Aldi--the secret of success: private label brands are gaining recognition throughout Europe.

The World of Private Label" met this year at the PLMA 2003 trade show in Amsterdam, The Netherlands, May 27-28 and celebrated another year of success with growing retail brands and proliferating private label markets.

In Western Europe the growth of this market segment is quite diverse. Private label products of fast moving consumer goods (FMCG) have the highest acceptance in the U.K. with more than 38% penetration in 2002. In Germany, Spain and France, the size of the private label segment increased significantly during the last three years, while Italy is still waiting for consumers confidence in these products.

Germany, being the country with the highest population in Western Europe, is a good example of the success of private label products. A weakening global economy also hit the largest member of the European Union and influenced the employment rate, inflation, purchasing power and, last but not least, the total turnover of consumer goods. The years 2000 and 2001 finished with positive results, while the segment decreased 2% in 2002.

The latest trends show a continuously negative development of 1.5% for the year 2003. Yet, in these difficult times for retailers there are still winners, such as German discounters. According to ACNielsen, the discount stores increased their marketshare from 34.4% in 2001 to 37.5% in 2002, despite the weak economy.

One important milestone in the history of private label products is the success of the German discounter "Aldi." Karl and Theo Albrecht, two brothers born in Essen, Germany, founded the first little grocery store in 1946 in their hometown. By 1950, the Albrecht family already owned 13 stores. And, in 1961 the brothers decided to divide the growing chain into two parts: Aldi North and Aldi South. Germany is known for being a difficult retail market, but Aldi further expanded and enlarged its empire year by year. Today, 3700 Aldi stores are offering their products in Germany. Additionally, Aldi North operates stores in The Netherlands, Belgium, Denmark, France and Spain, while Aldi South is represented in Austria, the U.S., the U.K., Ireland and most recently Australia.

Secret Of Its Success

Aldi has been offering a limited range of products since the very beginning--one coffee brand, one toothpaste label and one diaper brand (Vibelle at Aldi North and Mamia at Aldi South). Through the years, the company recognized this as an important advantage. With its reasonable turnover, Aldi had a lower cost structure than its competitors. The products sold changed through the years on changing demands and trends, but the total number of products offered (today 650 articles at Aldi South) remained the same. As Aldi is not selling a variety of products, they had to offer other advantages to convince customers to buy its stores--a significantly lower price and good quality. This is a simple strategy that has been strictly followed since the beginning because the Albrecht brothers wanted to build a deep relationship with their customers. One of the ways they achieved this was by making sure other stores were not offering its product at a lower price.

Even if Aldi is not the global number one retailer--Wal-Mart currently holds that title with an annual turnover of 200 billion [euro]--it is at the top of the list in the global purchasing market. The average purchasing value of an Aldi article is stated at more than 30 million [euro] (Wal-Mart products account for 1.5 million [euro] on average). So, years ago Aldi had the power to set a high standard of quality with its suppliers and forced other discounters to follow. For the diaper business, Aldi represented a 20% marketshare in 2002--approximately 566 million diapers--that they offer in only two sizes and are produced in various Western European countries.

The positive experiences of consumers when shopping at Aldi encouraged them to look for good quality at low prices. In Germany today about 44.5% of all consumers rate the quality of private label brands as good to very good. Independent committees prove that this opinion is right.

Price and Quality

The German consumer information institute Stiftung Warentest tested 16 different diapers. Reviewing only the leakage results (panel and laboratory tests), eight diapers were ranked as very good--four branded diapers, and four private label ones. And when looking at pricing, the private label products cost only half of the price of the German market leader's products. The consumer can hardly recognize these performance differences, while the price difference is highly recognizable.

For years, the branded manufacturers justified their high prices by touting high research and development and marketing costs. But, these manufacturers will try anything to keep marketshare. The largest-ever marketing offensive in Germany recently took place when Procter & Gamble celebrated Pampers' 30th birthday by offering its Baby Dry and Easy Up diapers at two for the price of one. The Pampers products were sold quickly as this was the first time such a special offer occurred in the German retail market. But, is that the right strategy to fight against private label products? Or, will the consumer get the impression that Pampers were overpriced until today?

In unstable economic times, price will remain a critical decision factor for the consumer. However, further product innovation will mostly come from the brand producers. They will continue to set new standards, but private labels will be quick to meet these standards. For the branded diaper manufacturer to remain a powerful market participant, a possible strategy is to divide the business and go for both segments--innovate, advertise and sell branded diapers, while using leftover capacity to produce private label products. This strategy has already been successfully adapted by producers such as SCA, in Sweden, and Paul Hartmann, in Germany, and it is very likely that others will follow.

More and more consumers will test private label products. They will most likely discover an easy way to save money without having to significantly lower their quality expectations. Nevertheless--especially for the well-being of their children--they will always be keen to find out what is new.

TABLE I
Development of Retail Brands in Western European Countries
% market share of total FCMG market

          2000   2001   2002

U.K.      38.9   38.5   38.6
Germany   25.8   28.0   31.3
Spain     18.6   20.9   24.2
France    23.3   24.6   25.0
Italy     6.9    7.2    7.6

Sabine Martini has been involved in the personal care and nonwovens industries since 1993, working specifically in the consulting and market research area since 1998. She can be reached at SMARTini Consulting, 49-2151-705546; Fax: [phone]; E-mail: [e-mail]; website: www.smartini.de.