The current crisis is providing good news for the Spanish consumer. The country’s big retail chains are involved in a continuous battle to satisfy the needs of their customers by offering lower prices, promoting their in-house brands and even eliminating some of the competing manufacturers’ brands in their stores.
For example, Mercadona, which leads the Spanish supermarket sector with a 20% market share, has restructured its supply of products, company sources say, lowering the average price by 10%. As part of a series of measures for reducing costs, it did a fundamental review of its 9,000 supply sources. As a result, the company removed from its shelves the 800 products that were in least demand. In addition, the chain decided to introduce cheaper packaging and sell fruit and vegetables in bulk.
Taking the opposite approach, Carrefour, a leading hypermarket company with 11.7% of the market, has decided to maintain its range of brands while offering significant discounts. The French firm has strengthened its own in-house brand with discounts of up to 70%. Prices of cleaning products have dropped suddenly to levels not seen since 2001.
Another main player in this battle is Lidl. The German company has attempted to win over Spanish customers from Mercadona by offering lower prices for well-known brands to loyal customers. Meanwhile, El Corte Inglés, the Spanish retail chain, did not want to be left out of the party so at the end of last year, it introduced a low cost, in-house brand that it baptized “Aliada.”
There are other players in this war, too. Retailers Eroski and Alcampo have adopted their own strategies to counter the moves made by their rivals. In almost every case, the focus has been on giving retailers’ in-house brands the major role.
Promotion of In-house Brands
In a sense, the crisis has brought nothing new; it has merely accelerated of the acceptance of in-house brands. According to data supplied by Nielsen in 2007, retailers’ own brands have enjoyed exponential growth in recent years, lifting their market share in such areas as food, drugs and perfumes to an average of 24% in 2006, compared with 11.1% in 1998. Belén Sandoval, joint director of the IE Business School’s Center for the Innovation of Production and Distribution, explains that the in-house retailer brand was born in the nineteenth century in England. From that point on, “It has enjoyed its maximum popularity at times of crisis because it enables the consumer to lower the cost of his or her basket of goods in exchange for a guarantee of quality that is not at all sophisticated. That’s where the name ‘white brands’ [in Spanish] comes from. It’s because of the discreet packaging, using white in the design, and so forth.”
To create its own brand, a retailer must call on a leading manufacturer that has excess production capacity that can be used to make the retailer’s brand product or it can look for a specialized supplier to manufacture exclusively for the retailer. Sandoval notes that this strategy has various advantages and challenges. For example, this sort of alliance enables the manufacturer to have a preferential relationship with the retailer “so he can place the product in a visible location on the shelves.” However, “the manufacturer gets exposed a bit to the retailer. It is a double-edged sword.” Sandoval adds that, generally speaking, the percentages that go to the shops depend on the policy of each retailer, but the underlying idea is this: “If the consumer trusts the supermarket, why not trust the retailer’s own brand?” Also, offering good prices permits the retail distributor to win the loyalty of its customers.
For Jorge González, professor of marketing at IESE Business School, “The question is whether consumers are ready to buy a product that is a bit worse in return for getting a 20% discount. Many people are ready to do that. It is all about the evolution of brands, and the confidence that we have in the brands of manufacturers and distributors, who need to be doing this very well.” González also emphasizes that in-house brands are counter-cyclical. “In other words, they rise in times of crisis but after the economy starts growing again, they stop growing, although they do not lose business. They keep moving up the rungs of acceptance, and once they have reached a good spot, it is hard to get them off it, unless there is an introduction or an innovative change of a product in their category.”
Innovation as Defense
Under these conditions, innovation becomes the best weapon that manufacturers can use to defend themselves. In that regard, González notes that the cereal business provides a paradigm. Years ago “Kellogg’s, seeing that in-house brands were advancing in their category, used product innovation to bring out its own new lines of lower-volume products that had much bigger margins.” González notes that innovation changes the logical evolution, “when you also realize that retailers’ own brands are copying each other at an increasingly fast pace.”
As for the reaction of retailers, “The only thing worth doing is real innovation; that which permits you to go forward or expand the meaning of your brand, such as [new] drinks or lifestyle products.” Perhaps that’s why brands such as Danone [yogurt] try these days to remind consumers in their ads “that they don’t manufacture for other people [who are manufacturers of yogurt],” as well as to emphasize the characteristics of their products. González believes that this brand is pursuing a brilliant strategy. “They have made their products stand out by emphasizing the strong health component.” Sandoval adds that Danone’s strategy is very coherent. “It has development and innovation skills that others don’t have. It is important to realize that manufacturers are the leaders in product development; they have the capacity for R&D. In other words, we are the pioneers, and what we do, we do well.”
Even so, González notes, “the crisis is going to accelerate the acceptance of in-house brands for many people who used to be more likely to consume the manufacturer’s own brand. They will get used to paying 20% less for this kind of product.” Sandoval agrees, noting that in times of crisis, the price differential between the leading manufacturer’s brand and the retailer’s own brand can vary from between 20% to 25%.
Nevertheless, Sandoval notes the social framework of the decision to purchase a distributor’s in-house brand. It may be true that people aren’t concerned about consuming retailer-brand products in the comfort of their own homes, but on other occasions – such as when they are invited to others’ homes – they may prefer to be offered the manufacturer’s brand. “Consumers are getting more and more sophisticated,” she says. “For basic products, the most important thing is getting a discount. Buyers of gourmet goods or delicatessen products go to another sort of establishment. Consumers are varying their purchasing experiences. They don’t want to go only to one establishment to make all their purchases. Nowadays, shopping is more sophisticated, and consumers are better informed; [they know that] each sort of product must be addressed in its own way.”
Freedom to Choose
González believes that the really novel thing in the Spanish distribution system is the selling proposition of some market leaders. For example, Mercadona “depends on a format in which consumers don’t buy just 30% of their purchases from a retailer’s brand; they buy 45%.” In his opinion, Valencia-based Mercadona is telling consumers, “I am going to offer you a cheaper basket of goods if you buy enough of our in-house brand.” In that sense, notes González, “Mercadona is inclined more toward the German retail format, where the in-house brand could easily capture 50% of total sales. In Spain, it could be about 35%, depending on the format.”
González explains that Mercadona wants to win over customers when they are on its turf. The interesting difference between Mercadona and those competitors who offer sizable discounts is this: Mercadona has managed to create clear brand equity for its consumers. “There are many consumers who, when they are consuming Hacendado [a brand exclusive to Mercadona], don’t realize that it is a Mercadona product. Or, if they know that, they don’t care because they consider it a good brand. The result is that the Spanish market is essentially more brand-oriented than other markets in Northern Europe. I don’t know if [the increased market share of retailer’s own brands] is going to work out in a more complete way. But it could work.”
González believes that Mercadona has to evaluate whether, with this approach, it is driving away some consumers who do not find the brands that they are looking for when they shop at Mercadona. “Using economic logic, this makes sense, but I wonder if there are some basic products in that store which were working out well for me only because [Mercadona] was my one and only stop, and I didn’t have much time [to shop elsewhere]. You have to evaluate very carefully if the customer is a buyer of the basic basket of goods that he comes to buy because he can find almost everything at that shop; or if he wants another product so he goes to another place [to shop]. To the extent that you adjust your supply, you are taking a more strategic view of your consumers.”
Along the same lines, Sandoval notes the criticism that Mercadona has attracted because of its recent decision to remove standard brands from its shelves. Sandoval says this strategy could wind up backfiring. Manufacturers are angry about Mercadona’s decision to cast them out of a retail chain that has such a significant share of the market. “This means reduced sales, consumption and even adjustments in the workforce. This is something very serious.” In addition, Sandoval notes that some consumers have expressed their unhappiness with this decision because it limits their ability to choose. For its part, Mercadona, in an effort to justify the decision, told the press that, of the 800 items that have been removed from its store shelves, half belonged to manufacturers, and the other half were Mercadona’s own brands.
Sandoval believes that other retailers are not going to follow Mercadona’s example. That is because “they want to give consumers freedom of choice when they go shopping every day. Actually, El Cortes Inglés, in response to the crisis, has given consumers even more options by creating its own house brand.” In Sandoval’s opinion, Mercadona has one more card up its sleeve. “Why carry out a measure that is so unpopular on the brand level?” The answer could involve internal cost policy. “The [Mercadona] model works well; it has strong growth, but to get the funds you need to keep growing and maintain your network of shops; you have to lower your costs in some way. The most substantial investments for any retailer are personnel costs and real estate/points of sale. If both of those costs keep growing, and you cannot touch them because they are both important for your strategy, then you have to cut costs, and then you justify that in some way to the consumer.” In any case, she believes that this is a temporary measure.
As for the battle for power in the distribution channel, González says, “If this plan works out well, and Mercadona continues growing, it will prove that customers do not belong to the brands but to the retailers. To the extent that retailers’ in-house brands grow, the power of the retail channel grows and only those mega-brands are positioned relatively safely.” It is a question of getting closer to the consumer. “But in my opinion, it is more than a tactical reaction; it is about trying to significantly reduce prices for consumers because over the coming years, more than ever, people are going to be talking about food in a way that is dramatically more focused on price, price and price.”
On the other hand, González explains, in a crisis the repositioning of competitors becomes more obvious. Starting now, “the big retailers are going to try to position their various product lines to cover the segments of the hypermarket either by providing higher prices with more brands of manufacturers, or with lower prices from their in-house brand, and they will go on testing.” González predicts that the result of all these measures will be a more Spartan, more Germanic style of retail distribution. He also mentions the outstanding role that will be played by using sales of fresh foods as a platform for differentiating one chain from another. “Each chain is looking to distinguish itself in ways that fit the needs of its various sectors of consumers. From that starting point, packaged food will become more and more Spartan, and each chain will try to reinvent itself a little by placing emphasis in one place or another.”
Ultimately, says González, “the big beneficiaries will be the consumers who get the products they want at lower prices.”