Last month, Tesco announced what analysts called 'brilliant' sales figures and confirmed that it was on target to make profits of more than £2bn this year. Like-for-like sales for the seven weeks to 8 January were up 7.6%, excluding petrol. Around half of Tesco's sales come from its own-label products, a percentage that has risen steadily over the past 20 years.
The own-label products of the top-four supermarkets (Tesco, Asda, Sainsburys and Morrisons/Safeway) have risen from around 22% of packaged grocery value sales in 1981 to around 40% today, according to figures from the Superpanel division of market information specialist TNS. When wine, fresh food, healthcare and toiletries are included, the figure rises to almost 47%. Much of the growth is driven by increasing segmentation and the development of premium ranges, such as Tesco Finest and Sainsbury's Taste the Difference.
While own label is clearly good for supermarkets and, at least for the moment, consumers, it is less so for FMCG brands or, indeed, for own-label manufacturers, many of which operate on paper-thin margins. So how much further can supermarkets take own label before it reaches a tipping point?
'It is up to customers to decide,' says Hamish Renton, head of the Healthy Living brand at Tesco. 'All the ranges we have launched to date have been in response to customer demand.'
He concedes it is 'unlikely' that the retailer will become all own label, but TNS communications director Edward Garner believes the own-label story has a long way to run before it becomes unsustainable. 'Own label is on a steady march,' he says.
Sainsbury's pioneered own label as far back as the 60s, its strong relationships with its customers allowing it to sell predominantly own-label ranges.
But its attempts to brand its products failed. Its Novon washing powder and Classic Cola enjoyed early success, but a lack of support for these 'brands' meant they quickly declined to general own-label status.
The first 'value' proposition was launched by Fine Fare in the late 70s, but Tesco led the charge in using innovation and segmentation to establish ranges with premium brand values, starting with Healthy Living in 1985 and Organics a year later. Its two other 'pillar brands' are Tesco Value and Finest, launched in 1995 and 1998 respectively, and it has added four supporting pillar brands, Fair Trade, Kids, Free From (wheat and gluten free) and Carb Control (launched in January).
Tesco's clever trick
'Tesco has taken control of a strategy that has coherence across product fields in a way that no manufacturer could hope to emulate, and other retailers have copied it,' says Garner. The 'really clever trick', he points out, is that the premium ranges are often more expensive than the brands. It is now perfectly acceptable to take a box of Tesco Finest chocolates to a dinner party.
But while Tesco Finest customers see themselves as connoisseurs, and Value customers are price-oriented, people pick and choose between ranges.
'Around 84% of our customers buy Value and 71% buy Finest, but 64% buy both,' says Renton.
Own label has made the biggest inroads into areas where brands tended to be complacent and under-supported - chilled ready meals being an obvious example. But own label is subject to trends. For example, own-label wine was a winner in an era when Blue Nun and Hirondelle represented the quality standard, but branded wines are now making a comeback - with retailers' support.
Success in such areas has allowed the retailers to move into other fields, for example own-label clothes ranges such as Asda's George and Tesco's Cherokee, and it is conceivable that at some stage Tesco or Asda might launch an electronics range.
'People are very brand conscious in the electronics market, because of issues and perceptions of reliability,' says Clive Vaughan, retail consultant at The Chambers. 'Even Dixons' own brand, Matsui, is not a prominent part of its offer.'
But with Tesco sufficiently trusted by customers to sell financial services, who knows what areas it might take over? After all, own label has prospered on the back of consumers' growing trust in supermarkets to offer them value and quality. 'Customers know the retailers will not compromise their brand integrity by selling duff products,' says Vaughan.
They have been helped in the task by sophisticated marketing, their control of distribution and the in-store advertising environment, and their captive audience, at a time when brands' scope to get their message across has been compromised by fragmenting media.
Also, points out Paul Cowper, consultant at brand strategy agency Brandsmiths, 'In a time of often bewildering choice, retailers serve as consumers' "lifestyle editors" in a way that is not feasible for individual brands.'
But Robert Clark, research director at Retail Knowledge Bank, believes there is now 'limited scope' to introduce more own-label ranges, at least in groceries, and that retailers will focus on evolving their existing ranges and manoeuvre them into more premium positions.
Added value
This is certainly a strategy the Co-op is adopting. Christine Clarke, head of Co-op brand at the Co-op Group, says: 'We aspire to all our own-label products having an added-value point of difference that ties in with our ethical positioning. For example, all our own-label chocolate and coffee is now Fair Trade, and we have an "honest labelling" policy that goes beyond what the competition is doing and what is legally required.'
The Co-op's bread comes in bio-degradeable packaging, and it is steadily reducing salt, additives and monosodium glutamate in its products. It is also continuing to develop the quality, lines and memorability of its ranges. 'We've been working hard on developing our Truly Irresistible range and we will be looking for more NPD in our convenience lines,' says Clarke.
Similarly, Sainsbury's will shortly relaunch its Basics range in a way that makes a virtue out of its 'value' positioning. For example, the packaging uses funny lines to explain that the mushrooms are just different shapes and sizes, the pitta breads a bit smaller, the peeled tomatoes may contain some peel, the rubbish bags are 'thinner, but not rubbish' and so on.
But while own-label brands have traditionally enjoyed the luxury of not having to do much advertising, the more stores create a point of difference with their own-label ranges, the more they have to treat them as brands in their own right and support them, believes Clarke.
Siemon Scamell-Katz, chair and founder of retail research and design agency ID Magasin, agrees. 'Retailers will increasingly have to promote their own-label ranges, especially those in strongly branded areas, such as snacks and soft drinks,' he says. 'Cheaper versions sell themselves, but a premium own-label product will need the kind of support FMCG brands get.'
Retail theatre
While advertising is one medium, another is the kind of in-store theatre brands employed five years ago, but which retailers' 'clean aisle' policies - aimed at protecting their own retail identities - have largely outlawed.
'This could be the next big development in own label,' predicts Scamell-Katz, 'but not within the next two years, given that we are in the early days of an aggressive price war between Asda and Tesco.'
However, retailers will be looking closely at the optimum balance between brands and own labels on their shelves. After all, brands provide a price/quality reference point for the category. What is more, says Cowper, the more dominant own label becomes the greater the threat to product innovation.
'It is the branded goods manufacturers who have the money to invest in NPD but haven't taken up the challenge,' he says.
But perhaps the biggest threat to own label will come when - or if - the perception of supermarkets as 'the customers' friend' grows tarnished. Most things are cyclical, including reputations, and Tesco, in particular, has been criticised for squeezing out small stores and putting pressure on suppliers.
And Tesco's storming results were in stark contrast to those of some of the big manufacturers that supply it. Over the past few months, Unilever and Colgate Palmolive, among others, have announced profit warnings, their performance in part dented by the inroads own label is making into their territory.
Own-label manufacturers have also suffered at the hands of supermarkets.
John Wringe, chief executive of integrated communications group Starchamber, points out that despite stealing an innovation march on branded-goods manufacturers, own-label manufacturers' margins are very slim.
Squeezed to the point where their pips are squeaking, own-label manufacturers are looking at their options, including creating their own brands. But, as Wringe points out, building a brand from scratch is hard enough, even when you are awash with money. He believes a compromise would be for supermarkets to pay more and charge more for innovative products, and to allow manufacturers to 'auction' their innovation to the highest bidder.
But others say such protectionism is unrealistic, and that manufacturers are more likely to break the retailers' dominance by grouping into consortia and supplying consumers direct.
Overall, Vaughan believes the march of own label continues to be a healthy development that benefits category management and, crucially, the consumer.
'At the very least, it provides a wake-up call for the FMCG manufacturers,' he says.
TESCO
Pillar brands
Finest Launched in 1998, covers 1300 lines.
Value Launched in 1995, covers 869 lines.
Organics Launched in 1986, covers 1400 lines.
Healthy Living Launched in 1985, covers 500 lines.
Supporting pillar brands
Free From Launched in 2003, covers 170 lines.
Fair Trade Launched in 2004, covers 94 lines.
Kids Launched in 2002, covers 50 lines.
Carb Control Launched in 2005, with 100 lines.
SAINSBURY'S
Taste the Difference Launched in 2000, covers 730 lines.
Blue Parrot Cafe Kids' range, launched in 2003, covers 90 lines.
Be Good to Yourself Launched in 2003, covers 404 lines
Organics Launched in 1986, covers 1143 lines.
THE CO-OP
Healthy Living Launched in 1995, covers 100 lines.
Fair Trade Launched in 2000, covers 74 lines.
Organics Launched in 2000, covers 70 lines.
Premium Launched in 2000, covers 70 lines.
Truly Irresistible Launched in 2003, covers 50 lines.
Everyday Launched in 1995, covers 100 lines.
Party Launched in 2000, covers 50 lines.
ASDA
Extra Special Food launched in 2004, covers around 725 lines in food and
general merchandise.
Good For You Launched in 2001, covers around 450 lines.
More for Kids Launched in 2003, covers 46 lines.
Smart Price Launched in 1999, covers 780 lines.
ASDA Brand Launched in the early 80s, covers around 6000 lines in food
and 8000 lines in general merchandise.
HOW CAN FCMG FIGHT BACK?
According to Siemon Scamell-Katz, chair and founder of retail research and design agency ID Magasin, branded FMCG goods companies need to work harder at communicating with both consumers and retailers. 'Class players such as Walkers are three steps ahead of the retailers, so the retailers come to them for advice. They also forge top-level contacts: for example, Terry Leahy (Tesco chief executive) might see the value of putting a crisps fixture in beer whereas a buyer's immediate response would be "no".'
What's more, continues Scamell-Katz, much so-called NPD amounts to line extensions rather than true innovation, creating only the illusion of wider choice. 'FMCG companies should be putting renewed focus on NPD to help retailers grow and develop the category, as Walkers has done with Sensations.'
Paul Cowper, consultant at brand strategy agency Brandsmiths, says FMCG brands need to put clear water between them and own-label brands, which represent a smart, rather than an emotional, buy. Secondary and tertiary brands, which are most threatened by own label, could usefully find a way of reviving the guts, passion and local provenance that is often lost when they are sold by small, dedicated manufacturers and become part of the product range of big multinationals, he adds.
Don Williamson, chief executive of branding consultancy PI Global, believes packaging design is a misunderstood and under-utilised tool. 'The branding and the packaging should be two distinct things: the advertising should trigger the emotion and the packaging should communicate the product,' he says.
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