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“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.

Introduction
The first two articles in this discussion (links provided at the end of this article or find under Categories: ‘Private labels’ on the right hand side of this page) have set the scene for why Australians in general and the wine industry in particular should be interested in private labels, in terms of what they are, what is already happening overseas and in Australia, and the challenges and opportunities they represent. The University of Adelaide Wine2030 network is inviting comment on this issue through this series of five blogs, of which this is the third. Is this a big issue in Australia? Are you concerned or excited? Please tell us.

Recent trends in the evolution of types of private labels; major shifts in marketing paradigms and the nature of consumer goods markets; and the emergence of complex portfolios and multi-billion dollar companies concentrating at least in part on private labels – these trends have been gaining momentum overseas and are ongoing. Many of the same trends are underway in Australia and also gathering momentum.

This article provides an overview of some of the world’s largest and most successful retailers who have followed a range of private label strategies. The approaches followed by these retailers range from generics and copycats to value innovators and to complex portfolios, approaches described in the previous article.

The rise of the private label – not a new phenomenon
While the rise of private labels is a topical subject around the world, and currently hotly debated in the wine industry in Australia, the notion of private labels is not new. In Europe and America, private labels have been around since the 19^th century. In the UK, St Michael has been the Marks & Spencer retail chain’s own brand for more than a century. Kumar and Steenkamp (2007) consider that the impetus for the recent surge in private labels began in earnest in the 1970s when retailers started to significantly consolidate and to develop national chains. Up until this point, manufacturers had firmly held the balance of bargaining and negotiating power in the market between retailers and manufacturers.

Since the 1970s, the balance of power has most certainly swung in favour of retail giants such as Tesco, Aldi, Costco, Walmart and Carrefour. These companies all have a significant part of their business concentrated in private labels, ranging from 10 percent for Costco to Tesco at 50 percent and Aldi at 95 percent in 2005 (Kumar and Steenkamp p.3). The two fastest growing retailers in the US – Trader Joe’s and Whole Foods – are both focusing on private labels. Speciality retailers selling their own labels have also successfully grown to go global, including IKEA, Toys ‘R’ Us, H&M and Zara.

Private labels are growing strongly around the globe and are expected to continue to do so. The range of products covered does not seem to be limited, enveloping all kinds of groceries, including alcohol; clothing; appliances; furniture; financial services; telecommunications, and so on.

Australia is a back runner in the private label race but is quickly catching the back markers. Private labels accounted for 23 percent of grocery sales in 2010 according to independent researcher IbisWorld, which expects the share to increase to 30 percent in five years. This compares to a figure of 41 percent in the UK and similar rate in the US, 36 percent in Belgium and 31 percent in Germany, with France and Spain not far behind.

Overview of most successful private label companies
I have chosen a shortlist of companies to profile based on the key global trends and on what is important to Australian markets, including wine retailers. Aldi and IKEA are already established in Australia and the supermarket chains Coles and Woolworths are comparable entities to the Tesco, Walmart and Asda of the UK and US. While various chains take different approaches, they are all competing for consumer expenditure and are all employing private label strategies to some extent.

This article gives a synopsis of the birth and development of these companies and summarises the approaches taken and the success achieved in terms of global reach and market power. Most of these companies are still expanding – the possibilities are not yet known.

Aldi – “Top quality at incredibly low prices”

What is Aldi?
Aldi is a German-based multinational selling groceries and other items in ‘no frills’ stores, passing on low prices to customers, and with a strong focus on private labels. It is Europe’s biggest “hard discounter” (Aldi: The Next Wal-Mart? 26 April 2004, Business Week, pp.20-23).

Background
Aldi, short for ‘Albrecht Discount’, was established in Germany by the Albrecht brothers, Karl and Theo. The name Aldi was first used in 1962 after the brothers legally and financially split the company between them in 1960 over a disagreement about whether to sell cigarettes at the till. The Aldi chain remains in two separate groups: Aldi Nord (North) and Aldi Süd (South).

Reach
There are over 8,200 Aldi stores worldwide, of which Aldi Nord accounts for a slightly larger share of 52 percent. Aldi Nord has 35 regional companies with about 2,500 stores in Western, Northern and Eastern Germany. Its international markets are in Belgium, the Netherlands, Luxembourg, France, Spain, Portugal and Denmark.

Aldi Süd has 31 regional companies with about 1,600 stores in Western and Southern Germany. Its international markets are the US, the UK, Australia, Ireland, Austria, Switzerland and Slovenia. Most recently stores were opened in Hungary, Greece and Poland.

The Albrecht brothers also own Trader Joe’s, a US-wide chain with over 250 stores selling around 80 percent private labels and focusing on low prices.

Company philosophy
As discussed in Article 2 Aldi is an example of a value innovator, with marketing slogans such as “Spend a little, live a lot” and “Top quality at incredibly low prices”. It applies a number of key cost-cutting strategies and these savings are passed on to consumers. Some examples of how it keeps costs down are:

• Aldi limits product numbers to around 700 distinct items or stock-keeping units (SKUs), compared to nearer 25,000 for a typical supermarket or over 100,000 for Walmart.
• Aldi mainly sells staple items including food, beverages and toilet paper. Many of these (90-95 percent) are private labels. There are some brands sold, such as HARIBO sweets in Germany, Marmite and Branston Pickle in the UK, and Vegemite and Milo in Australia, but these are exceptions.
• Distribution centres are usually located away from urban areas, near to main roads to facilitate transporting the merchandise to the stores.
• Until recently Aldi accepted only cash. It now takes debit cards in the US, the UK, Australia, Austria, Belgium, Denmark, France, Portugal, Spain, the Netherlands, Switzerland, Ireland and Slovenia. Aldi generally does not accept credit cards, though Aldi Australia accepts MasterCard and Visa for a 1 percent surcharge.
• There is a ‘no frills’ approach – customers take items directly from cardboard boxes in pallets.
• Aldi charges for shopping bags. Customers can bring their own, but often use the empty cardboard boxes to carry their shopping. Once scanned, items are put into the shopping trolley and the customers pack their own shopping away from the tills.
• In Europe, Australia, the US and parts of Canada a coin or token (purchased from Aldi) is required to use a shopping trolley. When the coin or token is inserted, the trolley is unlocked. When it is returned, the customer is refunded their coin. This saves on staffing and on stolen trolleys.
• Staff levels are kept to a minimum. However, due to the efficient checkout system, long queues do not always translate into a longer wait than in other supermarkets.
• Advertising expenditure is kept down, although the apporach differs between countries. In Germany the only advertising is through a weekly newsletter Aldi informiert (“Aldi informs”) that is distributed in stores, by mail, and in local newspapers. Print and television advertisements have been used in the UK, US and Australia, with Aldi’s “Smarter Shopping” slogan.
• Aldi has weekly special offers which are available in limited quantities and for one week only. This is most common with more expensive products such as electronics or appliances. This retains interest in Aldi’s products and allows it to sell other lines as they become available.

Tesco – “Every little helps”

What is Tesco?
Tesco is a UK-based chain, starting out in the grocery line and expanding to incorporate a complex portfolio of all levels of private label products as well as branded products.

Background
The company was founded by Jack Cohen in 1919. The Tesco name first appeared in 1924 when Cohen bought a shipment of tea from T. E. Stockwell and combined the initials with his own name. He opened the first Tesco store in 1929 in Edgware, south-east England, selling food and drink. Tesco has since grown to several thousand stores and sells a wide range of products including clothing, financial services, health, home and car insurance, electronics and internet services.

Reach
Tesco is the third largest retailer in the world measured by revenues after Walmart and Carrefour, and the second largest measured by profits. In 2010 it had around 2,500 stores in the UK and a similar number overseas. Its headquarters are in the UK where it is the leading grocery retalier with about 30 percent of the market, and it operates in 14 countries across Asia, Europe and North America.

Company philosophy
Tesco has entered the market for a range of product types (groceries, alcohol, financial services, and so on) and price levels (from budget generics to luxury items), thereby widening its market base to appeal to all kinds of consumer.

Starting out as aiming to be seen as competitive and good value, Jack Cohen’s business motto was “pile it high and sell it cheap”, The Independent (London), 16 December 2001 and later “You Can’t Do Business Sitting On Your Arse” (YCDBSOYA).

The approach has since become more complex. Tesco has acquired existing chains, entered into joint ventures, and shown market leadership in new areas. For example, in 1987 Tesco acquired the Hillards chain of 40 supermarkets in the North of England, and in 1994 the 57 William Low stores in Scotland.  In 2006 Inverness was branded as ‘Tescotown’, because over 50p in every £1 spent on food was believed to be spent in its three Tesco stores.

Joint venture partners include Esso (part of Exxonmobil) which sells fuel via Tesco, with Esso operating the forecourts. Tesco has also entered into joint ventures with O2 to set up the Tesco Mobile phone network in Ireland, and has a UK division providing internet, mobile and home phone services. Tesco’s international expansion has included joint ventures with the Samsung Group in South Korea and Charoen Pokphand in Thailand.

Tesco can boast market leadership in a range of new areas. For example, as early as 1996, Tesco was the world’s first retailer to provide a full home shopping service. It has also been pioneering in its expansion into many of the additional product lines.

The philosophy of appealing to all kinds of consumers in all parts of the market is reflected in the range of types of stores, and their selected locations. Tesco has six store types to appeal to location and customer preferences:

• Tesco Extra stores are large hypermarkets that stock nearly all of Tesco’s product ranges and are mostly located away from town centres.
• Tesco Superstores are standard large supermarkets, stocking groceries and a small range of non-food goods.
• Tesco Metro stores are sized between Tesco superstores and Tesco Express stores. They are mainly located in city centres, the inner city and on the high streets of towns.
• Tesco Express stores are smaller neighbourhood convenience shops, stocking mainly food with an emphasis on higher-margin alongside everyday essentials. They are located in city centres, small shopping precincts in residential areas, small towns and on Esso petrol station forecourts.
• One Stop include some of the smallest convenience stores.
• Tesco Homeplus is a non-food venture in the UK selling poducts for the home.

The other main aspect of Tesco’s approach that is of key interest to this series of articles is the complexity of its portfolio. As well as selling branded products, Tesco has launched private label ranges in the generic ‘Value’ category; a range of ‘Tesco’ labels that partly started as copycat products; and the luxury/premium ‘Finest’ range. Tesco successfully competes with branded products across all price categories and has earned customer loyalty. Furthermore, as described above, Tesco has entered into markets for a wide range of product categories including food, alcohol, clothing, homeware, phone services, financial services, fuel, software, and even film-making.

As Citigroup analyst David McCarthy is quoted as saying, Tesco has “pulled off a trick that I’m not aware of any other retailer achieving. That is to appeal to all segments of the market”.

Walmart – “Save Money Live Better”

What is Walmart?
Walmart (branded as Wal-Mart until 2008) is a US-based chain of large discount department stores and warehouse stores, with operations across North America, South America, Asia and Europe.

Background
Walmart was founded by Sam Walton in 1962, with its headquarters in Arkansas in the southern US. The first Walmart Supercenter opened in Missouri in 1988. It started selling private labels in 1991 with its Sam’s Choice beverage line and saw immediate success. It branched out internationally in 1994 with the acquisition of the Woolco division of Woolworth Canada, Inc. In 1995 it opened stores in Argentina and Brazil, then moved into the UK in 1999, when it bought the grocery chain Asda. Walmart also owns the Sam’s Club chain in North America.

In some countries Walmart operates under another name, such as Asda or Asda Walmart in the UK, Walmex in Mexico, Seiyu in Japan, and Best Price in India.

Reach
Walmart is the largest grocery retailer in the US. In 2010 it was the world’s largest public corporation by revenue, according to the Forbes Global 2000 for that year. Walmart operates over 4,000 stores world-wide in 15 countries and employs more than 2 million workers, making it the single largest private employer in the US and Mexico, and one of the largest in Canada. There are over 600 Sam’s Clubs in the US and a further 100 in Brazil, China, Mexico and Puerto Rico.

Company philosophy
Walmart’s philosophy is to sell a wide range of products at low prices. Its aim is to give customers the best value for money as reflected in its slogan “Save Money Live Better,” which replaced the “Always Low Prices, Always” slogan in 2007. Its Asda stores have the logo “Saving you money every day”.

Like Tesco, Walmart provides a prime example of operating a complex portfolio. It has a number of retail formats selling a wide range of branded products while also steadily increasing its range of private labels. Walmart retail formats include: small markets (bodegas); food and drug (pharmceutiacls) stores; discount stores; general merchandise stores; cash and carry; supercentres; clothing stores; membership warehouse clubs; and restaurants. The three main store types in the US are:

• Walmart Discount Stores selling general merchandise and groceries. Many also have a pharmacy, a bank branch, fast food outlet, optical centre, garden centre, cell phone store, photo delevopment service, a Tire & Lube Express, and a fuel/gasoline station.
• Walmart Supercenters are hypermarkets with a full-sized supermarket with delicatessen, fresh foods and forzen foods, and also selling everything that the discount store does.
• Walmart Neighborhood Markets are smaller grocery stores selling groceries, pharmaceuticals, and other general merchandise.

The other main Walmart chain in the US is Sam’s Club – a chain of membership warehouse clubs selling a limited range of groceries and general merchandise. Some stores also sell fuel. Customers have the choice of buying an annual membership, buying a one-day membership, or paying a surcharge if they do not wish to pay this fee. These stores have been aimed primarily at small business, being open early exclusively for business members. The chain’s slogan was “We’re in Business for Small Business.” More recently, in an attempt to widen the customer base, the slogan was altered to “Savings Made Simple”.

The Walmart stores sell approximately 40 percent private labels, some of which are co-branded with manufacturers. Walmart has been selling its own store brands since 1991, starting with its Sam’s Choice range of drinks manufactured by Cott Beverages exclusively for Walmart. It also sells under own store labels Great Value and Equate in the US and Canada, and Smart Price in the UK Asda outlets.

Walmart focuses on keeping the most profitable products on its shelves and monitors sales as does any other retailer, but unlike other retailers, it does not charge a fee for providing a slot on its shelves. Instead it provides incentives for store managers to stock the most popular products and drop the least popular.

Joint ventures and ongoing innovation have been key to the company’s continued growth and profitability. Examples of joint ventures include:

• Some supercentres sell gasoline through Murphy Oil Corporation, Sunoco, Inc., or Tesoro Corporation.
• Sam’s Club is entering into a joint venture with Dell and eClinicalWorks.com to provide a software package to physicians in small practices to manage their medical records.
• In 2010, Walmart jointly produced two full-length family movies with Procter & Gamble in which the characters using both Walmart and Procter & Gamble branded products. There are more movies in production.
• Walmart entered into a joint venture with Bharti Enterprises to open retail stores in India.

In terms of innovation and developing its image and reach, key projects have included the following:

• Walmart has employed consultants to find ways to improve energy efficiency in production and distribution. It has a stated goal of being a good steward for the environment. Initiatives have included increasing the fuel efficiency of the truck fleet, eliminating excess packaging from product lines and cutting waste to a minimum.
• Walmart has created its own electric company, Texas Retail Energy, to supply its stores at wholesale power prices and save millions of dollars.
• Since 2006, Walmart has been selling generic drugs for $4 per prescription, compared to the average price of $29 per prescription (and around $100 for manufacturer-branded drugs). It says it is achieving this by saving costs through mass distribution as for other products.
• In order to appeal to the Hispanic consumers in the US, Walmart introduced “Supermercado de Walmart”.

IKEA – “Love your home”

What is IKEA?
IKEA is a Dutch corporation (with Swedish origins) selling ready-to-assemble furniture, appliances and homeware, with over 300 stores in 37 countries across Europe, North America, Asia and Australasia.

Background
IKEA (Ingvar Kamprad Elmtaryd Agunnaryd) was founded in 1943 in Sweden by a 17-year-old boy named Ingvar Kamprad. He named the company after himself, the farm on which he lived (Elmtaryd), and his home village (Agunnaryd in southern Sweden).  

A group of companies now form IKEA and are controlled by the privately-owned Dutch corporation INGKA Holding B.V. which is wholly owned by a tax-exempt, not-for-profit Dutch foundation called Stichting INGKA Foundation. The company is run on a franchise basis, with Dutch company Inter IKEA Systems B.V. owning the IKEA concept and trademark.

IKEA of Sweden designs the products in the IKEA range, and Swedwood, owned by INGKA Holding B.V. is responsible for purchasing and supply, and the manufacturing of the IKEA furniture, most of which is done in Asia and Europe. Swedwood produces wood-based furniture and wooden components in 46 production units in ten countries.

IKEA opened its first store in Sweden in 1958 and expanded to Norway and Denmark in the 1960s. The first stores outside Scandinavia were opened in the 1970s in Europe, Asia and North America and the chain has expanded strongly ever since, with Germany its largest market. Australia got its first store in 1975.

Reach
IKEA is the world’s largest furniture retailer. In 2009 there were 267 IKEA Group stores in 25 countries with 590 million visitors. The top countries in terms of sales were Germany 16 percent, US 11 percent, France 10 percent, UK 7 percent and Italy 7 percent. There are an additional 37 stores in 16 countries owned and run by franchisees outside the IKEA Group.

In 2009, 198 million copies of the annual IKEA catalogue were printed in 56 editions and 27 languages.

Company philosophy
IKEA sells a large range of products, including 9,500 home furnishing products which are “designed to be functional and good looking but at a low price” (Reference: IKEA website). The products are all designed and developed by IKEA of Sweden.

IKEA stores are large warehouse-type buildings usually located outside of city centres to save costs and for traffic access. Most of the furniture products are sold in boxes to be carried home and assembled by the customer. This permits IKEA to minimise costs and use of packaging. Many of the IKEA products are manufactured in developing countries to keep costs down. The largest suppliers are China, Poland and Italy, with Sweden in fourth place.

IKEA is keen to promote an environmentally friendly image. On the IKEA Australia website, the stated responsibility of IKEA is:

“Low prices are the cornerstone of the IKEA vision and our business idea – but not at any price. At the IKEA Group, we believe that taking responsibility for people and the environment is a prerequisite for doing good business.”

IKEA products are each given a single word name, most of which are Swedish and each product range tends to have a theme. For example, beds, wardrobes and hall furniture have Norwegian place names; garden furniture is named after Swedish islands; chairs and desks are given men’s names; and materials and curtains have women’s names.

The main marketing tool for IKEA is its annual catalogue, distributed both in stores and by mail. It has been said that more copies of the IKEA catalogue are printed each year than the Bible.

Innovation and joint ventures continue to help build IKEA’s success and reach. Examples include:

• IKEA has expanded its product line to include flat-pack houses, with a product named BoKlok launched in Sweden in 1996 in a joint venture with Skanska.
• In 2008, IKEA UK launched a virtual mobile phone network called Family Mobile,using the T-mobile network.
• IKEA promotes its ongoing environmental and social projects and initiatives – a way to bolster its image and promote customer loyalty. The website provides a number of examples.

The layout of the stores and offering cheap restaurants and childminding are also innovative and effective strategies for attracting customers:

• Most IKEA stores are very large with few windows with a blue and yellow decor – the colours of the Swedish flag. The layout is such that the customer must follow a one-way system that takes them through every department, although some shortcuts may be available. This is a novel design for a retail outlet.
• Many stores have a play area called Småland, which is the name of the province where Ingvar Kamprad was born. Parents can leave their children at the playground and collect them later and are given free pagers so that the staff can contact them if needed.
• Many IKEA stores have restaurants serving traditional Swedish food such as Swedish meatballs, and they open early to offer cheap breakfast deals. For example, in the Netherlands for €1 the breakfast includes a croissant, bread roll, jam, cheese, an egg and coffee or tea. In Australia $2.95 – $3.50 buys bacon, scrambled eggs, sausage, hash brown and tomato, with a $2 vegetarian option.

So what is there to learn from these four ‘super’ companies?
On first sight it may seem that these companies have little in common, all based in different countries with diverse heritage and background and individual approaches to their business. However, all of these companies have a number of key features in common:

Firstly, all are highly successful multinationals and have become so by adapting to their target market, by constant innovation, and joint ventures where appropriate.

Secondly, they all place great emphasis on cost-cutting and passing on the savings to consumers. This links in with the heavy presence of private/own brand labels, which is the hot topic being debated around Australia as we follow in their footsteps, and brings us back to the theme of this series of articles.

A third and final point for this article is that these companies realise just how vital it is to build consumer belief in the companies. Attracting consumers requires people to believe that the products are good quality for the price. Then to retain the customers, the stores need to build loyalty in their own brands and this is a much more complex challenge. Consumer loyalty is the magic key to success and as Kumar and Steenkamp note (p.90) ‘Private labels build store loyalty’. How do they do this? Article 4 in this series takes up this chain of thought… Coming soon!

Main references in this article:
Nirmalya Kumar and Jan-Benedict E.M. Steenkamp, ‘Private Label Strategy’, Harvard Business School Press, 2007.

IbisWorld forecasts, www.heraldsun.com.au, 6 August 2010, ‘Consumers reject traditional beer and wine brands to chase best price’

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 4: The key to success – building and retaining customer loyalty

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