In 2010, private label products accounted for 9% of global retail tissue and hygiene value sales equating to $7 billion. While since 2008, private label recorded a $250 million incremental value increase, its share declined by half a percentage point over the same period. Therfore, private label continued to underperform against the market as a whole. Although the global economy went through a deep recession, followed by a recovery period during 2010 and into 2011, overall recovery still appears to be tentative, with sovereign debt a persistent issue across Western Europe and North America. Against this backdrop, private label might have been expected to boom as consumers looked to cut their expenditures in uncertain times, but quite the opposite proved to be the case.

While private label as a whole has long since gained consumer acceptance and become a normalized part of fast-moving consumer goods (FMCG) retail, sales continue to be concentrated in Western Europe, which can broadly be considered the home of private label globally. In the case of tissue and hygiene, 50% of global value sales were generated by Western Europe in 2010; sales in the region have, however, either been flat or in decline since 2008, posing interesting questions as to why consumers favored brands and even shunned discounters during a recession billed as the worst since the great depression some 80 years earlier.


Consumers’ value perception redefined
Certainly a major cause of private label’s failure to perform of late has come from manufacturers’ efforts to promote existing brands, alongside a concerted period of new product development across the industry as a whole. Innovations in diapers, for example, saw the development of Procter & Gamble’s Dry Max core and a good example of how (after initial teething problems perhaps) manufacturers’ investment in patented technologies has brought back significant differentiation between the features offered by brands and private label, a gap which had been narrowing. High technology, in terms of design, components and manufacture, has meant that private label products struggled to match the speed and impact of the evolution of branded products.

Not only in hygiene but across FMCG, manufacturers’ efforts to improve functionality and performance without increasing prices have (on the whole) helped big brands fight back. This can be seen across markets as diverse as home and beauty and personal care, as much as in hygiene products. Price movements have also been key, as thrifty consumers were willing to pay for innovation, although these – more often than not – meant prices stayed static. Where price hikes were necessary, due to raw material price increases, again, big brands such as Pampers, Huggies or Tena with improved functionality still looked like a good bet against a background of general increases in unit prices.

Procter & Gamble’s DryMax diaper core technology is a good example of how branded players are using patented technology to compete against private labels.

Green is the word
The development of green diapers is a case in point, with demand for biodegradable or compostable diapers high on many new parents’ agendas, but commonly lacking motivation to pay inflated prices for these products. Interestingly, brands which looked to lifecycle analysis and more efficient production methods in order to produce a more“sustainable” product have ultimately won out in this new market environment as carbon and raw material efficiency have become the new economy of scale. This means prices have been kept lower than standard products, while margins have appeared more robust.

On the back of this, nappies/diapers brands have regained their central place in core Western Europe, but this may have come at a cost as bulk buying is increasingly becoming commonplace. The UK is a great example of a market that has seen retailers offer large pack sizes of anything up to 150 units in order to offer consumers the keenest pricing. Huggies Giga Packs contain 192 size three nappies, with an average unit price of just £0.08, which is roughly half the price of an average private label 44 pack, meaning that major manufacturers are really leveraging their production strength to offer both functionality and value.

Large pack sizes have also been encouraged by online retail activity offering the added benefit of home delivery, where brands are again dominant. In South Korea, for example, arguably the world most“connected” country in terms of the internet, 40% of value sales of nappies/diapers were made through the channel in 2010, eclipsing other developed markets but a sign of things to come. In the U.S., merger and acquisition activity has seen Amazon.com purchase Diapers.com parent Quidsi, which points to the operating environment becoming more difficult for private label makers over the medium term as consumers, especially in the most developed markets, switch to the convenience, choice and value offered by online retailers.


Distribution still uneven
A further issue for private label has been the difficulty in establishing itself evenly across the globe. The Middle East, Africa and Eastern Europe have seen a rapid rise in sales since 2005. Eastern Europe particularly so, with Poland seeing booming private label sales as the German hard discounting retail model pioneered by Aldi and Lidl migrated eastward along the line of least resistance into markets with less developed retail structures. Booming private label sales have also been evident further afield in countries such as Brazil, where rapid private label growth has come on the backs of retailers such as Walmart and Carrefour setting up shop and expanding their product offerings there.

Interestingly, growth has come in these emerging markets despite the fact that retailers have not overtly pushed the format, while in India, where there has been much more retailer activity directly promoting private label, growth has been more spectacular. This activity has seen its share of tissue and hygiene in India double to 1% in five years, but its share of tissue value sales have risen to 5% over the same period, which, in one sense, is indicative of how modern retail channels are influencing sales, even in territories where tissue products do not have a great deal of traction for cultural or economic reasons. The high penetration of private label is then an illustration of the gap that exists in developing markets between the modern economy and retail accessed by the middle classes versus traditional retail and the products accessed by the majority of consumers lower down the income ladder.


A question of trust and credibility?

Modern retail channels are influencing private label sales.

As the example of India suggests, private label sales are very polarized within tissue and hygiene, and also by channel. Specifically for tissue and hygiene, there is a real disadvantage for private label in that these products often lack the credibility, which is more or less essential for the quasi medical orientation of much of the market. That is to say that in sanitary protection and incontinence, consumers are hooked on brand loyalty and this is largely a question of trust. This trust is certainly fostered by constant product refinements and blanket advertising, especially for sanitary protection, which is one of the most widely promoted FMCG products globally.

It has been very difficult for private label to bridge this gap with consumers; this is especially difficult as consumers on the whole choose a brand, which suits or speaks to them earlier in their lives and tend to stick to these products with little opportunity for change. In Europe, drugstores such as Schlecker and Alliance Boots have had more success in leveraging their health credentials by developing private label sanitary protection and incontinence products, but, on the whole, supermarkets, which account for the bulk of retail value sales globally, have struggled to make an impact here.


The future, innovation conveyor belt
With a view to the future, it is difficult to see an environment in which private label will not flourish in the developing world. There is currently something of a gap between consumer demand for reliable and affordable products, their growing ability to pay for these products and the establishment of modern retail structures, a prerequisite for the sale of private label. This gap is likely to narrow rapidly, giving brands, especially those imported from the west, far less time to ingratiate themselves with consumers, as would normally be the case, as the pace of retail change is expected to gather pace significantly.

In key markets such as Western Europe and North America,private label sales are unlikely to progress as long as manufacturers continue to ram home their advantages in terms of research and development and promotional spending. Consumers will, however, continue to demand more for their money. Innovation will be key for branded manufacturers continued success, as the first mover advantage associated with proprietary technology – which helped sales in 2009 and 2010 – will not last forever. Big brands will have to continue to differentiate themselves and offer value both in terms of pricing and features if consumers’ current faltering interest in private label tissue and hygiene products is going to continue in developed markets.

Euromonitor is a global leader in strategy research for consumer markets. Ian Bell can be reached at ian.bell@euromonitor.com.