Private Labeling South Africa – Great opportunities for exporters

ExportFelix Wieneke
Private Labeling South Africa – Great opportunities for exporters

Private labeling within South Africa’s FMCG retail sector was historically driven by corporate retailers and embraced by South African shoppers. However, over the past few years, private labeling has also started emerging within the formal independent wholesale trade.

Shoppers at formal independent stores (including both consumers and informal traders) have shown an increased demand towards the cost-competitive, generally high-quality alternatives entering the African market.

Before we elaborate on the private labeling opportunities available in South Africa, let’s first define exactly what private labeling is.

Private labeling – Definition

A product that is manufactured by a contractor or a third-party manufacturer but sold under a retailer’s brand name is called a private label product. The retailer purchasing the private label products has control of how the products are packaged and how the label should look.

Private labeling is a common practice in today’s shopping world. It makes it possible to outsource manufacturing, sourcing, importing, shipping, and other aspects of the supply chain and can help gain access to the entire supply chain. It allows businesses to sell products under their own brand, without the headache of manufacturing the products themselves.

Private labeling exists in almost every category of consumer products, including but not limited to personal care, beverages, cosmetics, paper products, household cleaners, condiments, and food products such as salad dressing, dairy products, and frozen foods.

Private label products often cost less to purchase compared to branded products which is why it is a popular choice among African companies.

Shift in South African consumer habits:

Traditionally, South African consumers have been loyal to brands, however, the decline in household disposable income and the rise in food prices has resulted in the shift towards low-cost brands. The decline in brand loyalty is evidenced by growing presence of secondary  ‘value’ brands and private label growth.

Participation of private label products in the  South African shopping basket grew from 22.8%  during 2019 up to 24.3% by May 2021. Sales of private label products have been tracking ahead of branded goods.

In March 2020, just before South Africa’s first and highest Level 5 lockdown, private label growth reached a peak of 27.2% increase due to pre-lockdown stockpiling.

The upward growth in demand for private label products continued to grow throughout 2020.  All while during this same period, name brands experienced a decline in sales. The trend continued throughout April  (+19.3%), May (+18.5%) and June (+18.2%),  according to the NielsenIQ State of Private Label Report for South Africa. Statistics show that a staggering  69% of South African of cash-strapped shoppers have switched to cheaper brands in response to recent food price increases.

Private Labeling in South Africa:

The formal independent trade within the South African FMCG retail industry (consisting of wholesalers and retailers) has undergone great changes in the past five to ten years, having been historically categorised as “traditional trade” with a distributor focus of bulk offerings. 

To support the needs and demands of South African consumers, wholesalers and retailers are tapping into trends such as the rise in private label products. These businesses regard growth in private label as a key strategic focus area because of the margin advantage it provides.

Frozen Foods were among the FMCG private label goods that saw R2-Billion in sales in 2020. This was mainly driven by South African consumers purchasing bigger pack sizes and more products. Healthcare products was also among the fastest growing private label products, with sales having increased by 34.8%.

Personal care private label products have also seen a consistent gain in value share over the past three years. This follows the change in demand from consumers following the Covid pandemic, products such as  hand sanitizer, with 69% of consumers claiming to have purchased more private label personal care products compared to a year ago.  

Advantages of private labeling

Private labeling can offer retailers several advantages including:

  • Loyalty - The key to long-term business success is building a loyal customer base. Branding through private labeling is a great way to build loyalty from customers who like the products. Limited accessibility makes customers feel connected to your brand and like they are among the select few who own it, which ultimately increases loyalty and sales from the customer base.
  • Control over branding - Own-brand products carry the brand name and packaging design created by the retailer.
  • Control over production - Third-party manufacturers operate at the direction of the retailer, providing complete control over product ingredients and quality.
  • Control over pricing - With control over the product, retailers can also determine product costs and profitable pricing.
  • Control over profitability - With control over production costs and pricing, the retailer has control over the profitability of its products.
  • High profit margins - Private label brands tend to have higher profit margins than resale products because it is usually cheaper to make your own products than to buy pre-made products, especially if the development and marketing of the products is of high quality.
  • Wholesale income - In addition to selling a product exclusively, companies can consider acting as wholesalers for their brand and offering limited access to other retailers who pay a premium for the right to carry the brand. In this way, additional revenue can be generated, and brand awareness can be increased.
  • Adaptability - Smaller retailers can quickly bring an own-brand product into production to respond to increasing market demand for a new feature, while larger companies may not be interested in a niche product.
  • Exclusivity - Own brands allow a company to stand out from the competition. The best thing about own brands is that in many cases the company has the exclusive right to sell the product. Good marketing creates demand for the product, which benefits the company as it is the only source for the product.

Conclusion

While it may be 2 years since the COVID-19 pandemic struck, the pandemic has caused undeniable changes in the  buying habits within the retail landscape and in consumers’ lives. These disruptions have resulted in changes in both shopper behavior and retailer approaches to private label products.

The economic impact of the pandemic on consumer disposable income has amplified the key shopper need for ‘value as a necessity’. More shoppers are now switching from their favorite brands to cost-competitive alternatives. With this,  the formal independent trade is slowly responding to its shoppers’ needs by providing private label goods. It will be interesting to see how much this continues to evolve in the coming years and how formal independent retailers respond with innovative private label goods – with price and quality at the heart of their offering.

Looking to the future, private label will continue to be a very good space to play in for manufacturers and retailers alike. This is because African consumers are increasingly switching from their favorite brands to cost-competitive alternatives supplied from the private labels. With this,  the formal independent trade is slowly responding to its shoppers’ needs by providing private label goods. It will be interesting to see how much this continues to evolve in the coming years and how formal independent retailers respond with innovative private label goods – with price and quality at the heart of their offering.

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Tags: Export, South africa