The key to success – building and retaining customer loyalty

“Private label has existed in Europe since the beginning of the 19th century. But it wasn’t until the 1970s when Sainsbury penetrated the European market that private label became an important part of grocery retailing. As in Australia, private label began as a cheap alternative. However, it now has products ranging from basic to exclusive.”

This quote from the Australian and New Zealand publication Global Food and Wine Magazine, 10 July 2009, sums up the discussion so far. Private labels have been around for a long time but the surge has been in the last few decades across Europe and the US and Australia is catching up. The private label is a multifaceted beast, which must be respected and understood, and accepted as part of modern day business, because it is here to stay. Private labels have a virtually 100 percent penetration in European and other developed economies. “In short, in essence nearly everybody now buys private labels” (Lincoln and Thomassen, 2008, p.14)

While the success of the diverse range of companies benefiting from the use of private labels can be attributed to an extensive list of business tactics and innovations, what has become clear to me during this research for the University of Adelaide’s Wine2030 network is that the focus on what the customer wants is key, not just to attract new customers but to retain their custom – in other words, building and retaining customer loyalty.

Customer loyalty – the key to growth and longevity
The overview of the four highly successful multinational retailers profiled in the previous article in this series – Tesco, Aldi, Walmart and IKEA – shows how they all have one thing in common and central to their success to date and to their ongoing expansion and appeal – customer loyalty. I have summarised eight areas which have contributed to this success.

(1)    A consistent image:
What is common to all of the featured companies is that they have put out a constant and clear message of what their company is about and what the customers can expect from them. The slogans that the companies use are an important part of the message to consumers.

Examples:
–        Aldi – “Top quality at incredibly low prices”
–        Tesco – “Every little helps”
–        Walmart – “Save Money Live Better”
–        IKEA – “Love your home”

(2)    Cost cutting and passing savings onto consumers:
All four of the companies I have profiled emphasise that they cut costs where possible and pass the savings onto their customers. Private labels are seen as part of the package for each company. Some of these companies also emphasise making substantial efficiency savings through selling a limited number of product lines, with some cutting out a number of costs altogether, and/or making efficiency savings in the whole product sourcing and transportation chain, and so on. The companies have different strategies of cutting costs, according to their individual approach, for example, Aldi concentrates on a limited range of products while Tesco and Walmart have a much larger range and are aiming for a different kind of marketing.

Examples:
–        All have private labels – Aldi sells around 95 percent private labels, IKEA is a private label retailer. Through ever more complex portfolios, Tesco and Walmart have been rapidly expanding their private label ranges to account for a significant and growing share of their sales.
–        Cutting out a number of costs altogether, such as IKEA with the customers assembling their own furniture.
–        Having limited product lines helps to cut costs for Aldi, with only around 700 SKUs.
–        Aldi’s costs (staff, logistics, overheads, marketing, etc.) from procurement of its products to retail are half that of traditional supermarkets.

(3)    Appeal to all socioeconomic groups:
The cost cutting and assurance of a quality product is something that appeals not only to people on a lower income but to people across all income levels and backgrounds. A customer wants a good deal whatever their personal circumstances. A 2002 survey in Germany by market researchers Forsa found that a large proportion of workers across the four main employment categories shopped at Aldi: blue-collar 95 percent, white-collar 88 percent, public servants 84 percent and self-employed 80 percent.

This wide-ranging appeal goes hand in hand with the trend towards complex portfolios, which has in turn been enabled through the increasing acceptance of private labels (as discussed below). Alongside providing the retail outlet for a wide range of manufactured brands, Tesco and Walmart have successfully introduced own label products across all price levels to compete with the budget end of the branded market right through to selling premium own brands.  They are combining price-based, category-based and benefit-based market segmentation to produce successful and complex portfolios which appeal to all types of consumer.

Example:
Tesco has three main ranges (a good, better, best range architecture): Tesco Finest premium range of products; budget Value range; and an intermediate Tesco range. Tesco has an ever-widening range of products, not only groceries but finance products, cell phone services, petrol stations, electronics, and more (see Article 3), and it reaches its customers through a variety of retail formats in all types of location – city centre, rural centres, out of town centres, online sales, and so on. This complexity means that the whole spectrum of consumers are catered for and Tesco’s market reach is maximised.

 

(4)    Acceptance of private labels:
No longer regarded only as cheap, generic alternatives, stores’ own brands are winning recognition in their own right. The acceptance of private labels is almost ubiquitous. Buying private labels is seen as ‘smart shopping’ and attracts across all socioeconomic groups. Lower income people may need to buy private labels, but better-off people also choose to because they like good value too. Manufactured brand loyalty is falling, not because there is any evidence that people are less loyal overall, but because they are becoming loyal to store brands.

A recent survey of own brand groceries in Australia by consumer group Choice was reported in The Australian on 13 September 2010 in an article entitled ‘Home brands lose their stigma’. In the study Choice compared the private labels of Coles SmartBuy and Woolworths Home Brand with manufacturers labels and “found that the cheaper store brands often match leading labels for taste and nutritional value”. Furthermore, there were savings to be had: “The survey found that a basket of 30 premium brand items cost $125.48, almost double the $63.51 for the same basket of store brand products.” Private labels are said to account for 23 percent of Australia’s $70 billion grocery market, based on research by independent researcher IbisWorld, which expects this share to reach 30 percent in five years.

Examples:
–        In the UK private labels account for 41 percent of grocery sales, and the US has a similar penetration.
–        Across Europe, the shares are 36 percent in Belgium, 31 percent in Germany, and France and Spain are not far behind.
–        In the UK, depending on who you ask, anywhere from one third to one half of the volume of wine sold is own label. In Australia it is 10 percent.

(5)    Product endorsements and awards for private labels:
The quality of private label products has been proven in the product endorsements and awards won by these products against competitors. As noted in the previous point about acceptance, in Australia, the consumer group Choice has made favourable comparisons in terms of quality and price. This is independent endorsement for the private labels. There have also been studies showing how consumers benefit from lower costs. A 2005 Washington Post story reported that “Wal-Mart’s discounting on food alone boosts the welfare of American shoppers by at least $50 billion per year.” A study in 2005 at Massachusetts Institute of Technology measured the effect on consumer welfare and found that the poorest segment of the population benefits the most from the existence of discount retailers.

These companies also promote the quality and low cost of their own products. For example, on its UK website, www.uk.aldi.com, Aldi provides a list of product endorsements. Aldi also guarantees every product in its store which is a clear demonstration of confidence in its own products. Asda (Walmart’s UK chain) provides endorsements in its wine section from wine critics.

Some examples of awards for private label wines are provided below.

Examples:
–        Waitrose 2002 Vintage Champagne made by P&C Heidseick of Champagne wins a gold medal at 2010 International Wine and Spirit Competition (IWSC), London.
–        Asda Cava Rosado NV wins silver (best in class) at 2010 IWSC for its rosé, made by Jaume Serra of Spain.
–        Tesco Premier Cru Champagne, costing less than £15 a bottle is named the best non-vintage champagne at the 2005 Christmas wine Oscars in UK, beating French Grand Marques such as Lanson and Taittinger.
–        Waitrose Reserve Shiraz 2008 made by St Hallett Wines is named Great Value Champion Red at the UK’s 2010 International Wine Challenge (IWC).
–        Marks & Spencer Puligny Montrachet 1er Cru Les Chalumeaux 2007, Jean Pascal & Fils, is named Champion White Wine at 2010 IWC.

(6)    Earning respect:
In addition to product endorsements and awards, and promotion through independent research such as the Choice and Forsa reports in point (5), consumer respect can be earned through promotion of the image and actions of the company itself.

Examples:
–        Aldi earned consumer loyalty when the euro was introduced in 2003. It was widely believed that many retailers had used the currency switch to put prices up. Aldi displayed clear listings of prices before and after for several months and did not increase prices in Euros versus the national currency.
–        Aldi Australia says on its website that it is “the first grocery retailer to achieve the prestigious ecoBiz accreditation”.
–        IKEA emphasises its involvement in environmental and efficiency initiatives and its contribution to social programmes – the IKEA Social Initiative which it says on the website has helped 100 million children.
–        Walmart promotes its research and programmes to be environmentally friendly cut costs. In 2009, it announced plans to develop a worldwide sustainable product index.

(7)    Innovation:
Part of the building of consumer loyalty has been through ongoing innovation in all areas of business. This is manifested in a number of ways, such as entering into joint ventures with other companies; increasing product and service ranges; cutting costs further through various measures; adapting advertising, promotions and the messages sent out to consumers (which includes changing company slogans); and in developing private label lines. These areas of innovation are covered in Article 3. Some examples are cited here.

Examples:
–        The whole combined approach of IKEA is unique – selling products that customers must assemble themselves and passing on cost savings; sending them round a one-way system in the store; providing childminding services and cheap breakfast.
–        Aldi has employed a number of original cost-cutting measures (limited number of SKUs; minimal staff; selling direct from pallets; coin-operated trolleys; no shopping bags; only accepting cash, etc.) and passes the costs onto consumers. This is the main feature for which Aldi is recognised.
–        Tesco was one of the first supermarkets to sell its goods online.
–        Tesco’s Clubcard (discussed below) was hugely innovative and instrumental in Tesco becoming the largest grocery retailer in the UK.
–        Walmart created its own electricity company, Texas Retail Energy, to power its own stores at wholesale power prices, saving millions of dollars.
–        Joint ventures have enabled companies to sell products with the kudos of the partner, such as Tesco linking with Samsung in South Korea and Waitrose selling St Hallett shiraz from the Barossa.
–        The ongoing increasing range of private labels, and the growing complexity (and success) of private label portfolios reflects ongoing innovation by these companies.

(8)    Loyalty schemes:
Many of the successful retail companies have loyalty cards. Tesco was a trailblazer in this area, introducing its Clubcard in 1995 and making such effective use of the information it could access that it was instrumental in propelling Tesco to becoming the largest grocery retailer in the UK, passing Sainsbury.

IKEA has launched a loyalty card that is free of charge and can be used for discounts on selected products. In Australia, loyalty cards are increasingly common. Woolworths has its Everyday Rewards loyalty card; Coles has not yet introduced one, but is part of the Fly Buys scheme. Looking through my wallet I realised I had accumulated a range of cards from pharmacies – Priceline and Better Health Pharmacies; Miller’s clothing chain; Just Jeans clothing; Athlete’s Foot; and some local hotels and cafés.

Example:
Loyalty cards are a simple tool that have a number of benefits which all lead to the success of the company. Looking at Tesco as the example, Tesco employed the services of the company dunnhumby to establish its Clubcard. Customers collect points on purchases at the stores and through using the Tesco credit card and other Tesco services, and can redeem them for products in-store or for a range of Clubcard deals or for Airmiles.

Through using their Clubcards, transaction data are gathered for the 13 million people (and 50 percent of UK households) on the Tesco Clubcard database. The value in this information is that it reveals what people actually do, in terms of their purchasing decisions and habits – this has an advantage over focus groups in understanding the behaviour of customers, which can only assess what people say they would do. As it states on the dunnhumby website:

“When we know what, how and why they buy, we can work out who our clients’ best customers are and where their biggest opportunities lie.”

The ongoing analysis of the data enables companies to better target promotions and customer communications; design product ranges and new products; set prices and plan store space. They can quickly identify trends as they emerge and target marketing accordingly. They can also measure consumption patterns before, during and after marketing campaigns. This has many advantages, including saving on marketing costs as the campaigns can be more targeted and designed to reach those most likely to respond. As Edwina Dunn states:

“The more targeted the offer, the fewer gimmicks you need to sell it. It will sell itself because it is what people want.”

To conclude:
This shortlist of strategies that assist in building and maintaining customer loyalty is not exhaustive but it does add another layer to our understanding of how these large companies have been so remarkably successful and the role that private labels has at the centre. This is all key to the discussion I would like to initiate about the rise of private labels in Australia.

Having set the scene in the first four articles, with regard to the rise and the appeal of private labels, and examples around the world of private label market penetration, the next article in this series takes us back to the Australian market and focuses in on trends affecting the Australian wine market in particular.  Some questions that occurred to me are:

  • Should some members of the wine industry be worried, concerned or critical of private labels becoming a factor in the wine market, or should they be responding to a new challenge as the  marketplace embraces new trends?
  • Should consumers be loyal to wineries – does buying private labels indicate a loss of loyalty – or a change in the nature of loyalty?
  • Will these trends reduce or increase choice for consumers?
  • Has the recent rise in private labels been a positive step for the Australian wine industry in finding another way to market part of the oversupply?
  • Should retailers be concerned about their behaviour on the wine industry or is it just business at work? Retailers do not owe wineries a living after all. Is this not just a case of the free market working, and the matching of supply and demand?

I would very much like to hear from interested parties, whatever your viewpoint.

In case anyone is in any doubt of the power of the private label, I am closing this article with some interesting statistics:

  • Asda is THE biggest clothing retailer in Britain.
  • Each week, about 100 million customers, nearly one-third of the US population, visit Walmart’s US stores.
  • IKEA is the world’s largest furniture retailer.
  • More copies of the IKEA catalogue are printed each year than the Bible.
  • Tesco plc is the largest grocery retailer in the UK and the third largest retailer in the world measured by revenues and the second largest measured by profits.
  • Aldi was the third most respected corporate brand in Germany behind electronics giant Siemens and automotive manufacturer BMW in 2004 (reference: Aldi: The Next Wal-Mart? 26 April 2004, Business Week, pp.20-23)
  • In Australia, Coles, Woolworths and Metcash (which owns the IGA retail chain) between them share 62 percent of the packaged (as opposed to fresh) grocery sector and 71 percent of the packaged liquor market.  They are currently targeting the fresh food market where their share is lower at around 49 percent.

Other articles in this series:

Article 1: Private labels – what’s the problem? Is there a problem? What about wine?

Article 2: Private labels – what are they?

Article 3: The evolution of selected private label companies and complex portfolios

Article 5: Private labels – back to Australia and back to wine

References:

Keith Lincoln and Lars Thomassen, ‘Private label: turning the retail brand threat into your biggest opportunity’, Kogan Page, 2008.

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About tigchandler

English-born, lived several years in Wellington, NZ, then in Adelaide, South Australia, and recently moved back to New Zealand. With an economics background, I have worked in researching wine consumption patterns, marketing, economics and social media at the University of Adelaide. I also worked a vintage and in wineries in McLaren Vale so have seen both the research/analytical side of the industry and the practical/hands-on side. I have retail experience and many ongoing industry links all around Australia and overseas. This blog reflects my ongoing passion for everything related to the wine industry.
This entry was posted in New World wine, NZ wine, Private labels, UK wine, Wine news and tagged , , , , , , , , , , , , , , , . Bookmark the permalink.

5 Responses to The key to success – building and retaining customer loyalty

  1. Pingback: The evolution of selected private label companies and complex portfolios | Tigchandler's Blog

  2. Pingback: Private labels – back to Australia and back to wine | Tigchandler's Blog

  3. Pingback: Private label wine on the rise in Australia – what are the facts? « Wine 2030 – University of Adelaide

  4. Larissa says:

    The most important thing here is… merchants live up to their services despite the discount. Deals are temptations and not all live to their expectations.

  5. Pingback: Private labels – back to Australia and back to wine | Wine news from Tigchandler

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