%, is seen as a driving force behind new product development and innovation. However it is also seeing private label being used as a tool for retailers to compete with each other over price.

It is well recognised that the key reason to develop a compelling private label range is to help retailers differentiate from their competition and to drive customer loyalty. The UK, with a private label share of over 50%, is seen as a driving force behind new product development and innovation. However it is also seeing private label being used as a tool for retailers to compete with each other over price. As in most European countries, private label ranges across the UK retailers initially took the standard format of offering “good, better and best” tiering, allowing the consumer to choose from a range of qualities to fit their budget. Most of the “good” tier came in the form of plain white packaging, often referred to as the Value tier. The “better” tier, also known as “standard” tier, was marketed under the retailer’s name and the “best” tier offered premium quality products under branding such as Tesco Finest and Sainsbury’s Taste the Difference. The premium private label tier flourished during 2020 as the UK consumer looked for high quality products that replicated the restaurant

experience they were deprived of due to the pandemic and lockdowns. Premium tier sales grew by an impressive 16.5% in 2020 compared to total private label at 11.1%, according to Kantar.

However, for some years now, the good, better, best tiering structure has been complemented by a raft of product launches within the private label “value added” sector. Retailers have created sub-brands to cover the likes of healthy eating, free from, organic, vegetarian, and regional options. Not only has this resulted in meeting more customer needs and increasing range breadth but it has given retailers the opportunity to enhance margins. In recent IPLC research we saw “value added” private

labels selling at an average price index ranging between 193 and 244 compared to the equivalent standard private label product. Despite delays caused by the pandemic over new product development launch processes, the main UK retailers delivered a truly impressive raft of new Vegan and Plant Based private label products in time for “Veganuary” at the beginning of this year. Full bays of products were seen across ambient, chill and frozen categories in many of the top UK supermarkets including Aldi and Lidl. Alongside the already established impressive bays of Free From products, the post pandemic trend of more healthier eating looks as if it will be well catered for.

Retailers are striving to offer as much choice across their private label ranges in the UK. We are even seeing extensions of the premium tier, in particular at key seasonal times. Aldi are leading here having launched their Specially Selected Exquisite luxury tier over the past few Christmases and, only recently, extending their premium offering in the chill cabinet with Specially Selected Gastro added value meat dishes. In April, Tesco launched their Finest Restaurant Collection range of three restaurant quality dishes, serving two people at £20-£25 each – indicating there is no limit to the quality or price that private label can offer. Often leading the innovation in private label new product launches, and with a determined focus on offering the best possible quality products and a range that enabled the customer to do a “full shop”, Aldi and Lidl saw rapid growth in the 2010’s increasing their combined UK share from 8% to 14% by the end of the decade. This prompted the big retailers to re-think their strategies, a result of which was Tesco’s significant step in 2016 of launching their “Discounter brands” in a bid to mimic the discounters and halt the heavy switching they we seeing as customers moved to Aldi and Lidl.

Vegan – full bay offerings in Asda and Aldi

The discounter brands steadily took the place of Tesco’s former Value range. Many brand names such as Stockwell & Co. and Rosedene Farms were created and designs, sometimes looking quite similar to either Aldi’s or Lidl’s, were introduced. However, specifications of the products did not change and therefore the launch of the discounter brands was merely a re-branding exercise. Pricing matched Aldi and Lidl but only against their value offerings (Aldi Everyday Essentials and Lidl Simply). No significant impact was seen on the growth rates of both discounters. In 2019 Sainsbury’s followed Tesco by launching their own discounter brands. Again, most of these products were simply Sainsbury’s “Basics” Value products simply re-badged.

In a surprise move in March 2020, Tesco launched their “Aldi Price Match” initiative (APM), lowering between 250 and 300 prices to the same pro-rata price as Aldi (and therefore effectively to Lidl as well). A mix across their discounter brands and standard tier private label products were matched against Aldi’s standard tier and a few brands that Aldi sold at the time were also price matched.

Tesco invested in heavy marketing for the campaign and Aldi immediately reacted by reducing their retail price of some the price-matched items. Within 10 days Tesco responded by lowering their price to the new Aldi price. Tesco never undercut Aldi on prices but always followed. Eventually, Aldi seemed to accept the new lower prices across the featured items as no further reductions took place and therefore both retailers sold these items at the same price. Margins must have been severely impacted. Tesco’s APM prompted Aldi to ramp up their “Swap & Save” advertising, featuring baskets of goods compared specifically to the equivalent baskets in Tesco and claiming 25-30% savings. The number of featured items in Tesco’s APM changed slightly over the following months and, in July, they added over 150 branded products to the initiative bringing the total to over 500 at the time. Tesco price-matched many brands that were being sold by Aldi as part of their “Special Buy” programme (available for a limited period only at very No escaping the message!

low prices), and therefore the brands featured in the APM had to change regularly. Aldi’s sales growth in 2020 was behind the market (+8.7% compared to the total market at +10.9%). Although the main reason for this would have been the impact of lockdown and shift to online purchases impacting the discount channel, Tesco’s APM will definitely have also affected Aldi’s performance. It is well reported that many shoppers who left Tesco for Aldi returned, resulting in positive sales shifting for Tesco. In a further surprise move, on 10th February 2021 Sainsbury’s launched their version of the “Aldi Price Match”, using the same title for their initiative. Tesco wouldn’t have been too happy about that but clearly were unable to register it back in 2020. Sainsbury’s are featuring the initiative heavily in store, online and in the press. Sainsbury’s entry into the Aldi Price Match arena has raised a lot of questions not least whether they attacking Aldi or Tesco and what their true pricing is strategy going forwards.

Sainsbury’s will be hoping for a similar impact as Tesco have experienced. Hopefully they will also have done their homework on the cost of such a powerful campaign. And we are not just talking about the obvious lower resulting margins (maybe prompting Sainsbury’s recent supplier letter “to discuss how we can work together to lower prices”), nor the significant marketing costs, but the on-going time and resource costs required to manage a complicated and detailed initiative. It was reported in the UK press that some prices actually rose in Sainsbury’s to match Aldi and some of the comparisons have already been questioned. Teams may have to be employed to manage the comparisons and ensure accuracy, otherwise the Price Match claims could be totally flawed. It has been reported that Sainsbury’s increased the price of their canned Chicken Curry from a recent 59p to £1.05 to “match” Aldi. What has not been realised, however, is that Aldi’s product has 35% Chicken whilst Sainsbury’s is a Chicken & Vegetable Curry with only 15% Chicken in it. On checking a random sample of 70 Aldi Price Match items featured by Sainsbury’s a few other specification differences were seen, such as more cod in Aldi’s Fishcakes and pork in their Salami. Conversely, Sainsbury’s specification sometimes outshines Aldi’s, such as more Premium – Aldi’s Specially Selected Gastro and Tesco’s Finest Restaurant Collection

pork in the price-matched frozen Pork Sausages and more egg in their Brioche Burger Buns. Similar differences can be seen in some of the Tesco Aldi Price Match products. Tesco are price matching their Ms. Molly’s 2 litre Vanilla Ice Cream (99p) against Aldi’s Gianni’s at £1.25. Sainsbury’s are matching their Lovett’s at £1.19. Confusion reigns!

Aldi can genuinely contest some of the Price Match claims due to the lower quality of the discounter brands. Their Smooth Peanut Butter contains near-brand matching 94% peanuts whilst Sainsbury’s price-matched Hubbard’s contains 89% and Tesco’s Stockwell & Co. a mere 87%. Aldi’s No Added Sugar Apple & Blackcurrant Squash boasts 20% fruit juice content, way ahead of the discounter brands at between 5 and 6%. Its Mushy Peas contain 95% Processed Peas, the same as the leading brand, Bachelor’s, whilst both Sainsbury’s and Tesco’s price-matched contain only 90%. A truer comparison would be Sainsbury’s and Tesco’s standard private label 95% products, both currently selling at 30p, 8p higher than Aldi. Aldi continues to claim significant basket savings against the Big 4. It appears they have not tried to undercut some of the Sainsbury’s price matched products. Sainsbury’s have, for the moment, concentrated mainly on matching own label prices, with only 33 of the 251 listed Price Match products being branded. Aldi’s new headache is that many of Sainsbury’s 250+ featured products are not featured in Tesco’s Aldi Price Match list but are “new entries” in the price match arena - hence Aldi will need to live with even more of their products selling at the same price as at least one of the Big 4. In a recent survey only 6% of those who had heard of Aldi Price Match said they were shopping less at Aldi as a result of the campaigns. Nevertheless it seems the initiative has helped Tesco win back some shoppers, and it may well do so for JS, but at a high cost in both on-going time and resource. Ultimately the customer will remain confused as products featured, specifications and subbrands change. Maybe the Big 4 should simply take a leaf out of some other European supermarkets’ books. The likes of Edeka, Rewe and Albert Heijn have simply ensured that their own label tier matches Aldi and Lidl in every aspect; quality, packaging and price, stemming the growth of the discounters as a result. However they are now used to a world of lower margins. What is for sure is the correct positioning of private label ranges is crucial in the on-going battle to win customer loyalty and sales growth.

Paul Stainton, Partner IPLC UK International Private Label Consult