Colin Hession , Consultant05.01.09
Here in Europe we have been reading about Wal-Mart’s plan to lift its private label game to a new level. That’s not unexpected given the financial pressures of recession on both consumers and retailers alike. It’s also not unexpected because of the headroom that exists when you compare European penetration of private label with the considerably more modest levels that currently exist in the U.S.
But for companies in the European personal care industry, the growth of private label can be a double-edged sword. For those manufacturers who are truly geared up to supply private label, growth in this sector offers worthwhile new business opportunities. But for brand owners, any increase in private label activity should sound alarm bells, particularly for No. 4 or No. 5 brands, as well as also-rans.
Our consultancy has run with the hare and hunted with the hounds on this one. We have worked with a number of major pan-European private label suppliers, and so have come to recognize the key drivers of success. But our main area of work has remained with the major brand manufacturers in cosmetics and toiletries, where we have all too often encountered indifference when it comes to being aware of, and defending against, private label.
To succeed in private label, you must be single-minded and gear up your company operation accordingly. The secret lies in speed of reaction and technical excellence in terms of the basics; e.g. small batch procurement, manufacturing flexibility, consistent quality control (there’s nothing like putting Retailer A’s label on Retailer B’s product to start losing business at a rate of knots), plus high service levels—retailers don’t appreciate running out of stock!
Then there is the whole question of how to successfully pitch for new private label business—we’ve attempted to encapsulate our thoughts in the panel above.
On the other hand, if you’re a brand owner, private label is in some ways as much the enemy as that competitor you’ve been struggling with for years. It has always surprised us when going into brand manufacturers, to find brand directors’ filing cabinets full of information on their branded competitors, yet virtually nothing on private label. Again, we have sought to tabulate a few thoughts on defense for brand owners (see table above).
Always, always challenge rip-offs of your brand. European retailers sometimes call it “shadowing the brands” but in plain language, the proper description is rip-off. But don’t get your poor, hard working sales manager to rush in and start threatening his customers—that’s a no-no from the start! Rather, handle complaints about rip-offs via your legal department, so that your sales people can retain some degree of integrity vis-à-vis their customers. Meanwhile, as private label tries to move from rip-offs into “retailer brands,” your marketing people should be thinking about what new technology they can build in to their brands to increase competitive insulation and make it more costly and time consuming for private label to follow.
One thing that you should not attempt to do, as a manufacturer of brands, is to treat private label as some sort of production capacity regulator. That is, try and get into private label supply when it suits, without really being properly set up for it. Time and again, it has been our experience in Europe that such a double-minded approach in personal care leads to problems. It may perhaps work in, say, instant coffee, but in the premium world of cosmetics and toiletries it can be little short of disaster. There are many reasons why. Your purchasing and operations people are simply not geared up for the short runs and constant line changeovers. Your sales people are ill-equipped to handle the myriad packaging and formulation variables inherent in private label. But by far the biggest danger is cross negotiation; i.e., when your nice, friendly buyer turns round and asks for the same formulation, fragrance or packaging innovation as your company’s flagship brand, to put in his private label. Your sales manager then finds himself between a rock and a hard place. If he says no, suddenly that nice buyer threatens to delist your flagship brand. If he says yes, he risks losing his job when he gets back to the office. This happens time and again. It’s a slippery slope.
Private label is simply too big these days—here in Europe, anyway—for supplying both private label and brands. It’s got to be one or the other. In case you have any doubts, dear U.S. reader, take a long hard look at the table on the previous page; it shows European private label’s shares by category, just imagine what would happen, or indeed may happen in the U.S., if recession causes anything like these levels of private label success to be achieved. That’s great news for genuine private label suppliers, but a big threat to the No. 4 and 5 brands in the category, and quite likely the death knell for the rest.
Innovation is a brand manufacturer’s best insulation against private label, as well as against branded competition, and Germany’s Beiersdorf knows it. Two recent examples in Europe come to mind.
Beiersdorf has consistently increased its share of the European deodorant category, and has just launched Nivea For Men Silver Protect. The product includes “antibacterial silver ions to work against the bacteria that cause body odour.” The silver package puts the brand head-to-head with Unilever’s Rexona Men (Degree in the U.S.). But whereas Rexona has its well-known “tick” motif to signify long-lasting action, Nivea’s Silver Protect includes a 24-hour roundel motif. Although Unilever effectively owns the global deodorant category with more than a 28% share, this new entrant from Beiersdorf should give Unilever a run for its money when it comes to the male deodorant segment in Europe.
Another piece of interesting innovation from Beiersdorf has been the launch of another line extension for Nivea For Men called Hair Recharge. There are two SKUs, one in the form of a shampoo and the other a tonic. Both contain what the manufacturer calls “two highly active ingredients, Carnitin & Creatin” which Beiersdorf claims promote hair growth. An interesting point strategically is that hidden in the supporting copy are the words "in vitro tested;” i.e., no full-scale clinical trials have (yet) been done. This suggests that while these products may help a bit, Beiersdorf has yet to crack one of the biggest consumer worries in hair care, namely hair loss and how to stimulate re-growth. Our understanding is that all the major hair care manufacturers are still chasing this one hard, and devoting considerable R&D resources to it. Although little has emerged in the public domain, not least because of toxicity problems with the some of the most likely solutions, the size-of-the-prize is considerable.
Europe’s pharmacy trade is dominated by three major wholesaler operations, which together account for more than 80% of the sector. The three are Alliance Boots in the UK, and Celesio and Phoenix, both from Germany. Pharmacy wholesale is particularly important in Europe because chain retail pharmacies are still not allowed by law in most continental European countries, although this looks to be changing, albeit more slowly in the current recession than has previously been predicted.
KKR, the U.S. private equity group that owns Alliance Boots, has reportedly expressed “active interest” in Phoenix, which is part of the faltering empire of Adolf Merkel, the German billionaire who committed suicide in January. The Financial Times has quoted a person close to the discussions as saying “Phoenix would be a perfect fit as Alliance Boots aims to expand and fill gaps in Germany and Europe.” Certainly, it will make Boots a whole lot bigger, yet again, and a very potent force to be reckoned with—provided Boots can live with a highly leveraged financial situation. Strategically interesting for CVS and Walgreens, too; if and when they come to Europe, or vice versa.
There have been reports of two very different businesses that may be up for sale. One has considerable added value, thanks to its single-minded focus on its core business, while the other’s business is diffuse.
Steifel Laboratories Inc., a closely held pharmaceutical skin care manufacturer, is apparently considering a sale in a deal that could be worth several billion dollars, according to a report in The Wall Street Journal. We’re not surprised that the potential sale has apparently drawn interest from a number of major drug companies. Steifel, which makes anti-itch creams, acne treatments and other dermatological remedies, has a very interesting portfolio of added value dermatological products, some available in retail like Oilatum & Polytar, others only on medical prescription. Stiefel, although founded in Germany, is now based in Coral Gables, FL and has annual sales of around $1 billion. Thanks to its single-minded focus on dermatological R&D, the business could well fetch somewhere in the range of $3-4 billion.
At the other end of the scale, Sara Lee is examining the sale of its European household and body care business, with Goldman Sachs hired to flush out possible bidders.
Frankly, we don’t think Goldman will get lucky on this one, or the activist hedge fund apparently pushing for the sale—not for $2 billion anyway.
The reality is that Sara Lee’s body care division is a very mixed bag of one- or two-country brands, with Sanex the only one with any pretensions to having a proper international franchise. Sara Lee executives have sat on their marketing hands for too long, never grasping the nettle and rationalizing their many and diverse local portfolios into a coherent series of pan-European brands. If someone else is going to do this for them, it is unlikely to be at much more than distress sale prices.
Read more from current Happi columnists.
Our consultancy has run with the hare and hunted with the hounds on this one. We have worked with a number of major pan-European private label suppliers, and so have come to recognize the key drivers of success. But our main area of work has remained with the major brand manufacturers in cosmetics and toiletries, where we have all too often encountered indifference when it comes to being aware of, and defending against, private label.
To succeed in private label, you must be single-minded and gear up your company operation accordingly. The secret lies in speed of reaction and technical excellence in terms of the basics; e.g. small batch procurement, manufacturing flexibility, consistent quality control (there’s nothing like putting Retailer A’s label on Retailer B’s product to start losing business at a rate of knots), plus high service levels—retailers don’t appreciate running out of stock!
Then there is the whole question of how to successfully pitch for new private label business—we’ve attempted to encapsulate our thoughts in the panel above.
On the other hand, if you’re a brand owner, private label is in some ways as much the enemy as that competitor you’ve been struggling with for years. It has always surprised us when going into brand manufacturers, to find brand directors’ filing cabinets full of information on their branded competitors, yet virtually nothing on private label. Again, we have sought to tabulate a few thoughts on defense for brand owners (see table above).
Tesco’s private label products make for a formidable lineup. |
One thing that you should not attempt to do, as a manufacturer of brands, is to treat private label as some sort of production capacity regulator. That is, try and get into private label supply when it suits, without really being properly set up for it. Time and again, it has been our experience in Europe that such a double-minded approach in personal care leads to problems. It may perhaps work in, say, instant coffee, but in the premium world of cosmetics and toiletries it can be little short of disaster. There are many reasons why. Your purchasing and operations people are simply not geared up for the short runs and constant line changeovers. Your sales people are ill-equipped to handle the myriad packaging and formulation variables inherent in private label. But by far the biggest danger is cross negotiation; i.e., when your nice, friendly buyer turns round and asks for the same formulation, fragrance or packaging innovation as your company’s flagship brand, to put in his private label. Your sales manager then finds himself between a rock and a hard place. If he says no, suddenly that nice buyer threatens to delist your flagship brand. If he says yes, he risks losing his job when he gets back to the office. This happens time and again. It’s a slippery slope.
Private label is simply too big these days—here in Europe, anyway—for supplying both private label and brands. It’s got to be one or the other. In case you have any doubts, dear U.S. reader, take a long hard look at the table on the previous page; it shows European private label’s shares by category, just imagine what would happen, or indeed may happen in the U.S., if recession causes anything like these levels of private label success to be achieved. That’s great news for genuine private label suppliers, but a big threat to the No. 4 and 5 brands in the category, and quite likely the death knell for the rest.
Innovation from Beiersdorf
Innovation is a brand manufacturer’s best insulation against private label, as well as against branded competition, and Germany’s Beiersdorf knows it. Two recent examples in Europe come to mind.
Beiersdorf has consistently increased its share of the European deodorant category, and has just launched Nivea For Men Silver Protect. The product includes “antibacterial silver ions to work against the bacteria that cause body odour.” The silver package puts the brand head-to-head with Unilever’s Rexona Men (Degree in the U.S.). But whereas Rexona has its well-known “tick” motif to signify long-lasting action, Nivea’s Silver Protect includes a 24-hour roundel motif. Although Unilever effectively owns the global deodorant category with more than a 28% share, this new entrant from Beiersdorf should give Unilever a run for its money when it comes to the male deodorant segment in Europe.
Nivea Silver Protect and Hair Re-charge—recent innovations from Beiersdorf. |
Alliance Boots Gets Bigger
Europe’s pharmacy trade is dominated by three major wholesaler operations, which together account for more than 80% of the sector. The three are Alliance Boots in the UK, and Celesio and Phoenix, both from Germany. Pharmacy wholesale is particularly important in Europe because chain retail pharmacies are still not allowed by law in most continental European countries, although this looks to be changing, albeit more slowly in the current recession than has previously been predicted.
KKR, the U.S. private equity group that owns Alliance Boots, has reportedly expressed “active interest” in Phoenix, which is part of the faltering empire of Adolf Merkel, the German billionaire who committed suicide in January. The Financial Times has quoted a person close to the discussions as saying “Phoenix would be a perfect fit as Alliance Boots aims to expand and fill gaps in Germany and Europe.” Certainly, it will make Boots a whole lot bigger, yet again, and a very potent force to be reckoned with—provided Boots can live with a highly leveraged financial situation. Strategically interesting for CVS and Walgreens, too; if and when they come to Europe, or vice versa.
For Sale
There have been reports of two very different businesses that may be up for sale. One has considerable added value, thanks to its single-minded focus on its core business, while the other’s business is diffuse.
What price Sara Lee's household & bodycare business? |
At the other end of the scale, Sara Lee is examining the sale of its European household and body care business, with Goldman Sachs hired to flush out possible bidders.
Frankly, we don’t think Goldman will get lucky on this one, or the activist hedge fund apparently pushing for the sale—not for $2 billion anyway.
The reality is that Sara Lee’s body care division is a very mixed bag of one- or two-country brands, with Sanex the only one with any pretensions to having a proper international franchise. Sara Lee executives have sat on their marketing hands for too long, never grasping the nettle and rationalizing their many and diverse local portfolios into a coherent series of pan-European brands. If someone else is going to do this for them, it is unlikely to be at much more than distress sale prices.
Read more from current Happi columnists.