Retail Brand Disruptors

Jan-Benedict E.M. Steenkamp

Massey Distinguished Professor of Marketing at UNC;
Executive Director AiMark;
Honorary Professor EIASM (Brussels);
Fellow at Fudan University (Shanghai);
Committee of Global Experts of China Association of Quality (Beijing);
Chairman International Advisory Board, Institute for Nation(al) Branding
(Shanghai)

© Prof. J-B.E.M. Steenkamp

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Growing bifurcation in retailing
Growth,
profitability

Low Medium High

Price, value-added by store

(personal service and advice, shopping experience, exclusivity, brand assortment)

© Prof. J-B.E.M. Steenkamp

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Bifurcation also in brands –
Evidence from CPG in Germany Change in
share
2002/2017
% points

Premium brands 9.8 9.9 10.1 11.2 +1.4%

16.6
Market leader 18.9 19.3 18.9 +2.3%

-12.1%
44.6 37.0 34.7 33.3
Mid-range brands

34.0 35.9 37.4 +6.9%

Store brands 30.5

2002 2007 2012 2017

Source: GfK (2009, 2018) © Prof. J-B.E.M. Steenkamp

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What are store brands?

Store brands (a.k.a. private labels or retail brands)

are brands that:

1 are owned by
a retailer 2 who is primarily if not
exclusively responsible
for its marketing, and
3 are sold largely, if not
exclusively through
that retailer.

© Prof. J-B.E.M. Steenkamp

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The shift to value: The rise of store brands in Europe

Source: Europanel (2018) © Prof. J-B.E.M. Steenkamp

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The rise of store brands in the U.S.

30%

25%

22.4%
20%

15% 16.2%

10%
20 20 20 20 20 20 20 20 20 20 20 20
07 08 09 10 11 12 13 14 15 16 17 18

Source: Europanel (2018) © Prof. J-B.E.M. Steenkamp

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Average real household income 1965-2017: Future?

Source: Advisor © Prof. J-B.E.M. Steenkamp

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Perceptions of store brands by generation

Source: IRI (2017)

© Prof. J-B.E.M. Steenkamp

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SB architecture

Premium
SB

Standard
PRICE

SB

Value 2.0
Economy
PL
PL

QUALITY

© Prof. J-B.E.M. Steenkamp

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Beyond the three-tiers
Specialty Super
SB premium
SB
Premium
SB

Standard
PRICE

SB

Value 2.0
Economy SB
PL

QUALITY

© Prof. J-B.E.M. Steenkamp

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Improved store brand architecture
Kroger’s store brand architecture in cooking and baking ads categories

© Prof. J-B.E.M. Steenkamp

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Store brands advertise their quality

© Prof. J-B.E.M. Steenkamp

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CPG market in U.S. under pressure:
Change in grocery revenues in last decade

Food price inflation Volume Downtrading Value

10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Last 12
Months

Source: Europanel (2019) © Prof. J-B.E.M. Steenkamp

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NBs generate organic sales growth via price
increases that exceed those of SBs
15%
Total Price %
Change
10% PL Price %
7.7% Change

5%
4.8% 1.4%
0% 0.5%

-5%

-10%
200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8

Source: Europanel (2018) © Prof. J-B.E.M. Steenkamp

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But what about quality?
The ‘normal’ situation

National
brands
Quality

Store
brands

Price

Source: Consumer Reports © Prof. J-B.E.M. Steenkamp

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Reality-
sunscreen spray
Trader Joe’s
100

95 Banana Boat

90 CVS

85
Walmart Neutrogena
Quality

80 Panama Jack
Hawaiian Tropic
75 Target Caribbean Breeze
BullFrog
70 Rite Aid Aveeno
Walgreens
65 Coppertone
60
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00

Price (cost per ounce)

Source: Consumer Reports © Prof. J-B.E.M. Steenkamp

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Reality –
color laundry detergent

90 Tide

80 Persil

Costco Sam’s Club

70
All OxiClean
Target
Quality

Purex
60 Gain Cheer
Arm & Hammer
Seventh
50 Generation

40

Trader Joe’s
30
$0.00 $0.05 $0.10 $0.15 $0.20 $0.25

Price

Source: Consumer Reports © Prof. J-B.E.M. Steenkamp

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What is a hard discounter?
• Small stores, 8,000 – 15,000 sq. ft.
• Limited assortment – typically less than
2,500 SKUs
• Low staffing levels, austere store
interior,
• Overwhelming emphasis on store
brand products (80-90% of total
assortment)
• Store brands priced up to 50% below
brands and 20-30% below standard
store brands of conventional grocery
retailers
• In the U.S., there are four major
players, Aldi, Trader Joe’s, Save-a-Lot,
and most recently, Lidl

© Prof. J-B.E.M. Steenkamp

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The global top-10 in grocery retailing
Company Home Grocery CAGR Dominant # Revenues
country revenues 2012-2017 format countries from
2017 ($bn) overseas
Hypermarket/
Walmart US 314.4 1.6% 28 27%
Superstore
Kroger US 100.1 2.2% Supermarket 1 -

Schwarz Germany 97.6 6.4% Discount store 29 63%

Hypermarket/
Carrefour France 96.2 2.3% 33 59%
Superstore
Aldi Germany 91.8 7.2% Discount store 20 69%

Seven & I Japan 90.7 - Convenience store 19 38%

Costco US 76.5 4.9% Warehouse Club 12 28%

Ahold
Netherlands 70.6 - Supermarket 11 79%
Delhaize
Hypermarket/
Tesco UK 60.5 -2.8% 8 24%
Superstore
Rewe Germany 56.8 2.4% Supermarket 11 28%

Note: Grocery = edible grocery, health and beauty products, and household and pet care

© Prof. J-B.E.M. Steenkamp

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Global presence of Aldi and Lidl in 2018

© Prof. J-B.E.M. Steenkamp

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Aldi in in Australia

16

14

12
Aldi Share (%)

10

Aldi

© Prof. J-B.E.M. Steenkamp

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Impact on conventional retailers:
Woolworths
16 8

Operating Margin of Woolworths (%)

14 7

12 6
Aldi Share (%)

10 5

8 4

6 3

4 2

2 1

0 0

Aldi Woolworths

© Prof. J-B.E.M. Steenkamp

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Rise of hard discounters in the U.K.
14

12

10
7.6
7.0
8
% Share

5.4
6

3.5
4
2.0 2.5
1.6 5.3 5.6
1.4
2 3.8
2.4 2.9
1.8 2.1 2.2

0
2005 2007 2009 2011 2013 2015 2017 2018

Lidl Aldi

© Prof. J-B.E.M. Steenkamp

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Impact on conventional retailers:
Tesco
8%

6%

4%
Operating Income

2%

0%
2002 2007 2012 2017
-2%

-4%

-6%

-8%

© Prof. J-B.E.M. Steenkamp

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Aldi in USA – (Aldi + TJ’s)

© Prof. J-B.E.M. Steenkamp

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Aldi expansion in U.S.

© Prof. J-B.E.M. Steenkamp

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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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© Prof. J-B.E.M. Steenkamp
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Store economics: Mainstream retailer vs. hard
discounter

Mainstream Discounter
Discounter
retailer advantage
Gross margin 30.9% 19.1% -11.8%
Operating costs -25.6% -11.2%
Store contribution 5.3% 7.9% 2.6%
Overhead -1.7% -0.9%
EBITDA 3.6% 7.0% 3.4%

© Prof. J-B.E.M. Steenkamp

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Planned/underway moves
• $3.5 billion expansion plan; # stores set to increase
from 1600 (2017) to 2500 (2022)
• $1.5 billion store refurbishment program
• Assortment innovation: 20% SKUs new y-on-y
• 40% increase in fresh assortment
• National rollout of online shopping with Instacart

• Learning and adapting

• Acquisition of NY grocer
• Accelerating store expansion

© Prof. J-B.E.M. Steenkamp

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Do Americans
like the stores?

http://www.bestn
ewproductaward
s.biz/usa/winner
s/;

© Prof. J-B.E.M. Steenkamp

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Hard discounters lead in Net Promotor Score
across majority of shopper journey types

Source: Bain (2019) © Prof. J-B.E.M. Steenkamp

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Amazon in
grocery
retailing

© Prof. J-B.E.M. Steenkamp

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Amazon’s store brand architecture (grocery and
non-grocery; 137 brands and counting)

Source: UBS (2017) © Prof. J-B.E.M. Steenkamp

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Amazon’s store brand ambitions

Source: Wall Street Journal (1/26/2019) © Prof. J-B.E.M. Steenkamp

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Current pincer movement in U.S. grocery

Prime, Big Data, e-

commerce expertise,
deep pockets,
“condoned” long-term
view

Low margins, high fixed costs,

low customer satisfaction, low
e-commerce expertise, Low cost, hyper-
quarterly earnings regime efficiency, low
prices, deep
pockets, long-
term view, high
margins

© Prof. J-B.E.M. Steenkamp

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Strategic response options versus hard
discounters

High
(Assortment, Quality, Service, Convenience)
Added-Value Image

Fight Coordinated
back Strategic
Responses

Defensive
Strategies
(reduce price
and/or value)
Low

Low High
Price Image
(Price level, Promotions)

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Fighting back against Lidl – Reduce prices
Price reduction on store brand assortment in response to entry
of Lidl in Virginia and the Carolinas in 2017

Source: Gielens (2018) © Prof. J-B.E.M. Steenkamp

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Introduce/push
economy private label

© Prof. J-B.E.M. Steenkamp

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Strategic response options versus hard
discounters

High
(Assortment, Quality, Service, Convenience)
Added-Value Image

Fight Coordinated
back Strategic
Responses

Defensive
Strategies
(reduce price
and/or value) Downgrading
Low

Low High
Price Image
(Price level, Promotions)

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Downgrading – Tesco sets up its own hard
discounter, Jack’s

© Prof. J-B.E.M. Steenkamp

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Strategic response options versus hard
discounters • Adding extra services
• Assortment improvement
• Upgrading quality

High
(Assortment, Quality, Service, Convenience)
Value Offensive
improvement Strategies
(Improve
added-value)
Added-Value Image

Fight Coordinated
back Strategic
Responses

Defensive
Strategies
(reduce price
and/or value) Downgrading
Low

Low High
Price Image
(Price level, Promotions)

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Kroger’s performance on added-value leaves to be desired

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Kroger’s performance on added-value leaves to be desired

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Adding online channel

• https://www.kroger.com/;

© Prof. J-B.E.M. Steenkamp

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Strategic response options versus hard
discounters

High
Offensive
Strategies

(Assortment, Quality, Service, Convenience)

Value (Improve added-
value)
Value
improvement
redefinition
Added-Value Image

Fight Coordinated
back Strategic
Responses

Defensive
Strategies
(reduce price
and/or value) Downgrading
Low

Low High
Price Image
(Price level, Promotions)

Source: Steenkamp with Sloot (2019) © Prof. J-B.E.M. Steenkamp

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Value redefinition at Wegmans

© Prof. J-B.E.M. Steenkamp

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Value redefinition at Wegmans

© Prof. J-B.E.M. Steenkamp

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Value redefinition at Wegmans

© Prof. J-B.E.M. Steenkamp

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Takeaways
• Going for value is a global mega-trend in retailing (grocery, apparel,
home furnishing,…), consumer packaged goods, airlines ….
• SBs are growing strongly in the U.S. – and this is before the next recession hits!
• The main store brand disruptors in the Western world are hard discounters. Amazon
has also ambitions.
• In market after market, incumbent retailers have woefully underestimated Aldi and Lidl.
Will the U.S. be any different?
• Contrary what many believe, U.S. shopper satisfaction with hard discounters is high!
• Conventional retailers witness a pincer attack: Amazon from above, Aldi, Lidl from
below.
• Conventional retailers can plot countermoves! The most common is to fight back by
reducing prices. Only the strongest retailers can afford this. Many U.S. retailers are
financially weak. An alternative is developing economy lines.
• Value improvement strategies are needed to break the pincer. Conventional retailers
score low in value-added (service, quality, assortment, convenience)! In-store service
improvement and online shopping with cost-effective delivery models are necessary.
Nobody has figured out yet how to make online grocery profitable !
• Consumers are the ultimate winners. They save tens of billions of dollars each year.

© Prof. J-B.E.M. Steenkamp

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