The Private Label Revolution: As private label share grows, some worry that national brands will eventually become redundant. However, private labels and national brands are complementary, as national brands generate store traffic, support retailer profit optimization, and provide consumer choice. Notably, high private label volume penetration and high private label market share in a category do not necessarily lead to maximized category profitability. __ Let's start with the answer. The era of hard discounts is coming, primarily replacing cheap generic brands. FMCG companies should quickly occupy higher price points, and the window of opportunity for higher price points is fleeting. The conclusion is simple, but the logic is complex. This article will first elaborate, then return to the theme. Why Are Hard Discounts Hard? Hard discounts mean absolute value for money. At the same quality, they are absolutely cheaper. Even without promotions, they are cheaper. So why are hard discounts cheap? In the book "Procurement Management and Operations Practice" written by the PSCC Procurement and Supply Chain Experts team, it is mentioned that typically, negotiating price reductions with suppliers can only yield 5%-10% cost savings; streamlining processes and transaction informatization can reduce management costs by an estimated 10%-20%; and 70%-85% of cost optimization space comes from areas such as technology R&D, marketing, and consumer services. Let's interpret the above statement. Typically, retailers source from regional distributors, and even with strong negotiation power, they can only get 5%-10% price concessions. Such discount space is certainly not hard enough. If they bypass regional distributors and go directly to manufacturers, simplifying channel processes, they can achieve 10%-20% cost optimization. Although the discount space is larger, it is still not hard enough. Moreover, the products still carry brand labels, not private labels. If retailers enter product R&D, marketing, and consumer services, then there is 70%-85% cost optimization space. At this point, the discount space becomes very hard. And the products erase the traces of brand manufacturers, becoming private labels.**** In my article "Why Are Private Labels So Cheap?", I mentioned five procurement prices for retailers, with price differences potentially up to 85%.

1. Workshop cost price = Workshop production cost (variable cost) + Workshop allocated fixed costs

2. Company cost price = Workshop cost + Company allocated fixed costs

3. Company ex-factory price = Company cost + Company gross profit

4. First-tier distributor price = Company ex-factory price + Distributor operating costs + Distributor gross profit

5. Second-tier distributor price = First-tier distributor price + Second-tier operating costs + Second-tier gross profit The larger the price difference, the harder the discount. From my personal business experience, I have indeed procured goods at 20% of retail price from manufacturers. Wu Jinhong, founder of the private label alliance "Ant Alliance", said that Ant Alliance has many positions that Chinese retail enterprises do not have, which involve intervening at the source of production, doing things that brand manufacturers used to do. China's hard discount era has just begun, and retailers are still in the stage of channel process optimization. Currently, they only manage to source from manufacturers, rarely participating in product R&D, so hard discounts are still not hard enough. That is to say, although hard discounts have arrived, they are still far from private labels, and the current cost optimization space is not large enough, requiring a long process of gradual iteration. The reason the snack track was chosen to fire the first shot of hard discounts is mainly that the snack category has a sufficiently long channel, with larger optimization space, resulting in higher discount ratios. When the hard discount battlefield shifts to other categories, the cost optimization space will not be as large. Additionally, the snack track is inherently a long-tail category with few well-known brands. In the development of Chinese commerce, brand manufacturers reached terminals through deep distribution, and in an environment of small-scale distributors, industry brand giants emerged. The development of hard discounts will be retailers reaching the source (manufacturers), optimizing links, and completing and replacing some functions originally performed by brand manufacturers (such as product R&D), thereby gaining discourse power. The hardness of hard discounts lies in the thoroughness of the supply chain revolution. China's supply chain revolution fired its first shot in the snack track and will later spread to other tracks. The supply chain revolution cycle is long, not achieved overnight. China's hard discounts are currently not hard enough, mainly because they are running too fast; for example, Hema's private label share has already reached 35%. Summary In the face of hard discounts, well-known brands must not respond by lowering prices. First, hard discounts do not replace well-known brands but cheap generic brands; second, even if prices are lowered, they cannot reach the price points of private labels. The procurement price and brand endorsement of private labels determine their huge cost advantage that is difficult to replace; third, if you are in the price range of private labels, quickly transfer or retreat, as time is not generous.**** Hard Discounts Are Identity There is currently an atmosphere in China that hard discounts are a product of consumption downgrading. This fits the current sluggish business climate. So, are hard discounts a product of short-term consumption downgrading, or a relatively stable business model that can transcend economic cycles? The president of TreeHouse Foods' retail division said: "For millennials, value-seeking shopping is part of their identity." TreeHouse categorizes private label shoppers into five types: Value Optimizers (29%), Pure Quality Seekers (28%), Solution Seekers (25%), Brand Loyalists (9%), and Independent Habituals (9%). Please note the keyword: identity. This is the core of hard discounts. In fact, the middle-class consumption that was once popular in Europe, America, and Japan is also identity. A US survey found that besides the middle class, a considerable number of high-income and low-income people also identify themselves as "middle class." Because being middle class is an identity. This differs from China, where typical middle-class individuals do not consider themselves middle class. So, what is identity? It is determined by the lifestyle shaped by medium- and long-term economics. Early low-income consumer characteristics: 1. Consume cheap generic brands; 2. Occasionally consume popular national brands; 3. Look up to high-end brands. At this stage, buying cheap generic brands is a necessity. When income reaches a certain level, consumption characteristics change: 1. Normally consume low-priced private labels (hard discount part); 2. Normally consume popular national brands; 3. Occasionally consume high-end brands; 4. Low-frequency consumption of luxury brands. At this time, consuming private labels is confidence after income growth. After income growth, there are two important changes: First, consumers' attitude towards popular national brands. For example, in the past, multinational brands like Coca-Cola and P&G were considered high-end. Now they are seen as popular national brands. Chinese consumers' attitude towards popular national brands is already similar to that in Europe and America. Second, low-priced private labels replace cheap generic brands. In fact, hard discount models like private labels have not taken share from well-known brands but from cheap generic brands. The most affected are third- and fourth-tier brands, even including second-tier brands. In the brand spectrum, the original was: Cheap Generic Brands → Popular National Brands → High-end Brands → Luxury Brands. Now it changes to: Private Labels → Popular National Brands → High-end Brands → Luxury Brands. The biggest change is that private labels replace cheap generic brands. Private labels have two major advantages over cheap generic brands: first, private labels are cheaper than cheap generic brands; second, as retailer brands, private labels have stronger brand endorsement. Europe's private label history spans 60 years, including economic booms and busts. Private label consumers include high-, middle-, and low-income individuals. It can be seen as a business model that transcends economic cycles. Such a business model is welcomed in both economic booms and busts. It is a product of the supply chain revolution, not forced by consumption downgrading. It happens now, rather than in the early reform and opening-up period when consumption capacity was weaker, because the arrival of the supply chain revolution has its historical regularity. Summary In the low-income stage, buying high-end and luxury goods is due to lack of confidence; in the middle- and high-income stage, buying private labels is due to sufficient confidence. This sufficient confidence becomes a normal lifestyle, meaning both the value of private labels and the brand premium of high-end brands are accepted normally, as shown by Japanese consumption patterns in Mitsuru Sasaki's "The Fourth Consumption Era." Never define hard discounts as a consumption pattern for low-income groups. It is a consumption method accepted by all income classes after income reaches a certain stage, or a common identity for the whole society. Hard discounts may be rapidly matured during an economic downturn, but they are a consumption pattern that can transcend eras. Europe's 60 years of economic changes have been varied, but hard discounts have been developing healthily. Redrawing the Price Bands With China's economic development, the price band of each category is getting longer. According to the brand spectrum of "Private Labels → Popular National Brands → High-end Brands → Luxury Brands," a full price band spectrum is forming. First, Private Label Price Band Private labels constitute an independent price band. A typical private label has a three-tier structure. The three-tier structure described in "The Private Label Revolution" is: Good, Better, Best. Of course, the premise is hard discount low prices. That is, hard discount products are also stratified in quality and price, not crowded into the lowest price band. Even the lowest tier of the three-tier structure has good quality. So, there is only low price, no cheapness. European private labels have also evolved continuously, going through the white label stage (1970s), the imitation stage (1990s), the umbrella brand with good quality (2000s), the customer segmentation stage, and the mixed private label architecture (since 2017). Of course, with the popularity of European private labels, they have also extended to other price bands, but that is a later story. Second, Popular National Brand Price Band Super large single products of FMCG multinationals and domestic leading brands can be considered popular national brands. Since 2013, I have proposed "mainstream shifting," which is the forward movement of the popular national brand price band. For example, the mainstream price band for bottled water has shifted from 1 yuan to 2 yuan, and is now moving to 3 and 4 yuan. Over a decade ago, many thought Coca-Cola was high-end; now, beverages launched by well-known companies are rarely priced below Coca-Cola. Will the prosperity of private labels take more share from popular national brands? "The Private Label Revolution" tells us the European approach: Private labels will certainly take some share from popular national brands, but retailers will focus more on promoting higher-priced popular national brands to balance the full price band. After all, popular national brands are very important for traffic generation. But popular national brands with low brand loyalty are not so lucky. The closer a brand is to the private label price band, the more likely it will be covered by private labels. Conversely, the farther away, the safer. Third, High-end Price Band Even Chinese consumers in the early reform and opening-up period had the impulse to buy well-known brands. However, due to limited consumption capacity, they could only consume infrequently. During the three years of the pandemic, despite the impact, high-end consumption actually showed explosive growth. In the past, high-end brands were dominated by multinationals; with China's growing national strength and consumer confidence, Chinese brands have been taking an increasing share of the high-end segment. Moutai is an early liquor brand that pioneered brand premiumization, leading the high-end process in the liquor industry. Fourth, Luxury Price Band Except for categories like liquor and cigarettes, where domestic luxury brands have emerged, luxury as a whole is still dominated by multinational brands. Among the above four price bands, the most affected by private labels and hard discounts are cheap generic brands; well-known brands are basically unaffected. Of course, some hard discount stores discount well-known brands; for example, Oriental Leaf, originally 5 yuan, is sold for 3.5 yuan. This is not hard discounting but loss leader pricing. Summary The closer to the hard discount price band, the more likely to be covered by hard discounts. Therefore, well-known brands should not move closer to the private label price band but move away from it. Of course, moving closer to the private label price band may bring huge short-term gains, but it is harmful in the long run. It depends on whether you focus on short-term interests or long-term interests. The Window of Opportunity for Price Increases Well-known brands are hard currency in hard discount stores. "The Private Label Revolution" tells us that well-known brands are indispensable in hard discount stores. There is an optimal combination between the two. From the laws of economic development, continuous industry contraction and premiumization are twin brothers. This process began as early as 2016. Currently, the three major factors affecting brand manufacturers are: industry contraction, private labels and hard discounts, and premiumization. The first two are uncontrollable for brand manufacturers; the controllable factor is premiumization. It can be said that in the current environment, retailers' main opportunities lie in private labels and hard discounts, while brand manufacturers' main opportunities lie in mainstream shifting and premiumization. Specifically, it means upgrading popular national brands (mainstream shifting) and premiumization, moving as far as possible from the private label price band. First, Mainstream Shifting After 2016, there was a wave of mainstream shifting opportunities, and many companies seized them. For example, Uni-President's Tang Daren. Recently, many brands are planning price adjustments for popular national brands. The explosion of Oriental Leaf in 2023 can be seen as an example. The years starting from 2024 should be a window of opportunity for mainstream shifting. When the window of opportunity arrives, whoever seizes the initiative has the advantage. For example, beer companies have done very well in mainstream shifting in recent years, with Tsingtao's White Beer, Snow's Heineken, and Yanjing's U8 growing rapidly. Second, Premiumization High-end is a price band far from mainstream but not reaching luxury. For example, the sub-high-end in the liquor industry. Take popular national brands as the dividing line. The faster private labels and hard discounts develop, the more dangerous products close to the private label price band become. At the same time, products farther from the private label price band have greater opportunities. Industry contraction, private labels, and hard discounts affect low-end brands the most. The price band of low-end brands overlaps with private labels, and they have no advantage in brand endorsement. Some fantasize about becoming private label suppliers, but small and medium-sized brand manufacturers should find it difficult to meet the stringent requirements of private label supply chains. Of course, many small and medium-sized snack brands still have opportunities now, mainly because snack hard discounts are still just sourcing from manufacturers, not evolving into participating in product R&D and production. I suggest low-end brands move away from the low end as soon as possible; in the future, high-end offers more opportunities than low-end. The lower the end, the more important scale advantages are. High-end is precisely differentiated, offering opportunities for small and medium-sized enterprises. The opportunity for popular national brands lies first in mainstream shifting, and second in high-end layout. Mainstream shifting has scale, and the price band is the popular national brand price band, which has advantages. High-end focuses on layout, not scale. Because mainstream shifting is a continuous process, today's high-end may become tomorrow's mainstream shifting. Influenced by the past pursuit of sales scale, many people are now very wary of sales decline. In fact, the era of contraction has long arrived, and mainstream shifting and premiumization are inevitable trends. Even private labels and hard discounts cannot change the trend of mainstream shifting and premiumization. On the contrary, the advancement of hard discounts will accelerate the pace of mainstream shifting and premiumization. The famous American futurist Naisbitt has two famous sayings:

  • Success comes not from solving problems but from seizing opportunities;
  • Opportunity is like a window left open on a stormy night; you don't know when it opens or closes. When the window of opportunity has opened, seize it without hesitation. After all, such strategic opportunities are rare in a lifetime. Summary Occupying a price band is occupying an era. Hard discounts are not an era of low prices but an era of redrawing price bands. The earlier you occupy a new price band, the more likely you are to dominate it.******** Dare to Raise Prices? Back to the theme of this article. In the era of hard discounts, do FMCG brands still dare to raise prices? My answer is: In the era of hard discounts, FMCG brands should raise prices. The lower the price range, the more they should raise prices. If they cannot raise prices, plan to retreat early. Because brand manufacturers cannot compete with private label hard discounts in the low-price range. But whether they dare to raise prices depends on three causal factors: first, cognition of the era; second, self-cognition of marketing capabilities in the new environment; third, the definition of marketing goals, whether to obtain short-term gains or long-term industry position. Of course, the best way to raise prices is not to hard-raise prices on old products, but to shape brand premium through new product launches. Pursuing both the value of hard discounts and brand premium is a conflicting yet reconcilable consumption direction in every consumer's mind. Which direction dominates depends on the consumption desires evoked by the consumption scenario. ** Note: This article references many viewpoints and data from "The Private Label Revolution," and we thank it! After all, European private labels account for 38% of retail share, leading globally. Private labels are the premise of hard discounts, and the evolution of European hard discounts provides a demonstration and reference for China's development of hard discounts.**