INTERNATIONAL GROWTH THROUGH PRIVATE LABEL

JAMES FALLON

LONDON -- Private label has become one of the new battlegrounds in global food retailing.

Leading food retailers are increasingly wielding their private label lines as competitive tools to both maintain and grow their domestic markets and infiltrate new, developing regions. The result has been an upsurge in sales of private label products in Europe and elsewhere, fueled by growth in established categories as well as an expansion into such newer categories as organic foods, health and beauty and apparel.

The growth is led by such European food retailers as Tesco plc, Cheshunt, England; J. Sainsbury plc here; Asda, the Leeds-based subsidiary of Wal-Mart; Ahold, Zaandam, The Netherlands; Carrefour SA, Paris, and Aldi of Germany.

"European retailers are leading the globalization effort and private label is a very important part of that," Brian Sharoff, president of the New York-based Private Label Manufacturers Association, said in an interview.

In the U.K. and Germany, food retailers have stepped up their private label programs both to cater to a wider number of categories and to blunt the inroads of Wal-Mart. The PLMA's latest international yearbook -- which is based on data prepared by ACNielsen, Schaumburg, Ill., and covers seven countries and more than 2,000 product categories -- found that the U.K. continues to lead the European market with about 45% of sales last year in private label products. It is followed by Belgium, where 34.7% of sales last year were in private label, Germany with 33.5%, France with 22.1% and The Netherlands with 20.6%.

The growth in the German market was fueled both by Wal-Mart and by the continued expansion of Aldi. But Aldi's offerings until now have focused totally on the lowest prices. Observers believe that will change as Wal-Mart expands in the German market.

"Wal-Mart in the U.K. and in Germany are two very, very different things," Sharoff said. "In the U.K. private label is so well-established that Wal-Mart has to play catch-up with the market leaders. In Germany, though, it is making its private label merchandise a point of difference from its competitors."

The U.S. retailer, which bought Asda last year for $10.8 billion following its 1998 entry into Germany, in June announced plans to launch three private label lines in the two markets -- Asda Great Value, which it claimed was 10% to 15% cheaper than other retailers' private label lines and 15% to 30% less than major brands; Asda Smart Price for the budget sector, and Asda's Sam's Choice, which will be rolled out this month and will be made up of prepared meals and unique lines.

"The Wal-Mart effect means customers in Britain and Germany can taste as well as pocket the difference," Allan Leighton, then-CEO of Wal-Mart Europe, said at the launch of the lines. "In the U.K. these new brands place Wal-Mart and Asda -- the two great symbols of value -- side-by-side, on product packs, for the first time."

Wal-Mart's experience in Germany, however, illustrates the roadblocks that can occur as retailers enter new markets. Wal-Mart's attempts to practice everyday low pricing in Germany -- subsequently taken up by the likes of Aldi, Lidl & Schwartz, Plus and Norma -- have run afoul of the country's cartel office, which ruled the five companies were selling the products at a loss. Such a practice is illegal in Germany. Wal-Mart claimed it wasn't acting illegally but it and the other firms have been forced to raise their prices.

But Wal-Mart's competitors in the U.K. have so far been successful in matching its price cuts. Terry Leahy, chief executive of market leader Tesco, recently said the company isn't feeling any major impact from Wal-Mart's acquisition of Asda.

"We measure thousands of prices every week and in the first half-year we have significantly improved our leading value position against all the competition," Leahy said.

The CEO said the price cuts his store is implementing are in both private label lines and major brands. Mike Godliman, an analyst at consulting firm Verdict Research here, said Tesco and Wal-Mart have both adopted everyday low pricing in the U.K. that mixes both private label and branded products. Tesco has two tiers of private label products -- its Value budget line and its new Finest line of fresh and prepared foods.

Meanwhile, Tesco also recently launched an expanded private label organics line to cater to a growing demand for organic products in the U.K. The move was in response to expanded organic lines at Sainsbury's and at Iceland plc, which in June announced plans to switch many of its private label lines to all-organic at the same prices as conventional items. The program starts next month with Iceland's private label frozen vegetables.

"The retailers now all want to appeal to different types of customers," Godliman said. "If you look at the mass-market end where Tesco's and Asda's private label lines are now, it's worth about $35.2 billion. Then there's a quality end currently occupied by such companies as Marks & Spencer and Waitrose that is worth about $7 billion. What Sainsbury's and Tesco want to do is to eat away at some of that as well. And it's not just with food; increasingly the companies are introducing nonfood private label in health and beauty and apparel."

Ahold follows a similar private label strategy, offering high-end, middle-market and budget lines in all its operations, said Hans Gobes, the company's spokesman. Ahold also is a member of the 11-member buying group A.M.S., which offers a budget line of 350 private label products under the Euroshopper brand.

"We currently get about 30% of our sales in private label and view it as very important," Gobes said. "It is continuing to grow but we wouldn't want it to be more than 35% in all our operations. That means in the U.S. we still have lots of room to grow in private label because it now represents only about 15% to 20% of our sales."

Retailers such as Tesco, Ahold and Carrefour also are helping to expand private label beyond the core European markets. For example, the PLMA found that private label sales in Spain and Italy were up 20.5% and 17.1%, respectively. Spain had the highest growth rate of all seven countries surveyed and it was a result of Carrefour's continued expansion in that market, Sharoff said.

"Such retailers as Carrefour and Monoprix have been very successful in creating private label brands that are very high-end," Sharoff said. "They are using these brands aggressively to expand into other markets."

Private label is also a vital tool for retailers as they move into new regions like South America, central Europe and the Far East. David Reid, deputy chairman of Tesco, said the retailer is using its private label expertise to establish itself in such central European markets as the Czech Republic, Poland and Slovakia and such Asian countries as Thailand and South Korea. However, it doesn't always brand the lines as Tesco; for example, in Thailand it uses the name of the local retailer Lotus, which it bought in May 1998.

"We use whatever brand appeals to that local market," Reid said, adding that Tesco's strategy is first to open stores and then set up a modern supply chain, including dry goods and composite warehouses. "We have a huge amount of skill in that area and we make it available to the local companies to develop their own products. It's one of the areas where we can add value as we move into those markets."

It also helps global retailers maintain a unified image worldwide. Godliman of Verdict pointed out that for many retailers a major challenge in entering new markets is to find suppliers that can meet their standards. "Private label products provide a guaranteed quality level," he said.

Gobes of Ahold said such quality guarantees are becoming more and more important as consumers become more concerned about food safety. "Food safety will become even more of an issue and a private label brand is a way to build and maintain consumer trust."

Ahold is increasingly linking its global operations together to source certain private label lines. It also continues to source private label products on a regional basis.

"When we enter less-developed markets in Asia or Latin America we immediately start with private label," Gobes said. "In Asia we operate under the Tops brand and that continues to grow. We also combine our private label needs together for the U.S., Europe, Latin America and Asia and have it made by one manufacturer, which provides economies of scale and means we can get very low prices."

But Sharoff believes it will be some time before private label sales in such regions as South America and the Far East approach those in Europe. Private label currently is only about 5% to 6% of sales in Asia, for example.

"The Far East is difficult for many of these companies to enter because there really is no such thing as Asia," Sharoff said. "Retailers have to take it market-by-market. It's difficult to find suppliers in many of those countries. Sainsbury's in Egypt, for example, would love to carry the private label lines it has in the U.K. but it can't find local manufacturers.

"But there is no doubt that every retailer in Europe has told their suppliers to be global suppliers, whether it's themselves or with local partners," he added. "They have to be to compete."