Amidst changing market dynamics, supermarkets, once the 'kings of retail,' have seen their glory fade, struggling under the combined pressures of online retail growth, evolving consumer demographics, and the COVID-19 pandemic. Despite explorations in channel integration, scenario creation, and new product introductions, the road to recovery remains long.
According to the China Chain Store & Franchise Association (CCFA) 2022 report "2021 China Supermarket Top 100," total sales of the top 100 supermarkets in 2021 reached 907.6 billion yuan, a 2.6% decline from 2020. Among them, 62 companies experienced negative sales growth, nearly double the number from the previous year.
Beyond sluggish revenue growth, profit conditions are even more concerning. Regional retailers have leveraged deep regional strategies to gain brand and supply chain advantages, with a few performing adequately; however, losses are the norm for national retailers—take Yonghui and RT-Mart, which were profitable five years ago, as examples: in the first three quarters of 2022, Yonghui was mired in losses, and RT-Mart was on the brink of losses.
China's supermarket retailers are undoubtedly at a crossroads again—how can they find new growth points and break through? Kearney believes that private brand strategy is the essential path to cost reduction, efficiency enhancement, and even survival and development.
Globally, private brands have become a core strategy for international retailers, with penetration rates typically exceeding 30% of sales.
In contrast, domestically, the retail environment has changed dramatically. With traffic costs soaring, whether in new retail or traditional retail, the 'traffic + monetization' approach is no longer a winning formula; returning to the essence of 'product strength + supply chain' is urgent.
In this context, private brands are increasingly attracting the attention of supermarket retailers. For example, Hema (Freshippo) reported in November 2022 that its private brand sales accounted for 35%. Costco and Sam's Club in China also have private brand shares exceeding 30%, while ALDI, which entered China recently, has a private brand share of over 60%.
If managed well, private brands can offer consumers high cost-performance options, enhancing product uniqueness; on the other hand, compared to third-party brands, private brands can help retailers increase gross margins by 5% to 15%.
However, it must be noted that even pioneers in domestic retail still lag behind mature foreign retailers in leveraging private brands for greater benefits—including improving gross margins, product differentiation, and even leadership, as well as consumer mindshare education—to boost sales and profits. Many more retail brands have not yet elevated private brand development to the strategic level it deserves.
Even international retailers' private brand businesses in China have only developed in recent years due to supply chain and bargaining power issues. To date, only a few have succeeded.
So, how can we seize the opportunity of private brand building? Supermarket retailers need to place private brand strategy within the overall strategic framework, carefully consider strategic issues such as brand architecture, category coverage, and expansion, and build an operational support system centered on products and supply chain.
Brand: A Vertically and Horizontally Integrated System
Generally, a mature private brand architecture should include both vertical and horizontal sub-brand systems, with each having distinct positioning. Vertical layout can cover the needs of consumers at different price points, typically the first step in extending private sub-brands; horizontal layout allows further specialization in core categories or customer segments, strengthening brand mindshare in specific areas.
Vertically, the brand matrix typically includes three tiers: mass, mid-range, and premium. The mass brand emphasizes cost-performance, targeting price-sensitive consumers; the mid-range brand emphasizes quality, aligning with the retailer's brand positioning and usually serving as the backbone; the premium brand targets the top of the pyramid with the highest quality. The construction of the brand matrix generally follows a principle of starting from easy to difficult, progressing gradually—typically starting with mass and mid-range brands, then extending to more profitable premium brands after a solid foundation.
Horizontally, brand layout can be based on different categories or specific consumer needs. For example, around food, sub-brands can be created for fresh produce, bakery, deli, etc. Similarly, precise coverage can target different groups such as mother and baby, children, or those with food allergies.
Building a private brand system is not accomplished overnight. Take Seven&I, the parent company of Japan's 7-Eleven, as an example: looking at the brands it launched from 2007 to 2017, one can clearly see its brand matrix construction path. Vertically, in 2007, it launched the "PREMIUM" brand with a vibrant logo, targeting the mid-range main brand; in 2010, it launched "PREMIUM GOLD" with a golden tone, targeting the premium main brand. Horizontally, in 2013, it launched "SEVEN CAFÉ" with a deep black logo to match the coffee category; in 2017, it launched "PREMIUM FRESH" highlighting the "green" of fresh food; and in the same year, for non-food items, it launched "PREMIUM LIFESTYLE" with a low-key, textured gray logo.
Sainsbury's private brand architecture is similar to Seven&I. Vertically, it has established three brands: "Basics," "Sainsbury's," and "Taste the Difference," corresponding to standard, mid-range, and premium positioning. Horizontally, "SO organic" targets premium organic products, "Be good to yourself" targets selected healthy foods, "Kids" targets children's healthy foods, and "Freefrom" is tailored for those sensitive to dairy, gluten, etc.
In contrast, some local retail enterprises actively building private brands are still in the "crossing the river by feeling the stones" stage, often falling into three typical pitfalls: first, incomplete brand segmentation, with one brand covering multiple tiers, overly broad; second, unclear brand differentiation, with brands at different tiers lacking sufficient distinction in product, packaging, etc., overlapping each other; third, insufficient brand marketing, lacking adequate product selling point promotion, making it difficult to support brand image positioning.
To fully explore the brand dimension, beyond the span of the brand matrix, attention should also be paid to the depth of product penetration—which reflects the relationship between private brands and third-party brands. Kearney research finds that the coverage potential of private brands varies significantly across categories. Taking Chinese cooking condiments—especially mainstream sub-categories like soy sauce and vinegar—as an example, Chinese consumers are extremely sensitive to taste, so they have a strong preference for national leading brands, and even some distinctive regional brands. We observe that several international and domestic supermarket companies that are relatively advanced in private brand development in China struggle in mainstream condiment categories.
So, for categories with natural "consumer mindshare barriers," are private brands truly helpless? Not necessarily. In this regard, some domestic retailers have already taken the lead in exploration, and a regional fresh food retail enterprise is a representative example. In its community retail sub-brand, private brands account for up to 90%, achieving full category coverage through multiple private brands. Its category logic is very clear: community stores are positioned as "a better wet market at the doorstep," with sales scenarios mostly for household emergencies, so consumers have low brand sensitivity, making it easier to promote private brand penetration than in large supermarkets. At the same time, the enterprise sets the same gross margin standards for private and third-party brands, but private brands have lower procurement costs, so pricing is more favorable, further stimulating consumer purchases through extreme cost-performance.
Category: The Evolutionary Logic of Gradual Penetration
Looking at the category evolution logic of global retailers' private brands, "starting with fresh produce, getting stuck in food and beverage, and being loyal to the brand" seems to be an unbreakable path. Retailers typically start with traffic-driving categories like fresh produce, gradually expand to other areas like food and beverages, and eventually reach categories with higher brand barriers such as condiments and personal care. The core logic of this evolution path is gradually breaking through consumers' brand mindshare barriers and the supply chain barriers of product development/production.
Taking an international retail enterprise as an example, its private brand growth in China can be roughly divided into three stages. The first stage is the early development stage, where private brands account for less than 20%. This stage focuses on trial and exploration, leveraging long-accumulated global supply chain advantages to introduce quality products, mainly imported fresh produce and ambient dairy products. The second stage is the growth stage, with private brands accounting for 20% to 30%. After initial cultivation, consumers begin to gradually accept private brands and explore more categories. Newly entered categories include rice, flour, oil, snacks, bakery, and household cleaning, which have moderate brand awareness barriers and product complexity, making them easier for consumers to accept and supply chains to manage. In terms of supply chain support, it mainly relies on domestic and foreign OEM factories, primarily using the ODM model, meaning high dependence on suppliers for product development. The third stage is the maturity stage, with private brands accounting for 30% to 40%. At this stage, consumers have become loyal users, so comprehensive category penetration can be promoted. Newly entered categories include spirits, condiments, and personal care. These categories require higher product differentiation and emphasize supply chain control. As retailers' consumer insight and supply chain management capabilities strengthen, their participation in product development also increases, so the procurement model extends from ODM to OEM.
For Chinese retailers, category penetration cannot be achieved in one step, so it is necessary to comprehensively consider the development potential and implementation difficulty of private brands to clarify the priority of category development. In terms of development potential, factors such as market size/growth/profit, competitiveness of third-party brands, and consumer behavior habits need to be considered; in terms of implementation difficulty, factors such as product complexity, capital investment thresholds, supplier availability, and regulatory complexity need to be considered. Given the current development stage of China's supermarket retail industry, in areas such as 3R (ready-to-eat, ready-to-heat, ready-to-cook), bakery, dairy, grain and oil, and household cleaning, private brand exploration can be prioritized.
After determining priority categories, efforts should be concentrated on creating mindshare products. Mindshare products are typically defined by metrics such as consumer purchase rate and repurchase rate, and high purchase and repurchase rates are usually driven by high cost-performance and differentiation. Kearney divides mindshare products into three major categories:
The first category is basic traffic-driving products, such as eggs, milk, bananas, cherries, and roast chicken at a high-growth membership-based supermarket. These products attract consumers to the store through price advantages, so they typically have only 5% to 10% gross margins.
The second category is specialty supply products, such as imported beef. While ensuring leading quality, they mainly rely on advantages such as direct sourcing from origin and economies of scale in the global supply chain to ensure high cost-performance, with typical gross margins of 10% to 20%.
The third category is taste innovation products, concentrated in low-standardization categories like bakery. Differentiation is achieved mainly through taste innovation and marketing support, thereby creating unique brand mindshare and generating higher gross margins (typically over 20%).
Of course, creating mindshare products requires a series of capital and management investments. Taking a membership-based supermarket as an example, its bakery bestseller is a typical taste innovation product, for which the supermarket has invested significant time and money. For instance, to upgrade the bakery supply chain, it renovated store kitchens, with a single-store investment exceeding one million yuan. Additionally, leveraging exclusive resources like consumer data, it deeply participates in new flavor development and strictly formulates standard processes (temperature, time, etc.) from suppliers to stores to ensure quality stability. Furthermore, through long-term contracts and other forms, it deeply binds with suppliers to ensure exclusive supply and requires suppliers to provide technical support to stores, ensuring equipment operation and employee proficiency. Moreover, stores prominently display bakery products in visible locations, creating aroma and visual impact, and pair them with sampling activities to attract consumers.
This "combination punch" has been highly effective. From the consumer side, about 30% of members have purchased the store's private brand bakery products; among them, about 5% purchase every time. From a profitability perspective, over 90% of bakery products are private brands, with average gross margins exceeding 20%, significantly higher than third-party brand business. From the supply chain side, mindshare products bring stable high sales, helping to improve bargaining power with suppliers, thereby obtaining lower costs, higher cooperation priority, and other competitive advantages, forming a virtuous cycle.
For most international retailers, creating mindshare products has always been one of the core strategies for their private brands, and they also provide greater marketing support and longer cultivation cycles. Specifically, first, focus on advantageous categories to create evergreen products—in key categories such as nuts, chocolate, biscuits, red wine, and coffee, evergreen products typically account for over 70%, with product life cycles generally exceeding two years. Second, prioritize resource allocation for key marketing promotion—unlike third-party brands that are piloted in 3 to 5 stores on a small scale, private brands are promoted nationwide at the initial launch, not only with premium display positions like end caps but also with sampling activities.
In contrast, some local retailers may over-pursue "constant renewal" in their private brand exploration, with a high proportion of short-lived internet-famous products, which challenges supply chain efficiency and costs while missing out on the competitive advantages of mindshare products in consumer stickiness and profitability improvement.
Supply Chain: A Tiered Network with Global Layout
When Kearney discusses private brand opportunities with management of leading retailers, supply chain capability is often their biggest concern. In response, we have raised some meaningful discussions, mainly covering three major questions: _1. Are there suitable supplier resources? _2. What models are available for cooperation with suppliers? 3. What risks and challenges need attention during cooperation with suppliers?
We will address these questions one by one.
Question 1: Supplier Resources
Are there suitable supplier resources in China? Are large suppliers willing to OEM private brand products for us? In the competition for overseas supplier resources, Chinese retailers are inevitably at a disadvantage compared to foreign brands. How can we mitigate the negative impact?
Kearney's view: First, private brand suppliers are often mainly small and medium-sized enterprises. The high cost-performance for consumers and high gross margins for retailers from private brands both stem from suppliers' margin concessions. Compared to large suppliers, small and medium suppliers are often more willing to provide OEM services at lower margins due to competitive disadvantages in brand and channels. Additionally, large brand owners may worry about potential competition from private brands, making them more cautious about providing OEM services. As a manufacturing powerhouse, China has abundant small and medium supplier resources, providing natural soil for private brand development. For example, a European supermarket that entered China recently, targeting the middle class and growing rapidly, has local suppliers accounting for two-thirds of its supply, with most being small and medium suppliers. It is these local small and medium suppliers that helped the supermarket's private brands establish a reputation for high cost-performance and quickly open up the Chinese market.
Compared to domestic suppliers, overseas suppliers are often the difficulty. In the short term, local retailers might leverage channels such as overseas retailers and purchasing alliances to quickly obtain products and use their scale advantages to lower procurement prices. Once private brands reach a certain scale, local retailers still need to gradually build capabilities for overseas sourcing and direct procurement to strengthen direct control over the supply chain and further break through in product innovation—this is very similar to the development path of private brand procurement by European and American retailers over the past few decades.
Question 2: Procurement Models
Different supplier cooperation models have their pros and cons. So, in supplier cooperation, what model should be adopted for different categories?
Kearney's view: Drawing on the mature European and American markets for private brands, outsourcing and subcontracting are the mainstream models, with in-house production being rare. In supplier cooperation, in addition to traditional OEM and ODM, there are usually deeper cooperation models for key suppliers, such as toll manufacturing, co-branding/exclusive supply, joint ventures/acquisitions, long-term agreements, and joint procurement. Specifically, on the basis of OEM and ODM, retailers can control suppliers' upstream raw material procurement through toll manufacturing, thereby better ensuring product quality and leveraging the cost advantages of centralized, scaled procurement. Additionally, retailers can create product scarcity through co-branding or exclusive supply models. However, this model is usually only applicable to specific products within a certain period (such as internet-famous bestsellers), with relatively limited category coverage, and is more often used as a supplementary procurement solution. Furthermore, for categories with tight upstream supply or the potential for differentiated competitiveness, supply chain control needs to be strengthened. To this end, consider integrating the supply chain through equity investments and other means to avoid easy replication by competitors. Specifically, there are two mainstream approaches—vertical integration and long-term strategic agreements.
For key categories with large procurement volumes and scarce resources, such as high-quality agricultural products, vertical integration can be pursued. Taking a foreign membership-based supermarket as an example, it adopted various integration methods based on supplier importance. First, for suppliers of general importance, it opportunistically used equity investment. For instance, it invested in leading meat processing companies in the United States and Japan, becoming a board member. Second, for suppliers of medium importance, it formed joint ventures. For example, it established a joint venture with a global meat processing leader. Third, for core suppliers, it used mergers and acquisitions. For instance, it acquired a meat processing plant, a pet products company, and several upstream resource enterprises such as OEM factories, plantations, and farms.
As an easier alternative, long-term strategic agreements can be used to lock in suppliers. For example, a supermarket focusing on European business has been expanding its private brand categories since 2008 and has signed multiple exclusive, long-term supply contracts. Domestic retailers are also actively using this approach to lock in resources. For instance, a regional fresh food retail enterprise, although its sales volume cannot match national supermarkets, has built an efficient supply system by deeply cultivating the regional market—its fresh produce category has over 300 long-term cooperative agricultural bases, with pre-packaging completed at the place of origin.
In terms of purchasing alliances, foreign markets are already quite mature; domestically, Ant Alliance (蚂蚁商联) and others have also actively explored. Still taking this fresh food retail enterprise as an example, it uses Ant Alliance's private brands such as "争牛," "饕厨," and "舒佳宜" to cover multiple categories including liquor, condiments, non-standard food, and women's products. Compared to self-purchasing, the purchasing alliance saved the retail enterprise 10% in procurement costs and, to some extent, helped solve its product development and innovation challenges.
Question 3: Cooperation Challenges
What special challenges exist when cooperating with suppliers? What risks need particular attention?
Kearney's view: Typical challenges include three aspects—product development, cost advantages, and supply security.
1. Product Development: A few leading retailers have established internal R&D teams with systematic new product development mechanisms. For example, for 12 key categories including 3R, an international supermarket has equipped each category with 3 R&D personnel, all with overseas living experience, enabling the launch of an average of one Western-style dish new product per week. Another international supermarket has established professional laboratories for multiple categories including food, with an R&D team of over 30 people in China and over 100 in the Asia-Pacific region, collaborating on product development.
However, for most retailers, cultivating a sizable internal R&D force remains out of reach. Therefore, how to leverage suppliers for R&D innovation has become a key issue for product differentiation. There are two solutions. One is to use supplier resources and adopt the ODM model. For example, 7-Eleven in Japan outsources its private brands to Mitsui, which combines its own team and its suppliers' R&D capabilities to provide R&D services to 7-Eleven. Another is to use purchasing alliances to continuously discover new products through "stones from other mountains."
2. Cost Advantages: To build cost advantages, first, supplier support is needed. Beyond micro-level incentives such as pricing concessions and sales commitments, the more strategic issues discussed earlier, such as deep supplier cooperation and creation of mindshare bestsellers, are closely related. Additionally, one can start from the consumer side. For example, Kearney's D2V (Design to Value) method is a consumer-centric product optimization approach that achieves cost reduction by simplifying/eliminating product design elements that consumers do not care about. Taking mascarpone cheese as an example, Kearney research found that consumers do not care much about the shape of the cup compared to origin and quality, so SKUs can be streamlined by simplifying the cup shape. Using the D2V method, Kearney helped a European supermarket achieve a 2% cost reduction for its private brands, saving tens of millions of euros.
3. Supply Security: Security here includes two dimensions: first, timeliness and stability of supply; second, quality of supply, especially food safety. On one hand, small and medium suppliers often have shortcomings in supply chain coordination. For example, how to use data integration and intelligent analysis to support more accurate sales forecasts and more efficient replenishment? On the other hand, food safety and quality management are the lifeline of products, and retailers accustomed to cooperating with large and medium suppliers may overlook the necessity of daily management when managing small and medium suppliers. Furthermore, small and medium suppliers often mean lower supply prices, so how to balance cost and quality is also a question that must be considered during supplier admission.
Final Thoughts:
When traditional models stagnate and innovation models slow down, and the entire industry falls into a vicious cycle of homogeneous competition, retailers have few options left. Private brands are the trend, but they are also full of challenges. Whether it is the reconstruction of brands and products or the control of quality supply chains, it is necessary to learn from best practices at home and abroad, and also to repeatedly test and adjust according to one's own situation, being prepared for trial and error.
Only those who build private brands can become game-changers and have the hope of becoming leaders in the next wave of supermarket retail.