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The Scoop on China's Private Labels

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Private labels have been a growing trend for decades. In some markets, such as Switzerland and the UK, private label penetration is set to cross the 50% mark before the turn of the decade. As of 2007, one in every five consumers in the world has recently purchased a private label. But in a trade environment like China’s, where the top five retailers only account for a meager 5% of market share, private labels should be no more than small fry, right? Perhaps, but there are compelling reasons for us to keep an eye out.

For one, major retailers are expanding both scope and scale in China and store brand sales (a subset of the private label) is growing along with them. Secondly, we’ve just hit a major global recession. Consumers the world over are becoming more price and value sensitive. What brands (or non-brands) are better positioned to reap the benefits of this increased thriftiness than private labels? And, finally, while private label share of sales in China are unimpressive, there may yet be a variable not fully accounted in the current statistics: copycat private labels.

China’s Great Unification

One of the primary drivers of private label growth is retailer consolidation and modernization. In mainland

China, the number of hypermarkets have increased fourfold over the past eight years, supermarkets sextupled, and convenience stores (which, to date, don’t even have a major presence in comparable developing markets such as Vietnam) grew by 2,300%!

While a modernizing retail environment is not equivalent to a consolidating retail environment, they do often occur hand-in-hand. The shift from predominantly traditional trade to a more modern one—where hypermarkets, supermarkets, convenience, and drug stores rule—may happen before retailer consolidation, especially where local businesses and not established global retailers are the first-movers. However, given the high cost of entering and sustaining modern retailing businesses and the huge economies of scale therein, it will only be a matter of time before the one trend catches up with the other.

Whatever Doesn’t Kill...

By “whatever doesn’t kill” I mean the global economic crisis. China’s growth rate for the year just ended has fallen below 9% for the first time in a long time. This year, inflation is expected to close above 4% after a massive 7.4% hike in the cost of living in 2008. What’s more, unemployment is finally beginning to flatten out after several years of decline between 2004 and 2007, during which period unemployment fell from over 10% to just 4.2%.

 

Of course, all these statistics matter little if consumers remain optimistic and continue spending. But contrary to that, consumer confidence has hit a six-year low, with China’s consumer confidence index falling 4.5 percentage points to 59.9% between September and December 2008. The drop already excludes declines sustained during the many more sorrowful months before September. Not surprisingly, in a poll conducted across 10 major Chinese cities, majority of respondents promised to tighten their purse strings in 2009.

 

But, as people vow to spend less, they are at the same time vowing to spend more—on cheaper brands, that is; including, among others, private labels.

Hidden Gem

Copycats (a.k.a. copycat private labels) are non-counterfeit products that emulate the look, style, and branding of a major national brand. These private labels are usually developed to provide consumers who use popular national brands with a lower cost alternative to their current product. Consumers who switch to copycats usually know they are buying a different product and do so because they are motivated by the copycat’s superior value offering.

 

Copycats may, however, be underestimated in the current statistics because the polls from which these statistics are taken measure self-reported use of private labels, a category of which copycats are not a widely known subclass. The more popular private labels are the store brands (think SM Bonus, a label that clearly calls out SM), store sub-brands (think of those products that have a distinct look but hardly any branding at all), and umbrella brands (think Parisian, itself an SM brand without any SM branding).

 

So, while you may not feel strongly motivated by promises of future greatness for Chinese private labels, will the possibility of a present, significant underestimation of value not merit a quick second look?

Print ed: 02/09

 

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