Private label and brands – global market dynamics

By Pöyry Management Consulting’s Soile Kilpi and Sanna Kallioranta

The key forces shaping private label versus branded tissue markets stem from consumer behaviour, structure of the retail channel and supplier strategies. Here, Poyry Management Consulting examines examples of each force at play in North American, European and Chinese retail tissue markets.

 

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Consumer behaviour – who is shaping the market now?

The North American tissue market is characterised by strong legacy brands, and private label market penetration is still significantly lower than in Europe – the North American private label market share is 27% vs. 63% in Western Europe. A decade ago private label market share in North America was only 18%, reflecting the expectation of high quality and familiarity with (iconic) consumer goods brands.
However, private label tissue products have gained share from branded tissue over the past few years driven by recession awakened frugality, increased availability of high quality private label tissue, and the emergence of a new force shaping the consumer market – the Millennials.

Tissue private label preference and consumption is higher among the Millennials than the more mature consumers. Interestingly, Millennials as a percentage of consumers will grow from the current 31% to 46% by 2025. Millennials have matured into consumers amid surge of lifestyle brands. Retailers (such as Whole Foods, Trader Joes etc.) aim to offer a selection of lifestyle products and brands, including their own private label products. Moreover, Millennials have grown up with a multitude of private labels (from milk to apparel, from cookies to kitchen towels) and often without sacrifice to product quality. For them, private label is a less “suspicious” product alternative than for older consumer groups.

 

Although the Millennials are the most-educated consumer group, they are earning less than the same age group did in the past, burdened by student loans, slow economy, high unemployment and stagnant wages. Millennials’ average earnings are $33,883, which is the lowest inflation adjusted level since 1980 and down by 9.3% over the past decade vs. flat for older full-time employed Americans (The New York Times, “We Are Making Life Too Hard for Millennials”, July 31, 2015).

Frugality has taught Millennials to discount product quality and brand status over cost. Tissue brands have been challenging private label growth by introducing more affordable, less fluffy or strong “basic” versions of the branded products, as well as reaching into their deep pockets for promotional strategies to sway the price sensitive tissue consumers, especially the Millennials, who have significantly higher price sensitivity than the mature consumers.

 

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Graph 1: Retail sector concentration vs tissue private label market penetration in largest European market

Retail sector structure

The key drivers for high private label penetration in Europe, in addition to general higher consumer value orientation and slower economic growth, are heterogeneous local markets from language to culture making it difficult to build pan-European tissue brands, and moreover, high concentration of the retailing sector in many European countries. For example, the German market with over 80% tissue private label share is controlled by the top five retailers (Edeka Zentrale, Schwarz Beteilugungs, Aldi, Rewe, Metro) holding around 35% share of German retail sales. France has a similar retail sector concentration with over 70% private label tissue market share (Graph 1).

Discount stores, as well as super and hypermarkets with a focus on economy products which typically have strong private label programmes have gained in popularity in Europe. 2014 was the first year a discounter, Schwarz Beteiligungs, made the top five global retailers list displacing Tesco. This highlights the power of low-price and reduced assortment product positioning.

Hence, developing and growing private label programmes has been a key strategy for the largest European retailers to counter the growth in in the discount channel, as well as sluggish overall sales.

The major chains, such as Carrefour and Tesco, have invested in upgrading their private label categories by developing private label lines with more upmarket positioning to attract higher income consumers towards these products. Also the leading discounter chains, such as Aldi and Schwarz Beteiligungs, are developing premium private label lines making it harder and harder for brands to compete and differentiate. Kimberly-Clark is the only North American brand power house left in the European tissue market, after recent exits by Georgia-Pacific and P&G.

 

Graph 2: Tissue per capita consumption
Graph 2: Tissue per capita consumption

Growing pains

China is still a young tissue market – both for brands and especially for private labels. Tissue demand in China has grown by 8.4%/a since 2008, yet it is still only 22-50% of the per capita consumption levels in the West (Graph 2). Private label products are available in Chinese supermarkets, but the majority of supermarkets have private label share less than 10% of sales. Food, beauty and paper products are key private label categories in China, due to their relatively low technical complexity, high price sensitivity and purchase frequency.
Developments in the structure of the Chinese retail sector bodes well for private label growth. The Chinese retail sector has been very fragmented and international chains have been struggling. Hence, the Chinese retail sector has entered an era of active M&A. A more consolidated retail sector typically brings better opportunities for private label product growth.

Graph 3: Tissue manufacturing concentration in China: capacity share
Graph 3: Tissue manufacturing concentration in China: capacity share

If the Chinese retail sector is fragmented, so is tissue manufacturing (Graph 3). There are over 850 tissue mills in China, and the top 10 tissue manufactures have only 46% of the industrial scale manufacturing capacity in the country. APP is the clear market leader with only 16% capacity share and strong tissue product brands (e.g. Virjoy, Breeze, and Zhen Zhen). The tissue manufacturing sector has been booming and 5 million metric tonnes of capacity have been added to the market since 2010, by more than 40 different companies. And more capacity is coming… 2.5 million metric tonnes of new capacity have been announced, by 25 different players. Although brands dominate the Chinese tissue market, high supplier fragmentation and rapid build up typically provide opportunities for private label market growth.

 

Markets in North America, Europe and China

One can conclude that change is the only constant in life and actions by all the consumers, retailer and suppliers together shape the market landscape and dynamics. The question is how to embrace change for a winning strategy in the tissue business?