Own labels, the risk of NPD

Research due to be presented this week at the annual conference of the Royal Economic Society in the UK suggests that even though own labels are well established, there is still a significant element of risk involved in rolling out new products.

Professor Michael Waterson of the University of Warwick suggested that retailers in the UK had tended to focus on certain key areas for own label growth, in particular products that are bought frequently such as bakery or dairy products rather items such as health and beauty or paper products which are bought far more infrequently.

"Most of the products we buy are what economists call 'experience goods': we can only ascertain quality or the characteristics of the good after consumption,"​ Waterson said. And this could explain why own label ranges have a high market share in some product sectors and not in others.

The market shares of own labels in bakery (63 per cent) and dairy products (67 per cent) contrast with health and beauty (24 per cent) and paper products (19 per cent), and this, the research suggests, is due to a reluctance on the part of retailers to put their reputation on the line.

"Because the quality of their store brand cannot be ascertained prior to purchase, the retailer puts its reputation at stake in convincing consumers the store brand fulfils expectations,"​ Waterson said.

"Where products are purchased infrequently, the retailer has an incentive to neglect the returns from subsequent purchases since these will be further away in time (goods such as shampoo, toothpaste and whisky, for example), and therefore not as important as for products that are replenished each week (bread, milk, etc.). Consumers, recognising this, may distrust private label versions."​

As a result, the researchers predict that products in categories that are bought frequently, and in particular where there is no strong brand name, will be the areas where successful private labels will develop.

Professor Waterson stressed that the research was at an early stage, and that in any case the UK was somewhat different from the rest of Europe in that the own label market was much more developed, with multiple levels of own label product ranges. Further investigations by researchers at the University of Toulouse, likely to be published later this year, would give a clearer picture of whether the own label market was developing in the same way on the other side of the Channel.

There certainly seem to be a number of question marks over the findings of the UK-based research. Consumers in the UK are so used to buying quality own label products that any new items launched under a supermarket brand are likely to be well regarded - if Tesco makes good own label bread, for example, why should it not make own label health and beauty products of similar high quality?

Furthermore, with competition so fierce in the UK food retail sector, companies are keener than ever to ensure that their reputation for quality remains untarnished, and launching an own label product which did not meet certain minimum standards, even one with a low level of repeat purchase, would be a short-term gamble that most chains would be unlikely to take.

Waterson stressed that it was still unclear as to whether the lack of own label development in some sectors was due, as he suggested, to the reluctance of supermarkets to put their reputations on the line, or to other factors. Product sectors such as baby food where there are a large number of branded goods tend not to have much in the way of own labels - but is this because the consumer trusts brands more than own labels, as Waterson suggests, or simply because retailers see no profit in moving into a crowded product sector?

If, as Waterson suggests, the growth in the UK own label market is likely to come from product sectors where products are bought frequently - and thus where own labels' quality credentials can be rapidly established - but where there are few strong brands, then the opportunities are likely to be few indeed. With most sectors without a strong brand leader already being exploited by the supermarket groups, they are left with little choice but to tackle the brand owners head on.

Of course, most retailers now have major R&D operations of their own, and one possibility not suggested by the research is that the real growth in the market will come from product innovation - from retailers creating their own product categories rather than copying existing brands.

The French research is likely to give a clearer picture of whether we are likely to see retailers taking more risks when it comes to pushing their own label into more product segments, at least according to the economic model suggested by Waterson's data, but with own labels playing such an important role in UK retailers' strategies, a slowdown in growth in this sector is unlikely.