The rise of private labels
Hungary a booming market for retailers
written by Marta Karenova

With the steady rise of purchasing power, Hungarians appear to be quickly catching up with the shopping habits of Western Europeans. The ever-increasing number of supermarkets and hypermarkets setting up shop in Hungary only fuel the trend. A recent study carried out by marketing company ACNielsen shows that retailers’ labels or so-called private labels are gaining even higher popularity than in the West and are expected to account for an estimated 15-20% of all manufactured products in the next five years.

Parting with shelves that display an intoxicating variety of products and brands, spent shoppers are seen racing loaded shopping carts and rustling plastic bags to an overcrowded parking lot – attached to the hypermarket's towering edifice. Not long ago this scene would have been associated predominantly with Western European or North American city suburbs. But any Hungarian these days would be quick to point out that this picture represents a rather common snapshot from rush hour in one of Hungary’s 23 Tesco hypermarkets. Since the mid-1990s, Hungary’s export-led economy has experienced rapid growth and constantly increasing trade openness. Upcoming European Union accession provides further assurance to foreign investors that they will encounter a more transparent and predictable economic environment in Hungary.

Shopping frenzy
While consumer retail service continues to be one of the most flourishing markets in the Hungarian economy, the phenomenon of supermarket and hypermarket shopping is one of the most visible signs of Central Europe’s post-communist transition. Central Europeans are no neophytes when it comes to supermarket shopping. According to a BBC report in December 2002, almost two-thirds of Czechs (the region’s most eager shoppers) visit a hypermarket or supermarket on a weekly basis, “not far behind the sort of levels seen in the West,” the report said. In the eastern Hungarian city of Eger, the Tesco hypermarket receives over 40,000 shoppers every week, equaling the city’s entire population. Post-communist trends aside, the Hungarian market remains ultra price sensitive, thereby making cost a key factor in sales strategies. This is where retail chains such as Tesco or Cora enter the picture. With regular screening of brand name prices in order to ensure the lowest price possible, Tesco offers more than 1,000 own label products. “Tesco Gazdaságos” (Tesco Value) products are the cheapest on the market, while the more recent private label products called “Tesco Minôség” (Tesco Quality) are 20% cheaper than brand name products. In the past, the Hungarian retail channel was represented by small, entrepreneurial and family-owned stores.

Private labels have found a major market in Hungary, where locals flock to shops like Tesco, Cora and Auchan to purchase the discount labels

Today it is characterized by medium-size, financially well-established business communities operating a chain of shops across the country (CBA, Real, Alfa, etc.). The country’s retail sector, however, is clearly dominated by foreign hypermarkets, supermarkets and department stores. Small family-run stores are most common in rural areas and serve immediate needs. Unable to compete with the wide array of products and price discounts offered by the invincible foreign retail competitors, smaller stores are gradually being pushed out of business. According to Euromonitor International, which provides business information and strategic market analysis, Hungarian supermarkets/hypermarkets experienced growth rates primarily at the expense of independent food stores and discounters, whose shares decreased dramatically from 25.3% to 10.9% in 2002. Foreign retail chains with operations in Hungary include Auchan (France), Metro (Germany), Match/Smatch (Belgium), Penny Market (UK), Cora (France) and Tesco (UK).

Private label success
A number of conditions have helped these retail chains consolidate their positions on the Hungarian market, not the least of which include: changing shopping habits, demand diversification, growing consumer disposable income, increasing popularity of once-a-week grocery shopping, flexible opening hours and, perhaps most importantly, favorable pricing policies. A different structure of household economics in Central and Eastern Europe (CEE) also cannot be overlooked. Even though CEE customers are still half as rich as their Western counterparts, their rents and utility costs are comparatively low. According to the BBC report, this leaves the region’s shoppers “able to spend up to 30% of their income on groceries, more than twice the maximum generally seen in the West.” It is clear to see why foreign retail chains were quick to move into CEE markets. Furthermore, a closer look reveals that much of the success behind their expansion is the effective marketing of private label products. For years, private label products have presented a low-priced, high-volume alternative. In emerging economies like Hungary, where consumer choices are driven by price rather than brand name, this is a winning strategy. According to the global study by ACNielsen, a marketing information company, “across all of the 36 countries and 80 categories studied, private label products were priced on average 31% lower than their manufacturer counterparts. The geographic variance went from a price differential of 50% lower in Poland to only 10% lower in Hong Kong.” Europe took the lead with the highest private label value shares, in terms of absolute dollar sales, while the US ranked first as a private label country. Paper products, plastic bags and wraps came in first in private label sales, although a strong, private label presence manifested itself across all types of food. Private label cosmetics and baby food showed strong growth rates, demonstrating increasing consumer trust in private label goods. The most striking results of the ACNielsen study were associated with markets in Hungary, Poland, the Czech Republic and South Africa. These countries posted the highest private label growth rates, “with an average growth rate in private label sales of nearly 50% ... with all four countries showing over 25% growth - Poland underwent an amazing 115% growth, the Czech Republic and Hungary each experienced a growth rate of 44%, and South Africa grew by 28%,” according to the study. This further confirmed that the growth of private label products is outpacing brand names . “The high growth rate of private label in the developing markets are directly related to the expansion of global retailers beyond their traditional geographic borders. As they build infrastructure, they build their private label brands,” said Jane Perrin, managing director at ACNielsen Global Services.

Catching up
CEE retail markets are also growing at a pace that will cause Hungary and its neighbors to reach Western European standards within 10 years - twice as fast as most economists predicted, said the BBC report. Following the initial infatuation with overpriced Western products in the early 1990s, Hungarians took a step back during the painful adjustments of the country’s economic transition, when middle class purchasing power steadily declined. Consumer preference was given to cheaper and familiar domestic goods. In the second half of the 1990s the Hungarian middle class experienced a recovery, making Hungary a booming market for retail chains. In new markets, the future prospects for ‘low price - high volume’ private label goods are more than promising. “Retailers will also continue to build on the power of private label by offering even more premium priced, higher quality products. Manufacturers of branded products will see private label as a growing competitive threat in the global marketplace,” Perrin said. There are some fears giant retailer expansions and private label marketing may eventually eliminate traditional local products and cause a homogenization of lifestyle.

Regional shoppers are “able to spend up to 30% of their income on groceries, more than twice the maximum seen in the west“- BBC report

The BBC report points out, however, that 90% of products sold in CEE Tescos are sourced locally. Tesco would have a difficult time if it did not appease local shoppers with its wide selection of Pick salamis and other local favorites . While private labels steadily increase their position in emerging markets, the ACNielsen study also uncovered that in some categories, private label prices are equal or even higher than brand name products, namely domestic ones. Some private label products bought as imports, and hence more expensive than domestic alternatives. In countries like Hungary, Poland and the Czech Republic, less expensive, low-end manufacturer brands are available at a discount in smaller, more traditional local outlets as opposed to higher-end products in the more expensive supermarket and hypermarket chains. Yet, there is little doubt market survival will become tougher for local manufacturers, especially as Central European candidates join the single EU market. Furthermore, considering the future growth of private label products predicted by ACNielsen, there could be fewer domestic brands on shelves. “Manufacturers of branded products will continue to feel added pressure especially on price and on managing the shelf. Additionally, discount retailers will continue to expand at a fast rate throughout the region,” states Rob Clark, marketing director at ACNielsen Emerging Markets, adding that, “Private label shares will reach 15-20% in five years’ time, especially in Hungary and the Czech Republic.”