Value appropriation of innovations in the Dutch FMCG industry. A-brands versus private labels

Value appropriation of innovations in the

Dutch FMCG industry.

A-brands versus private labels

Course : Master thesis strategy and innovation Author : Ivo van der Weide (s1230859)

Coach : Thijs Broekhuizen Second coach: Hendrik Snijders Date : 24-01-2009

Abstract

In this conducted research the Dutch FMCG situation is examined in terms of value appropriation from innovations. This is done by using several techniques, a large variety of primary and secondary resources are consulted. Special attention is given to informal and formal mechanisms to capture value from innovation. In addition, the effects of private labels on value appropriation by A-brands are investigated.

ABSTRACT ... 2

CHAPTER ONE: INTRODUCTION TO THE RESEARCH ... 5

§ 1.1 PURPOSE OF THE RESEARCH ... 6

§ 1.2 LIMITATIONS ... 6

§ 1.3 OUTLINECHAPTERS ... 7

CHAPTER TWO:VALUE,APPROPRIATION AND INDUSTRY DEVELOPMENTS ... 8

§ 2.1 WHAT IS VALUE CREATION AND APPROPRIATION? ... 8

§ 2.2 CREATION OF VALUE ... 10

§ 2.3 VALUE OF THE BRAND ... 11

§ 2.4 BRAND LOYALTY ON PRODUCT LEVEL ... 12

§ 2.5 BRAND LOYALTY ON STORE LEVEL ... 13

§ 2.6 INTEGRAL OVERVIEW BRAND LOYALTY ... 14

§ 2.7 HOW TO APPROPRIATE VALUE FROM INNOVATIONS ... 15

§ 2.7.1 APPROPRIABILITY REGIME ... 16

§ 2.7.2 DOMINANT DESIGN PARADIGM ... 18

§ 2.7.2 DOMINANT DESIGN PARADIGM ... 19

§ 2.7.3 COMPLEMENTARY ASSETS ... 20

§ 2.8 PRIVATE LABELS AND ITS SUCCESS ... 22

§ 2.8.1 ECONOMIC SITUATION AND PRIVATE LABELS SHARES. ... 22

§ 2.8.2 RECENT DEVELOPMENTS OF PRIVATE LABELS ... 24

§ 2.8.3 PRIVATE LABEL PENETRATION IN DIFFERENT PRODUCT CATEGORIES ... 25

§ 2.9 HEDONIC AND UTILITARIAN PRODUCT CATEGORIES ... 26

§ 2.9.1 BARRIERS FOR PRIVATE LABEL PRODUCT PENETRATION ... 27

CHAPTERTHREE: THE VALUE SYSTEM&STRATEGIC GOALS ... 28

§ 3.1 MANUFACTURERS ... 29

§ 3.1.1 PREMIUM BRAND MANUFACTURERS... 29

§ 3.1.2 PRIVATE LABEL MANUFACTURERS ... 30

§ 3.1.3 PRIVATE LABEL PURCHASE ALLIANCES ... 30

§ 3.1.4 DUAL TRACKERS: PREMIUM LABEL THAT ALSO PRODUCE PRIVATE LABELS ... 31

§ 3.2 RETAILERS ... 32

§ 3.2.1 SERVICE ORIENTED SUPERMARKET CHAINS... 32

§ 3.2.2 HARD DISCOUNTER... 33

§ 3.3 STRATEGICGOALS OF RETAILERS&BRAND MANUFACTURERS ... 34

§ 3.3.1 STRATEGIES PURSUED BY SERVICE ORIENTED RETAILERS ... 34

§ 3.3.2 STRATEGIES PURSUED BY HARD DISCOUNTERS ... 37

§ 3.3.3 STRATEGIES PURSUED BY BRAND MANUFACTURERS ... 39

§ 3.4 RESEARCH FRAMEWORK&RESEARCH MODEL ... 41

CHAPTERFOUR: METHODOLOGY ... 42

§ 4.1 DATACOLLECTION ... 44

§ 4.2 POSITIONING VIS-A-VIS EXISTING STUDIES ... 45

CHAPTERFIVE: RESULTS OF THE RESEARCH ... 46

§ 5.1 OVERALL EFFECTIVENESS AND FREQUENCY MECHANISMS ... 46

§ 5.2 THE EFFECTIVENESS AND FREQUENCY OF USE FORMAL MECHANISMS ... 48

§ 5.3 THE EFFECTIVENESS AND FREQUENCY OF USE INFORMAL MECHANISMS ... 49

§ 5.3.2 MARKETING AND PROMOTIONS ... 51

§ 5.3.3 LABOUR REGULATIONS ... 53

§ 5.3.4 ALLIANCES AND COOPERATION ... 54

§ 5.3.5 TECHNICAL AND LEARNING MECHANISMS ... 55

§ 5.4 PRIVATE LABEL PENETRATION ACROSS PRODUCTS ... 56

§ 5.5 THE STAIRS OF AGONY... 58

CHAPTERSIX: CONCLUSION AND IMPLICATIONS ... 60

§ 6.1 CONCLUSION ... 60

§ 6.2 MANAGERIAL IMPLICATIONS&RECOMMENDATIONS ... 63

§6.3 LIMITATIONS AND DIRECTIONS FOR FURTHER RESEARCH ... 69

REFERENCE LIST ... 71

APPENDIXI:THEQUESTIONNAIRE... 75

APPENDIXII: INTERVIEWPAULMOERS ... 83

APPENDIXIII: INTERVIEWBASTULNER ... 88

APPENDIXIV: INTERVIEWWOUTERMEIJER ... 94

APPENDIXV: INTERVIEWOLGACOENJAARTS ... 98

Chapter one: Introduction to the research

Lately, conflicts between retailers and manufacturers are commonly reported. “Wars” are fought in order to obtain or maintain dominancy in the value system, for example Unilever recently had a legal dispute with Delhaize in Belgium (Distrifood, 2009). In the Netherlands, Sara Lee had a price disagreement with various supermarkets united in the Superunie. As result communication stop was introduced and both parties were not on speaking terms for an extensive period of time.

It seems that retailers increase their efforts to capture a proportion of the available value more than they ever did before. As it seems this particular strategy is quite successful. Especially the increased significance of private labels in the fast moving consumer goods (FMCG) is noticeable; which causes tension in the value system between retailer and manufacturer.

An interesting article of Mirande (2009) reveals that a couple of Dutch general managers expect private labels to have a forty percent market share at 2019 in the Netherlands, which is a considerable growth from the twenty-five percent market share in 2008 (Mirande, 2009). Branded good manufacturers, for instance Unilever, Heinz and Sara Lee, try to prevent this situation. These manufacturers try to hold on to their historic strong position in the value system while the retailers use their private labels to increase market share.

Private label products are often seen as cheap imitations of the leading brands and therefore branded manufacturers often claim that consumers are mislead by the resemblance of the look-alike packaging of private label products (de Jong, 2007). In the Netherlands, 2005, Unilever and Albert Heijn (AH) had a conflict about the high similarity of thirteen products and to make matters worse AH placed these highly corresponding products next to those of Unilever on the supermarket shelves. Eventually, after a complaint, presidents of the Dutch court forbid two of these products. This ruling was seen as a victory for AH. Unilever was not able to prove the accusations of copy-cat behaviour for all of the products. Successfully, AH claimed that their private label line needed a refreshing and modern look and according to its beliefs modern products often have a close resemblance (Volkskrant, 26 Januari 2006).

The harsh economic climate even complicates the situation, a study from Lamey, Deleersnyder, Dekimpe and Steenkamp (2007) indicate that consumers are not only prone to buy private labels in economic harsh situations but consumers keep buying them when the economic circumstances improve, leaving permanent “scars” on the performance level of national premium brands1_.

§1.1 Purpose of the research

This research is intended to explain and answer the question if private labels really play an important role in the Netherlands and how this affects value appropriation for brand manufacturers. It tries to synthesize the existing theories about the undermining effects of private labels for the Dutch market into one theoretical framework.

Main research question:How can manufacturers of premiums goods protect their brands in the Dutch market against private label products in an effort to appropriate most value from their innovations?

To help answer this research questions some sub-questions must be answered:

1. What value appropriation mechanisms are commonly used by manufacturers and proven to be effective in the Netherlands?

2. Which products are highlyvulnerable for replacement byprivate labels? §1.2 Limitations

The focus of this research is on fast moving consumer goods, products sold quickly at relative low costs and at large quantities. This is typically done by FMCG companies such as: Red Bull, Clorox, Colgate-Palmolive, H. J. Heinz, Cadbury's, Sara Lee, Nestlé, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kimberly-Clark, Kraft, Pepsi, Wilkinson and Mars.

The focus will be at the Netherlands and limited to the supermarket level. This is done because it is believed that on this level the private label ‘problems’ are the most significant.. Additionally, the value appropriation vis-à-vis suppliers of raw materials are not explicitly addressed, it is believed that this is a completely different competition and is beyond the scope of this research.

1

§1.3 Outline Chapters

The general outline of this paper is divided into three different parts In the first part, existing theory about the matter at hand will be discussed. This is done by referrals to existing literature added with specific insights generated from fieldwork and other data sources. Furthermore a research framework is presented to give a clear representation of the value system as a whole. In the end a research model will be presented that is used in this conducted research.

The first part of this paper will start to discuss specific issues in the following order. Firstly, in chapter two the meaning and role of value creation and appropriation are explained including the variables of influence, additionally private label development is discussed. Secondly, in chapter three an overview will be given of the different parties that compete in the value system, furthermore different strategic goals of the various parties are discussed and in addition an outline is given about what product categories are vulnerable to private label penetration. In the end details are given about the functioning of the research model.

In the second part the methodology will be explained. Chapter four illustrates which data approach is used and how data is collected by the author. Additionally, the positioning of this research is examined in comparison to other studies in order to determine its relevance.

Chapter two: value, appropriation and industry developments

This chapter discusses different value definitions and various ways of howvalue is created as perceived by consumers. Next, the topics of innovation and appropriation are discussed. In this discussion the work of Teece (1986) plays a leading role. This research will to a great extent shape the conceptual model of this research. Teece argues that different building blocks are of great influence in the way manufacturers can defend their innovations. In addition, recent literature is combined to create a comprehensive overview. Next, the role of private labels is examined and recent developments are discussed. This part will also indicate the strength & weaknesses of private labels. Finally, the role of product categories on value appropriation is examined.

§2.1 What is value creation and appropriation?

The desirability of a company to be in a specific stage of a value system depends for a great deal on the value that is created minus the value captured at that particular stage (Mol, Wijnberg and Carroll, 2005). Value creation can be defined as the added utility to a product, from raw materials to the end-consumer. It is important to remind that this value creation needs to be perceived as highly relevant in the eyes of its final selectors. Many new product innovations fail simply because the relevant selectors determine that the value addition of an innovation is too low(Jacobs, 2007).

Next, value capture and value protection combined are known as the term value appropriation. Value capture can be defined as the difference between revenues and costs earned by a company (Bowman and Ambrosini 2000, Mol, Wijnberg and Carroll 2005). This difference can also be described as profit; profit differentials among firms have been linked to the ownership of particular resources (Mol, Wijnberg and Carroll 2005). Value capture typically is done vertically (fig. 1).

Company owned resources are often exploited to protect against the risk of competitive imitation and this defence is known as value protection. For instance, huge amounts of resources are spend on the protection of brand names and package designs in order to be distinctive as an A-brand manufacturer.

Hermans et al. (2001) make another interesting classification between the two aspects of appropriability. They distinguished the offensive and defensive features of appropriation. According to this research offensive mechanisms increase the ability to realize profits (capture value). Innovations are seen as the primary method to be offensive (Hermans et al., 2001). Defensive measures are taken to prevent other actors profiting in way that the returns of the original innovator or competitor will decrease (Value protection). For example, patents are used to protect innovations.

Literature about value appropriation has brought forward various formal and informal mechanisms in order to increase the effect of value appropriation efforts. It is believed that in particular a number of these mechanisms could be effectively used against imitation.

Formal mechanisms are based on lawregulations and include patents, trademarks and labour legislation. For instance, patents could be of utmost importance when research indicates that newly discovered ingredients prove to have very positive effect on the human body. In the FMCG industry patents are frequently used to protect these discovered ingredients in order to provide products with unique beneficial characteristics

On the other hand there are informal mechanisms such as sales promotions, strategic alliances or continuous product development. Informal mechanisms of appropriation are ‘informal’ in the sense that it is not enforceable by resort to institutional guarantors such as courts of law or recognized arbitrators (Gemser & Wijnberg, 2001).

Manufacturer A Manufacturer B Retailer A Retailer B V a l u e C a p t u r e

Fig.1 Currently, brand manufacturers also need value protection in their vertical relationships. Retailers more and more behave as opposing competitors instead of being “solely” a distribution channel.

Value protection Increased

Levin et al. (1987) conducted research on the effectiveness of formal and informal mechanisms to prevent imitation of innovations. Figure two below provides an overview of the results in regard to the effectiveness of certain mechanisms found by Levin. A score of one indicates that the mechanism is not effective at all whereas a score of seven hints that the mechanism is very effective.

For instance, newproduct innovations are best protected by lead times and sales and service efforts according the research of Levin et al. (1987). Formal mechanisms do not always work in practise as they do in theory, in most industries patents can be circumvented. This means that actors are able to “invent around” the patent. In addition, it is often very difficult to proof infringement, see the conflict stated in the introduction between Unilever and Albert Heijn.

§2.2 Creation of value

It is critical to assess how value is perceived on the demand side by consumers. As stated before if selectors determine that the added value of specific innovations or products does not suffice their needs it will probably fail (Jacobs, 2007). To complicate matters further consumers are often not aware of the specific value that is added by different actors. This reinforces the beliefs that fully comprehend and stimulate the preferences of selectors are of vital importance.

Retailers, hard discounters and A-brand manufacturers have different competing mechanisms to sells their products to consumers. For example, Zeithaml (1985) identified four ways of how consumers define value, depending on their mental model namely (1) value is low price, (2) value is whatever I want in a product, (3) value is the quality I get for the price I pay and (4) value is what I get for what I give. These different definitions are used by the competing actors to convince

Method of

appropriation

Formal / Informal Mean score Range of given

answers (min./max.) Patent to prevent duplication Formal 4.33 3.0 – 5.0 Patents to secure royalty income Formal 3.75 2.7 – 4.8 Secrecy Informal 3.57 2.7 – 4.1

Lead times Informal 5.41 4.8 – 6.0

Moving quickly down the learning curve

Informal 5.09 4.4 – 5.8

Sales or service efforts Informal 5.59 5.0 – 6.1

consumers to buy their products. Value proposition is really important for a product and its producer or retailer. It is crucial to consider what value a specific product has for a given price for a given consumer because without a convincing proposition the eventual benefits are unclear and consumers will ignore the product. For instance, the value proposition from Lidl is evident: low priced good with an acceptable quality. This is well-known by consumers and this creates clarity and is critical for consumer to evaluate the products. These propositions are vital to the expectations of consumers and in turn development of loyalty.

§2.3 Value of the brand

Besides the creation of value, brand loyalty plays an important role for A-brands. In this paper the definition of brand loyalty by Oliver (1999) is used namely: “a deeply held commitment to rebuy or repatronize a preferred product or service consistently in the future, thereby causing repetitive same-brand or same same-brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behaviour”.

To create satisfied and loyal consumers, it is necessary for a product or service to live up to the expectation of a consumer. Sufficed consumer needs could create satisfaction and in turn leads to loyalty according to research of Chen et al. (2009).

In the eyes of consumers branded goods offer superior value in various different ways. Brands are trusted because of their consistency or the consumption of A-brands have more favourable effects (Chaudhuri and Holbrook, 2001). This reflects the continuum between the two advantages of A-brands. Consistency emphasizes the utilitarian aspect of A-brand products. Consumers use these specific products because of the plain and clear advantages which faultlessly serve the purpose of use.

A-brands with hedonistic features are often consumed because it enhances status or improves image. Specific products such as beer, deodorant and ice cream are subject to emotional preferences by consumers because the usage reflects a certain standing or pleasure. In the case of Lipton ice tea for example consumers are attracted by the image of the product. Lipton stands for sportive and energizing and consumers simply want to identify themselves with this. It is believed that for these two aspects, consistency and favourable effects, consumers are willing to pay a premium price.

pre-purchase stage and the post-purchase stage. In the pre-purchase stage manufacturers and retailers use a wide array of marketing tools to attract target customers.It is understood that the frequency of printed advertisement for example is of positive influence in this first stage. It is argued that this will increase behavioural loyalty among consumers. Consecutively, Chen et al. (2009) relate an enlarged behaviour loyalty to an increased amount of consumer expenditures as can be seen in figure four (Chen et al., 2009). Printed advertisement could keep consumers informed about innovative products that are introduced to the market for a special price. Advertisement can also be used to make consumers aware of interesting discount promotions.

After the first stage there will be the post-purchase stage. In this particular stage consumers compare the actual quality with the expected quality and decisions about future consumptions are made.

The second important part of brand loyalty is attitudinal loyalty. This type of loyalty reflects the favourable attitude or commitment from consumers towards a specific product or service over a period of time (Chaudhuri and Holbrook, 2001). It is assumed that the favourable attitude of consumers influences the behavioural component of brand loyalty in a positive way (Chen et al., 2009). Therefore it is very important for to stimulate both dimensions in order to reap the benefits from brand loyalty entirely.

§2.4 Brand loyalty on product level

The ultimate goal for A-brands is to create and maintain a long term relationship with consumers to bear the consequences of increased market competition. Aaker (1991) andDick and Basu (1994) reveal that brand loyalty creates several advantages such as reduced marketing costs because consumers are familiar with the products. Therefore brand activation strategies can be scaled down in costs and frequency. Therefore, brand profitability has been linked to brand loyalty in several pieces of literature (Chen et al., 2009). These reduced costs and increased profits are further stimulated by otheradvantages of superior brand loyalty such as positive word of mouth and the resistance against strategies from competitors (Dick and Basu, 1994).

A more important aspect of strong brands could be the improved trade leverages towards the retailer. In the dispute with Delhaize, in which three hundred products were delisted by force, Unilever persuaded consumers to purchase the products in other supermarkets by advertisement in the Belgium media. It proved that the products of Unilever had a loyal group of consumers that were willing to change supermarket which crippled Delhaize severely.

§2.5 Brand loyalty on store level

AC Nielsen (2008) assessed the factors of influence to Dutch consumers in their decision making process selecting a supermarket (fig.3). It shows that the importance of having high quality brands is still present in the Netherlands; however, various other aspects seem more critical. Especially, the factor ‘everything in one shop’ belongs to the most important variables. This may explain the negative effects of a boycott of A-brands by retailers. Consumers seem to attach great value to a large variety of products in service supermarkets.

This is acknowledged by a study of Noordhoff (2004). He stressed that preferences of consumers are influenced by a wide range of contingency factors (Noordhoff, 2004). These factors are in line with the study of AC Nielsen (2008) and include store’s product assortment and consumers personal characteristics such as economic shopping orientation (Noordhoff,2004).

LESS IMPORTANT SUBLIMINAL

SAY IT, DON T MEAN IT MEAN IT, SAY IT

S

M

,

L

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§2.6 Integral overview brand loyalty

This research uses the literature and data to develop a comprehensive model that will offer insights about how attitudinal loyalty and behavioural loyalty can be stimulated by retailer and manufacturer. For example, retailers can create loyalty by taking different measures.A combination of studies from Chen et al. (2009) and Gomez, Arranz and Cillan (2006) showthat different variables do influence behavioural loyalty and attitudinal loyalty in supermarkets. These variables can be seen in (Fig.4).

Manufacturers on the other hand try to build brand trust and affect in order to create the two types of loyalties. The definition of brand trust can be described as the consumer’s confidence that the brand will meet consumption expectations (Chaudhuri & Holbrook, 2001). In addition, brand affect is defined as a brand’s potential to bring out a positive emotional reaction in the consumer as a result of its usage (Chaudhuri & Holbrook, 2001).

3 3 3 1 4 2 Attitudinal Loyalty Behavioural loyalty Printed Advertisement Loyalty programs

Consumers perception of the actual service Consumer spendings Prices, Variety & Location Appearance of the physical facilities and the convenience

offered to customers

Market Share Relative Price

Brand Trust Brand Affect Retailer Manufacturer Branding Innovation Increasing trust and affect can be done by a brand trough: Availability Uniqueness Quality etc. Therefore branding and innovation could be examples as means to do this.

Fig.4 Literature antecedents and consequences of attitudinal & behavioural loyalty (combined known as brand loyalty).

11111 1 2 3 1 1 1. Chen et al. (2009) 2. Gomez et al. (2006

3. Chaudhuri & Holbrook (2001)

4. Noordhoff et al. (2004)

In sum, research distinguishes several effects of increased brand loyalty. In general, these studies bring forward three positive effects namely: increased market share, improved consumer spending and the willingness to pay high relative prices. While the first two seems obvious the third needs some explaining. Relative price reflects the willingness of consumers to sacrifice more of their resources to obtain a specific product or service. This is what supermarkets such as AH are attempting; they increase convenience to create attitudinal loyalty. By doing this company is able to ask higher prices for their products. In addition, manufacturers innovate in order to be distinctive and unique. In turn this will create brand trust and affect which influences attitudinal loyalty. In the end, manufacturers are also able to receive higher prices because of the increased loyalty.

This paper will continue with an explanation of appropriation of innovations. In the work of Teece (1986) an overview is given about the specific circumstances of influence on the ability to appropriate.

§2.7 How to appropriate value from innovations

Innovations can be of great importance to companies but it is often very difficult for innovators to capture value from their innovations. Sara Lee and Philips reaped huge benefits from a joint effort to come up with a radical new way of making coffee, a brand called SenSeo. However, apart from informal and formal mechanisms specific conditions need to be in place to effectively appropriate the profits. In the case of SenSeo a lot more profit could have been generated if the implemented defence mechanism, a patent, held up. It can be expected that when the protection of patents will improve from a legal perspective, increased tightness of the apppropriability regime, this will be beneficial to all A-brands.

As Teece (1986) discloses in his paper three building blocks are of influence on the ability to capture profits generated byan innovation namely:

• The strictness of an appropriability regime • The dominant design paradigm

• Complementary assets

§2.7.1 Appropriability regime

An appropiability regime has been defined as the extent to which innovations can be protected from imitators (Laukkanen and Puumalainen, 2007). Different dimensions influence the strictness of such a regime. According to Teece (1986) this strictness consists out of two dimensions which are the efficacy of legal mechanisms of protection, such as patents, and the nature of technology (Teece, 1986).

Legal mechanisms of protection

Brand manufacturers have to deal with the prevention of imitation and this seems to be the major reason for companies to use legal mechanisms of protection to defend their new product innovations.

For instance, intellectual property rights help achieve competitive advantage in diverse ways according Reitzig (2004). For instance they can provide a temporary technological lead, protect brand names, motivate investors and inventors and help to become the superior industrystandard.

Still, there is some degree in effectiveness of the various intellectual property rights. For example, easy product differentiability is a factor which affects the efficacy of patent protection (Levin, 1987). Fear exists that competitors will closely resemble the innovation by tweaking certain features just slightly. When a company has to apply for filing of an innovation, information about the product or process has to be released which makes this innovation vulnerable to imitation. As a result this could reduce the competitive advantages of the innovator, reversing the trendsetting effects of huge R&D investments (Halliday, 2008).

Nature of technology

In addition, the nature of technology does influence the appropriability regime namely the degree to which knowledge is tacit or codified also effects the ease of imitation. In case of the former, the knowledge is subconsciously understood and applied, difficult to articulate, developed from direct experience and action, and usually shared through highly interactive conversation, story-telling and shared experience and often on organizational level it is embedded in routines and capabilities (Norman ,2002). The latter can be more precisely and formally articulated. Therefore, although more abstract, it can be more easily codified, documented, transferred or shared (Norman, 2002).

taste, no single document can replace this precious tacit knowledge (personal communications) and this is of great value.

Tacitness has similar effects on the value of innovations. For instance, it is believed that innovations based on a high level of tacitness are harder to imitate (Norman, 2002). Consequently, these innovations may be used to build a competitive advantage over competitors and are regarded to be very valuable. Therefore, tacitness in itself can be a mechanism of defence against imitation (Laukkanen and Puumalainen, 2007).

However, tacit knowledge may move from one company to another through the transfer of key personal with critical abilities. This is were formal protection could be interwoven, labour legislation could play an important role as an appropriability mechanism in these cases (Laukkanen and Puumalainen, 2007). For this key personal non competition contracts and clauses could be drawn up or long-term contracts that contain some form of sanctioning if they resign. These measures may help keeping skilled personal within the firm (Laukkanen and Puumalainen, 2007). Recently added dimensions

In addition to Teece (1986), Laukkanen and Puumalainen (2007) recently added three other dimensions that are of influence on a general appropriability regime and which are closely linked to the two discussed above. These dimensions are:

• human resource management (HRM) • practical/technical means

• lead times

In general the (im)mobility of human resources is an important aspect of protecting appropriability. Despite the fact that casual ambiguity and social complexity are present in most companies, skilled key personal eventually will become visible to ‘head-hunter’ of competitors (Laukkanen and Puumalainen, 2007).

Examples of practical and technical means to defend innovations against imitations are passwords, copy prevention, secrecy and access restrictions (Laukkanen and Puumalainen, 2007). Maintaining secrecy is also mentioned by Gemser (2007) and especially newproduct development are being guarded by this form of defence in order to create uniqueness in the market. Laukkanen and Puumalainen (2007) state that keeping information secret from competitors may be essential if the company wishes to use additional complementary appropriability mechanisms.

Finally lead times are of influence on an appropriability regime Laukkanen and Puumalainen, 2007). Lead times consist out of continuous development. Imitation is troubled when the technical frontier of a specific market is constantly pushed ahead. This gives imitators little time to keep up with the most recent trends (Laukkanen and Puumalainen, 2007). Being first to the market or being ahead of rivals could be beneficial to innovators according several pieces of scientific research (For instance Levin, 1987). Lead times are often among the most effective appropriability mechanism (Laukkanen and Puumalainen, 2007). The forgone influencing factors can be captured in a very useful overviewin which both researches from Laukkanen and Puumalainen (2007) and Teece (1986) are combined. Institutional protection • IPR’s • Labour legislation HRM: • Immobility • Monitoring data transfers Practical / technical means • Secrecy • Passwords Lead times • Continuous development • Market entry Nature of knowledge • Tacit • Codified Strictness of an appropriability regime Availability and strength of protection

§2.7.2 Dominant design paradigm

The second building block is the dominant design paradigm and refers to the situation in which designs, which are markedly different, compete to be the industry standard in the so called preparadigmatic design phase. According to Teece (1986) at a point in time one of these designs begins to emerge as the most promising. In this view, A-brands can be considered as the most promising of their product category and therefore the dominant design because mostly innovators set the standard.

In case of the typical Dutch Douwe Egberts brand it is safe to assume that the red brick shaped coffee packages are the standard in the Dutch supermarket industry. The strength of having a dominant design is very visible in supermarkets. Dominant designs are brought into play for the so-called “sign-posting” (Interview Meijer, nine October, 2009). Distinctive design and colours are used to let consumer instantly know where specific product categories are. These products the role model of a category. A single superior product could be the driver behind the growth of whole category (Interview Meijer, five October, 2009). Besides the colour red from Douwe Egberts other examples of dominant design products in the Netherlands can be identified. Recently, “Soep in Zak” from Unox vies to be the dominant design in its category. This innovation recently is regarded to be one of the most important (design) innovations in the FMCG industry. It is assumed that this success will increase the chances to actually become the dominant design.

§2.7.3 Complementary assets

The last building block is complementary assets, Teece (1986) states that the know-how of an innovation needs to be utilized in conjunction with other capabilities and assets, the success of innovations are not purely based on the idea itself. For example, in the FMCG industry it is assumed that new products cannot be commercialised autonomous. It needs complementary capabilities such as distribution and branding in order to be successful. In essence, the ownership of complementary assets help establish who wins and who loses from innovation (Teece, 1986).

Three different sorts of assets are distinguished byTeece (1986) namely:

• Generic assets; these assets are not specifically used for the innovation in question and could be deployed for other innovations. These are universal and easy replaceable by others assets. • Specialized assets have a one-sided dependence on innovations. It is more complicated to

replace these assets in comparison to generic assets.

• Co-specialized assets are characterized by the mutual dependence on the innovation and assets and are hard to replace by others, only fewget hold of these capabilities or assets. The above categorization of assets is found in the FMCG industry in a variety of ways. Teece (1986) cited Norman (1986) in his paper: “the point of distribution is where the profit and the power are in the marketplace today”. Interestingly enough after twenty-three years this quote is highly applicable to the situation at hand in the FMCG industry, it seems to be the case that retailers have enlarged their power in the value system and do heavily control the total amount of available shelf space in supermarkets (InterviewCoenjaarts, 2009)

Manufacturers simply are not able to get in contact with all consumers willingly to buy their products; they need retail distribution channels for that. If branded innovations or just existing premium brands fail to reach the supermarket shelf it will probably fail to become a success (de Jong, 2007). Therefore it could be assumed that innovations and produced premium goods have a one-sided dependence and in the case of manufacturers a distribution channel is a specialized asset.

specific taste is one of the pillars of success and consumers are aware of this and generally “know” what Coca-Cola stands for.

Contract & integration strategies

Teece (1986) provides insights into what a company has to do if specific critical assets are not owned but are critical to capture profits from an innovation. Teece (1986) mentions contract and integration strategies in order to secure access to complementary assets. Teece explains that under changing circumstances different strategies must be chosen to secure revenues namely: contract versus integration. Contracts are beneficial because the upfront capital expenditures are not needed to build or buy the assets in question. This is likely the optimal strategy when the appropriability regime is tight and when these assets are available in large quantities (there is a choice of sources). Distribution in the FMCG industry may be one of these complementary assets primarily used through contractual modes. Retailers and A-brand manufacturers often have annual contracts that specify discount percentages, the amount of shelf space taken and number of in-store promotions. Every year several rounds of negotiation are held to establish these annual contracts (Interview Coenjaarts, ten September, 2009).

Integration stands for possessing the critical complementary assets. For instance, if an innovation is easy to imitate and the complementary assets are only available in fixed supplies it may be of crucial importance to get hold of these assets (Teece, 1986).

The appropriateness of the above strategies does not only depend on assets alone, also the relative positions of actors are important. Imitators can often outperform innovators if they are better positioned with respect to critical complementary assets (Teece, 1986). There is no point moving to build a specialized asset if an imitator can do it faster and cheaper (Teece, 1986). For example, retailers are superior in controlling the distribution. Manufacturers are unable to build shops or organize logistic operations more efficiently than retailers (Interview Meijer, five October, 2009). However in some countries, Sara Lee in the Netherlands for example, shops are opened by manufacturers. Although this is merely seen as a opportunities to create little brand paradises instead of real distribution competition (Mirande, 2009).

As said before, it seems that the balance of power is shifting between retailers and manufacturers and it may be time to change strategies if manufacturers still want to keep profiting from the innovations.

adopted by for example retailers who have been working hard on professionalizing private labels. The next paragraphs will describe some of these issues.

§2.8 Private labels and its success

In the past, manufacturers had a comparatively simple relationship with retailers. Manufacturers produced goods and retailers sold them. However, the last couple of decennia this relationship has changed and transformed retailers into fierce challengers of manufacturers, as retailers too began to produce products themselves. These products are known as private labels. The definition of a private label can be described as a brand that is legally owned by a retailer in which the manufacturer does not invest into developing and maintaining consumer preference (de Jong, 2007).

The definition used by de Jong (2007) became invalid since retailers more and more try to stimulate consumer preferences. Still it represents the fact that private labels are legally owned by retailers. This reflects the reasons that retailers place such a high importance to the development of these products. Private labels often have very high profits margins making them critical to the success of a retailer (de Jong, 2007).

Private labels grew quickly but not only because of the continuous improvement of product quality and the increased professionalism of retailers. Research proved that even absolute unmanageable issues like economic conditions are of influence to the increasing consumption of private labels (Lamey, Deleersnyder, Dekimpe and Steenkamp, 2007). The next paragraphs will give a raison d'être why private labels became so popular.

§2.8.1 Economic situation and private labels shares.

Regarding the fact that an average economic crisis will last a couple of years it is crucial to consider what effects these conditions may have on the FMCG industry. The general economic condition of a country is often a strong predictor of the consumer willingness to purchase goods. Due to the essential nature of fast moving consumer goods it is not expected that consumers will postpone these purchases till the economic situation is more favourable which happens with consumer durables.

The fact that price is less important in case of the purchase of branded goods (top 50) shows that first class A-brands compete on different characteristics than price alone. Consumers reveal that quality is a major unique selling point during the purchase of “important” A-brands.

From premium brand manufacturers point of view a troublesome foresight emerges which relates to economic downtimes namely consumers still keep buying private label when dire economic times are disappeared, leaving permanent “scars” on the performance of national brands (Lamey, Deleersnyder, DeKimpe and Steenkamp, 2007). These conclude that, against long held opinions, a share of the consumers will permanently buy private labels instead of national brands even when the economic downtime is over.

Several reasons can be brought up for the consumer’s unwillingness to switch back to premium brands. First of all, consumers often find themselves on a poor income level and simply do not want to spend much of their income on ‘expensive’ premium brands. This is in line with the earlier mentioned price awareness (Gale, 1996). For example, a recent test in the Netherlands

Content or package shape The brand or private label

Quality Price Taste or Smell Healthy Easy to use Newproduct None

All products Top 50 Brands

illustrates that private labels are priced 35% belownational brands and this demonstrates a significant saving (Consumentengids, Juni 2009). Secondly, an increased income is used to decrease debts or to restore lost savings (Carroll, 1992). Lastly, consumers become sceptical and lose trust about the future so expectations about an improved income level are conservative (Katona, 1975).

The manufacturers and retailers on the supply side also make clear decisions that may reinforce the popularity of private labels in certain phases of the business cycle. Manufacturers for example tend to decrease the brand support in tough economic circumstances, a fundamental error according to Lamey, Deleersnyder, DeKimpe and Steenkamp (2007). These authors argue that, especially in recessions, pro-active marketing entailing new-product introductions combined with heavy advertisement could be a successful strategy for national brands to mitigate the negative effects from private labels.

In addition, often manufacturers are reluctant to decrease prices in downtimes of the business cycle. These strategic decisions are completely opposite to retailer decisions; retailers often emphasize their private labels when economic conditions deteriorate and accentuate the low-prices (Lamey, Deleersnyder, DeKimpe and Steenkamp, 2007).

§2.8.2 Recent developments of private labels

As one can imagine, economic harsh times are not the only cause that could be of influence to the growth of private label market share. Several other reasons can be pinpointed such as retailers have grown from small local stores into colossal international retailers with a lot of power and private labels in almost every product category (Elsevier, 2009). Consequently, more resources are dedicated for the development of private labels (Luijten & Reijnders, 2009). Furthermore, private labels had a cheap, simple and lowpriced image and this gradually changed because currently retailers have begun to regard their own products as ‘real brands’ and have improved quality over time (Steenkamp and DeKimpe, 1997; de Jong 2007). Consumers tend to be loyal towards private labels of a specific supermarket chain. Thus, retailers use private labels to stimulate consumer loyalty enhancement (Steenkamp, Pauwels and Ailawadi, 2008).

Additionally, Steenkamp, Koll, and Geijskens (2004) reveal that manufacturers might ‘help’ private labels bymaking weak judgements and decisions regarding brand support and innovations. Manufacturers often cling to specific strategies such as:

As result, the perceived distance between A-brands and private label can become too little considering quality, value and trust which further deteriorate the position of A-brands (Steenkamp, Koll, and Geijskens, 2004).

§2.8.3 Private label penetration in different product categories

Scientific and market research reveals that certain product categories are more prone to be invaded by private labels than others. Steenkamp and DeKimpe (2002) argue that the penetration of private label depends upon the extent to which existing customers are loyal to specific brands and their categories. Steenkamp and DeKimpe (2002) refer to this type of loyalty as ‘intrinsic loyalty’.

Conducted researches link brand loyalty constantly to profitability and the foremost reason seems to be the fact that it is less expensive to retain old consumers instead of attracting new ones. Loyal consumers tend to be less price sensitive, and a steady loyal consumer base provides firms with valuable time to respond to competitive actions (Steenkamp and DeKimpe, 1997).

Furthermore, the vulnerability depends on the extent to which the brand is successful in attracting consumers who are willing to switch brands, the so called ‘conquesting’ power (Steenkamp and De Kimpe, 2002). Brands and markets transform over time, consumers enter/leave markets and new products are innovated and some products disappear due to competition or just became obsolete. Not all consumers are loyal to specific brands and therefore a large consumer base is not enough, in the end it will erode (Steenkamp and DeKimpe, 2002). Therefore, new consumers are needed. ‘Conquesting’ power refers to the ability to attract not-loyal consumers and sooner or later convert them in loyal customers after satisfying brand experiences.

Interesting is the classification that is made by Steenkamp and DeKimpe (2002) that combines the mentioned brand power components ‘conquesting power’ and ‘intrinsic loyalty’ into a strategic brand power matrix (Fig.7).

Based on the mentioned components private label categories can be divided in quadrants named giants, misers, fighters and artisans.In the research of Steenkamp and DeKimpe (2002) these quadrants are explained as the following:

• Giants are those products that possess both ‘conquesting power’ and ‘intrinsic loyalty’ which is clearly the supreme situation for private label products.

• Misers are the complete opposite of giants and are regarded as products that do not highly possess either of the components of brand power.

• Fighters have a lowintrinsic value and ‘fight’ for consumers on each shopping occasion. • Artisans are comparatively motionless and their main strength is the loyalty of a specific

Steenkamp and DeKimpe (2002) categorized AH private label products in these quadrants and they found that “fighters” were often products with a low involvement. Moreover, in combination with giants these two quadrants were often perceived to have a higher quality than the other two quadrants. Misers were found a lot in categories in which large multinational dominated. According to Steenkamp and DeKimpe (2002) it is due to intensive advertisement within these categories are not penetrated that much byprivate labels.

§2.9 Hedonic and utilitarian product categories

AC Nielsen (2005) conducted researches with comparable conclusions. It evaluated the power of private label wherein it is stated that some product categories are more suitable than others in case of private label usage. A fairly simple classification found in the FMCG sector is the difference between hedonic and utillitarian products. Low involvement products can be defined as products that do not have a great impact on the consumer and its lifestyle. These products, known as utilitarian or functional products, are often bought without any preferences. Hence, it is believed that these product categories have great difficulties in resisting private label penetration. Consumers seem to be indifferent to product quality in these product categories. Private labels even gain fifty-four percent market shares in categories where such quality indifferences are present (Deleersnyder et al., 2002).

Fig.7 Strategic brand power matrix made by Steenkamp and Dekimpe (2002). In this matrix AH private label products can be divided into four categories.

However, globally forty percent of the consumers agreed that there are products for which quality really mattered. Consumers tend to be happy with the quality of private label when it comes to dog food, kitchen towels, sugar and flour (AC Nielsen, 2005) on the other hand A-brand products in categories such as shampoo, baby food and pasta sauce are highly favoured by consumers.

A number of these products are considered to have hedonic characteristics. Hedonic products are partly consumed to satisfy emotional desires and are less subject to cognitive considerations. Products in hedonic categories often increase status or improve image and are therefore less subject to private label penetration.

§2.9.1 Barriers for private label product penetration

According to the authors Steenkamp and DeKimpe (2002), retailers could face the problem that specific private label products have a low quality image and this will create a barrier to penetrate particular product categories. This is reinforced by a study form Deleersnyder et al. (2002). This study found that categories holding high quality A-brands, in the perception of consumers, lowered the total private label share in that category. Potato chips seems to be such a category where advertising intensity, innovation or quality difference prevent high private label market shares. According Steenkamp and deKimpe (1997) a couple of factors will block the increase of the private labels within a product category namely:

1. The quality difference with reference to a national brand is large.

2. The level of technical sophistication is high, only fewplayers have the necessary expertise. 3. The level of innovativeness in the industry is high.

4. The price competition between national brands in the category is high. 5. There is a great emphasis on advertising versus sales promotions.

Chapter Three: The value system & strategic goals

In this paper the relationship between manufacturer and retailer is the focus of attention, this is where the most friction seems to be in terms of value creation and appropriation. Fierce competition emerged instead of usual collaboration between these two actors.

The research framework (fig.8) consists out of three ‘layers’ where value is created and appropriated. First, there is the manufacturing process where the actual products are produced. For example, innovative products greatly enhance the value creation of manufacturers. Secondly, when products are finalized there is the option to add value by, for instance, mentioning that the innovative product has unique product features (branding). Finally, when products are at the

Hard discounters Supermarkets

Private label manufacturers

Dual trackers A-brand manufacturers

Private Label

Fancy Premium

Me-too Generic

Premium Brands

Consumers

Fig.8 Research framework that provides an overviewof the FMCG industry representing the flowof products. Private label

different distribution channels it is possible to generate value by promotions. To clarify this last example a bit more, research conducted by Steenkamp & Gielens (2003) indicate that different factors influence the adoption decision of consumers. Mass advertising for example builds awareness and recognition and for some consumers promotion is a sign of quality (Steenkamp & Gielens (2003), so in this viewvalue is added to the products.

Fundamentally, each stage creates and appropriates value. Premium brand manufacturers sometimes produce goods for retailers and become simultaneously the manufacturers of premium brands and private labels, frequently called dual tracking. Moers (2007) reveals that the company Bolletje produces private label products and this seems awkward however they use the value earned to invest in innovations. It can be imagined that a strategic alliance between Bolletje and these retailers makes it possible for Bolletje to have an influence in the value appropriation process. On the contrary, premium brand manufacturers are very careful with information about the dual track strategy. Consumer knowledge about a brand manufacturer that produces private labels could impede the quality perception of the A-brands from this firm.

Innovation in combination with branding seems very important for A-brands. Large retailers such as Albert Heijn greatly reduce the ability for manufacturers to capture the value they created through imitation. Retailers creation of ‘exact copies’ troubles the ability of value appropriation for manufacturers. Innovations therefore need to be very distinct and difficult to copy. Additionally, it seems that heavy branding these innovations sorts some effects as well. The next paragraphs will discuss the research framework in more detail.

§3.1 Manufacturers

In these following paragraphs the side of manufacturers will be reviewed. First, premium brand manufacturers are discussed followed by the activities of pure private label producers. In addition, purchase alliances are explained. Finally, a specific business model is reviewed namely dual trackers. These organisations simultaneously produce both private labels and A-brand products. §3.1.1 Premium brand manufacturers

personality through the support of product development, promotional activity and an appropriate pricing and distribution strategy”.

Branded manufacturers approach two target group; retailers and consumers (de Jong, 2007). Retailers are persuaded to include products in the assortment and to support these products at store level. Consumers are encouraged to purchase the products, this is often done by promotions, advertisement and branding in general. By building consumer preference, a stable consumer base is created coupled to a steady demand for A-brand products. This progression in the end will justify listing of A-brand products in the range of supermarket products.

§3.1.2 Private label manufacturers

Private labels manufacturers differ to a great extent from A-brand producers. The first difference is the focus on one single target group namely retailers (de Jong, 2007). It is for this reason that building and maintaining a good relationship with retailers is one of the highest priorities. Since private label producers are often unknown to the consumer there is no point of building a communication link towards consumers. It is even expected that powerful retailers will not even let these private label manufacturers build a relationship with consumers, after all this will undermine their own private label strategies (de Jong, 2007). Once the private label products arrive in the supermarket retailers do manage the complete marketing mix independently. Private label manufacturers play an advising role at the most.

§3.1.3 Private label purchase alliances

§3.1.4 Dual trackers: Premium label that also produce private labels

In the FMCG industry the companies that produce premium labels on the one side and private labels on the other side are known to be dual trackers. Whether to produce private labels next to the premium brand product lines is a question numerous premium brand manufacturers ask themselves. Especially faced with a decrease in market share combining the production of private label and premium brands could be an effective counter reaction. For example, an interview at Bolletje by Paul Moers (2007) indicates that the profits made by this company due to the production of private label are spend on innovation and branding the premium products. Next, de Jong (2007) also stresses that producing private labels could realise a more efficient utilisation of the production capacity or scale advantages in procurement and logistics.

However, efficiency is not the only motive to produce private labels, According to Sloot and Bouman (1994) several other factors are of influence.

For example, the production of private label positively influences the consumer satisfaction. Consumers who are fond of private labels often have a other price/quality perception and by producing private labels the manufacturer still keeps in touch with these consumers. On the other hand, as stated by de Jong (2007), private label manufacturers often do not reveal the range of products produced. On the one hand they are obstructed by retailers, these actors do not want private labels to become a strong player that could endanger the position of the retailer’s own private label brand. On the other hand, when private labels are made on the same location as A-brands it could damage the credibility of the brand manufacturer. It is difficult to convince consumers that products from Heineken made in the same factory as private label are still superior in terms of quality.

In relation to the forgone, Sloot and Bouman (1994) found that positioning could negatively influence ‘dual trackers’. If the produced private label products have a high resemblance with premium brands it may hamper the quality perception of the latter.

Improved relationships’ according Sloot and Bouman (1994) is also one of the reasons why dual trackers start to produce private labels. Power positions are considered to be of significant influence and could create “hostage situations”. If retailers have superior positions it is possible that the production of private labels by A-brand manufacturers is enforced in order to maintain shelf positions ( Sloot and Bouman, 1994).

manufacturers could fill valuable shelf space with private labels in order to block out products from competitors. In this viewdual tracking could also be positive for competitive reasons.

§3.2 Retailers

Retailers can be roughly divided in service supermarkets and hard discounters. In the first subparagraph an overview is given about different supermarket propositions, this shows that the various supermarket actors compete on different variables. Later on, hard-discounters are discussed. §3.2.1 Service oriented supermarket chains

Literature displays that supermarket chains around the world clearly try to position themselves differently in the market in comparison to others. There are mostly three variables that are distinguishing namely: price, service and private label share. AC Nielsen (2008) uses a classification system to cluster supermarkets, the figure beneath does represent such a classification and gives an indication in which perspective different supermarkets can be seen:

Retail Clusters Price Service Private label share

Examples Service quality High - medium High High – Very

High

Albert Heijn, Tesco, Casino

Value for money Medium – Low Low Medium C1000

Service discount Medium – Low Medium – High

Medium Jumbo

Brands discount Low Low Low Dirk, Boni

Hard discount Very low Very low Very High Aldi, Lidl

Local stores Varies Varies Varies Spar

Others Varies Varies Varies

Control over the market is the last factor that could influence the decision for A-brand manufacturers to produce private labels. For example, different product categories are penetrated by the variety of produced private labels. Therefore, a greater market is covered and this enlarged span could improve monitoring opportunities and threats. Moreover, identification multiple consumer preferences could provide valuable insights that could result in an increased market intimacy (Sloot and Bouman, 1994).

In recent years, supermarket retailers began a transformation. The increased focus on for example private labels urged supermarkets to develop other competences than solely buying and distribution competences. Commercial knowledge often poorly existed within these organisation and so experienced marketers were attracted, often from A-brand manufacturers (de Jong, 2007). This was the first step to a necessary increase of professionalism. Next steps were category management to optimise profitability and innovative new private labels. This is done by carefully monitoring the different product categories in order to spot trends and opportunities.

Branding also professionalized to a great extent according to de Jong (2007). Those retailers that are growing fastest and have highest market shares, in for example private label, tend to be the ones that focus on branding as a business philosophy. Therefore, major retailers such as Albert Heijn (the Netherlands), Casino (France) and Sainsbury’s (United Kingdom) have become much more than a chain of stores. Aldi 2003 Aldi 2008 Lidl 2003 Lidl 2008 Dirk 2003 Dirk 2008 Jumbo 2003 Jumbo 2008 C1000 2003 C1000 2008 Super de Boer 2003 Super de

Boer 2008 Albert Heijn 2003 Albert Heijn 2008 Plus 2003 Plus 2008

§3.2.2 Hard discounter

Grocery hard discounting is a form of retailing that has expanded rapidly since the 1970s (Wortmann, 2004). Hard discounters are different in a sense that they have completely other business models than ‘normal’ supermarket chains. Traditionally, discounter have extremely lean business models; relatively low product quality, a limited product range ‘no frills’ store design and almost no service (Wortmann, 2004). Even sales personnel are mostly not or at best poorly skilled. The concept is based on lowoperating costs and high volume of sales.

Therefore, annual buying negotiations with suppliers are often highly conflictive because of the focus on price and numerous terms and conditions such as amount and quality of shelf space. Relationships with suppliers as a result are generally described as non-cooperative (Wortmann, 2004). However, these discounters have achieved a significant size in most European markets and for competitive retailers and FMCG manufacturers this is most troublesome. Hard discounters are even mentioned to be the engine of private label growth (AC Nielsen, 2005). Private labels are often of high quality in comparison to the price paid which attracts a loyal group of consumers.

§3.3 Strategic Goals of retailers & brand manufacturers

Whereas brand manufacturers often try to appropriate as much from an innovation as possible, it is the other way around for retailers whom often try to lift on the success of these innovations as much a possible. Different actors have different strategies, in the next sub paragraphs an overviewis given of used strategies for each actor.

§3.3.1 Strategies pursued by service oriented retailers

The different supermarket retail clusters discussed above are not similar and thus have different value propositions. Supermarkets have to address delicate issues in regard to private label strategies.

proposition it is important to consider all relevant get and give components. For example, which fruit juice is more economical. Which lemonade will give me the most litres of drinks? Often private labels are considered to be closely linked to the forgone value propositions.

These perceptions of quality, price and perceptions can be of real importance to retailers. Because, Ailawada and Keller (2004) argue that if store brands can change consumer quality perceptions (through direct consumption experience) they will gain more customers and it will be difficult for manufacturers to win them back. Especially for value retailers, such as C1000, it is still very important to convince consumers that the quality of private labels is excellent. Since, Steenkamp and Dekimpe (1997) showthat the variation between the perception of different supermarket private labels is very noticeable. Value chains often suffer from an unfavourable gap between actual and perceived private label quality. For example, in the Netherlands private label products from Albert Heijn are preferred above the equivalent products of C1000 (Steenkamp and Dekimpe, 1997). Therefore, consumers experiences to create a positive image of private labels are critical. This is reinforced by conducted research from Hultman et al. (2008). In this research it is stated, by interviewed managers from different FMCG companies, that the total control retailers have over their activities is a strong advantage. Retailers use this control to create a favourable image by for example using integral brand advertisement levels. Also the control over available space within a supermarket is seen as one of the key assets because product placement is seen as a critical factor for private labels and A-brands (Hultman et al., 2008).

Furthermore, retailers differentiate themselves from its competitors by adding private labels to their range of products in an attempt to create an unique offering of products. According to Ailawadi, Pauwels & Steenkamp (2008) private labels are favoured by retailers because of (1) the high profit margins, (2) the position within the chains improves because of negotiation leverage in relation to national brands and (3) private labels improve consumer store loyalty.

Consumers in the Netherlands are attracted by the supermarket’s range of products and this forms one of the important criteria to visit specific supermarket formula’s (AC Nielsen). Private labels are found across a wide variety of product groups and enables retailers to rationalise its range of products and consequently B and C brands disappeared from the shelves. According to de Jong (2007) in the last couple year a trend emerged and by means of a niche marketing strategy, very specific targets groups can be approached with private labels. New private labels concepts were introduced sub-segmented by quality and package design surrounding the manufacturers brands.

The greatest advantage of these products is good quality against a relatively lowprice. Next, there are premium private labels that add great value and are often more expensive compared to premium brands. This last private label category often has exceptional features such as distinctive ingredients. For instance, microwavable Kip Korma dish with yellowpilau rice or peanut soup “from Java”.

In addition, it is interesting to behold that retailers introduce special discount lines in

In addition, it is interesting to behold that retailers introduce special discount lines in reaction to the success of hard discounters to avoid losing consumers at the bottom end of its consumer base. It can be regarded as a significant brand strategy. The focus here is on keeping customers in stores, so that they can be traded up again to its premium brands once the economic situation improves.

Yet, Ailawadi, Pauwels & Steenkamp (2008) point out that the amount of private label increase has an optimal level. Consumers confronted with too many private label products feel constrained in their selection. In both Great Britain and the United States supermarkets such as Sainsbury’s and Sears faced a decline in store traffic, revenue, and profitability because of the high level of private labels, the shares of private labels arose above the sixty percent (Ailawadi, Pauwels & Steenkamp, 2008). Therefore, in some countries emphasis on private labels are scaled back in order to avoid the risk of losing consumers. Statistical figures from GFK (2008) reflect these issues and reveal that in countries such as Great Britain the share of private labels declines.

Fig.12 Development of private labels in Europe Source: GFK §3.3.2 Strategies pursued by hard discounters

As Zeithaml (1985) identified four definitions of value, one of them is perfectly applicable for hard discounters namely value is low price. This emphasizes the give component of value, and what has to be given up, monetarily, is most salient to this perception of value. Consumers invest both money and other resources like time and energy to obtain services and products ( sacrifice both monetary prices and non-monetary prices). For consumers monetary price can be real important and this includes spending a lot of time and effort to get the lowest price possible by for example finding discount coupons.

Hard discounters depends mostly on their ability to be profitable, the net margin is estimated to be around four percent which is one percent higher than the average supermarket-chain (Vuyk, 2004). Research conducted by GFK (2008) seems to confirm the cost effectiveness of hard discounters and shows that the general costs of operating are around thirteen percent in case of a hard discounter. Which is significant lower than the twenty-nine percent for an average service supermarket (Fig.13). As a result, the success of leading hard discounters such as Lidl and Aldi seems to depend on low operating costs and simplicity, a business model that cannot be easily copied or competed against by service retailers (Wortmann, 2004). This strategy results in locations that are remarkably cheaper per square meter than their competitors, low personnel costs and a minimum of overhead costs on the head-office.

Therefore, traditionally the products from hard discount chains differentiate themselves by their powerful focus on competitive prices in comparison to the more traditional retailers and A-brands. Private label products from hard-discounters are commonly named fancy A-brands.

% of the market share

0 5 10 15 20 25 30 35

Belgium Netherlands Germany Great-Britain

Moreover, the reliance on their own brands and the offering of a narrow product range are also very specific for hard discounters (Deleersnyder et al, 2006). Deleersnyder et al. (2006) point out that because of the heavy reliance on lowprices discounters are typically not engaged in newproduct activity and as a result score poorly on innovativeness.

However, recently hard discounters modify their brand positions to change the perception of having a flat product line and poor product quality. In the United Kingdom for example Aldi launched a product line ‘specially selected’ to counter upper market private labels. Also, fair trade and certified food products are introduced by Aldi as well as Lidl. This strategy emphasizes an increased quality and diversity and the ethical nature of products.

Often discount operators rely on strategies that are focussed on increasing total category demand, whereas premium brand manufacturers mostly assess their performance by the acquired market share over competing brands (Deleersnyder et al., 2006). While hard discounters often do not encourage cooperation with A-brand manufacturers it could be beneficial to increase total category demand according to Deleersnyder et al. (2006). A-brands are major traffic builders and this implies that more consumers will visit the hard discounter when A-brands are included in the assortment. It is even recommended by Deleersnyder (2006) to include innovative brands according to the conducted research. Innovative brands not only stand out more in a discounter’s low innovative assortment, they can also enhance the attractiveness of the entire category.

Costs divided across types of supermarkets

5 10 2 5 2 4 2 5 2 5 0 5 10 15 20 25 30 35

Hard discount Service Supermarkt a s p e rc e n ta g e o f to ta l c o st s Logistics Rent Overhead Marketing Personnel