Private Lables:
Making Headway In China And Russia

By Vera Belaya and Nadine Wettstein, Researchers from IAMO

The establishment of a trusted private label can help foreign and domestic retailers gain foothold in the emerging markets of China and Russia. The future of private labels was explored in a symposium at Anuga Cologne on October 12, 2009, hosted by Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).

The massive potential of the newly opened-up markets of China and Russia is contributed by the purchasing power of 1.3 billion Chinese and at least 143 million Russians. This stimulates growth in the food retail sector as experienced enterprises such as Wal-Mart, Carrefour and Starbucks begin to aggressively venture into these markets.

To successfully establish a foothold in these emerging markets, it is vital that retailers truly understand the needs and preference of the consumers, and are aware of the unique cultural features of the respective markets.

With local companies and experienced international enterprises already possessing such invaluable insights, the introduction of private labels is thus a remarkable business strategy that can help new companies build their brands and enhance their competitiveness in new, emerging markets.

Advantages of Private Labels

Private labels, which have been playing second fiddle to national and established brands in China and Russia, will have an increasingly prominent role to play as they help new enterprises build a distinguished image in the local market.

A successful private label concept strategy needs a detailed analysis of the company’s own operational competency and a thorough understanding of the domestic market.

The establishment of private label have positively contributed to the differentiation and image growth of retailers during the last 20 to 30 years in Western Europe, particularly in countries such as Switzerland, the UK and Germany.

With the adoption of a private label, companies can better position themselves and establish long lasting positive brand image, as the brand progresses to become synonymous with the products the company carries.

Acceptance of Western Private Labels

It can be observed that China’s and Russia’s middle class society, including those who are aged 30 to 45, prominently gravitate themselves towards western brands and fashion trends. They embrace western consumption habits and lifestyles more readily than others.

Coupled with their high disposable incomes, this particular segment of consumers further drives the demand for the need to import international premium products.

As a result, many western brands are widely successful in China and Russia, although due to patriotism, consumers will prefer local brands if both product qualities are similar.

Russian Market

In the symposium, Dr Ekaterina Kuskova, consultant with Simon-Kucher & Partners, Strategy & Marketing Consultants, said that private labels occupy about 12 percent of the local market share in 2008.

While its food retail segment continues to be fragmented, Russia’s top five groceries retailers collectively occupy 20.3 percent of the local market share in 2008, thus signalling the continued strong presence exerted by domestic players.

The difference between national brands and private labels are however increasingly becoming blurred, as private labels are unexpectedly well-received in Russia.

According to Dr Kuskova, Russian consumers in general, pay closer attention to the reputation and quality of the brands and they drive the development of premium private labels even during the economic gloom. These established brands, often synonymous to high quality, are greeted and welcomed with enthusiasm by those who can afford them.

Chinese Market

At the symposium, Dr Jan de Graaf, general manager of German Agricultural Export East Asia, spoke about the Chinese market. According to him, China has a reputation of being the most price-conscious consumer in the world. It is therefore not surprising that the Chinese prefers items that are more valued-for-money.

In China, established foreign brands are perceived to be a representation of products that are prestigious, high-quality and contemporary, although they are also much pricier.

China’s foreign retailers are more advanced and more receptive towards embracing foreign private label brands. ‘No name’ brands that are cheap, no matter whether they are foreign or local, are associated with having dubious quality.

Private labels may not be as developed in China currently when compared with Russia but foreign retailers with private labels are aggressive in the Chinese’s non-grocery retail sector (e.g. Watsons).

Despite the success enjoyed by foreign retailers who adopted private labels, domestic private labels are few and they usually only carry essential household groceries such as rice and cooking oil. Presently domestic retailers lack of a long-term strategy to further develop private labels.

Caveat in Private Labels Adoption

A successful private label strategy demands that retailers cooperate closely with manufacturers, so as to ensure the private label carries a constant supply of high quality products.

Private labels offer market penetration support to retailers via increasing retail brand awareness and capitalising on customers’ loyalty and preference towards a specific brand. It can also address the needs of the different consumer groups more efficiently.

Despite its advantages, private labels may also cause confusion between price and quality standards for the consumers if products are sold at unusually low prices.

The adoption of private labels can also incur high marketing cost as responses generated from these newly opened-up markets may not be as predictable yet.

The share of sales generated by private labels in Russia is still marginal

Private label shares across Europe in 2008 (%)

The differences between national brands & private brands are becoming blurred

Private label shares across Europe in 2008 (%)

Private labels in Russia score unexpectedly well compared to germany

Russian consumers pay close attention to the reputation of quality brands

Even in hard economic times, supermarket chain Perekrestok, which is aimed at middle and high income earners, continue to report growing sales

Most respondents in russia have bought private labels before and intend to buy these products in future

About The Authors

Since its foundation in 1994, the Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) has monitored trends in the agri-food industries and in rural development. Its research environment covers Central, Eastern and South-East Europe, including Turkey and the emerging economies of Central and Eastern Asia.

Research work performed at IAMO focuses on change in agricultural policy, trends in agricultural markets and structural change at enterprise level and in rural areas. Key research topics take in the economic and social impacts of EU accession by Central and Eastern European states, restructuring of the agricultural and food sectors in the former CIS states, and rural development in China. The institute analyses economic and social implications of the above processes, it provides guidance to the parties involved in the transformation process, trains and promotes a new generation of academics from partner countries and exchanges scientific findings through publications, international cooperation and conferences.