Our branding article for The Melbourne Review – Private Label Needs Public Disclosure

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This year we began writing a regular column on branding for The Melbourne Review. This second of our articles explores the impact of private label brands on the retail landscape.

Whichever way you cut it, the growth in private label brands is going to continue within Australian supermarkets.

Consumers in Australia are increasingly seeing private label products as representing great value. A recent AC Nielsen research report into the power of private label brands globally found an average of 69% of all respondents agreed that ‘supermarket own brands are usually extremely good value for money’. In Australia 81% shared this sentiment.

Growing consumer adoption, combined with more sophisticated private label branding by supermarkets, has seen private label sales increase steadily from 15% in 2003 to above 25% of total sales today. Given that private label penetration is strongly correlated with market concentration, both Coles and Woolworths, with approximately 80% of all supermarket sales between them, are in a strong position to achieve their stated aims of pushing their private label sales closer to 40% of total sales.

From a consumer perspective this perhaps represents good news. Consumers are cashing in on some big savings while also believing that the discounted private label will often be coming out of the same factory as the national branded product. On the surface it’s all upside.

packaging design studioHowever, for many Australian food processors and manufacturers who have their own branded products in the market, private label is turning into a nightmare. They are witnessing the transformation of their once dedicated channel partners into formidable competitors with an unfair advantage. Never before have they had a competitor who required them to sit down and share their new product and promotional plans in advance. Never before did they have a competitor able to dictate their product pricing – a major issue when their input costs keep rising. Never before did they have a competitor who determined shelf allocations, positioning and promotional slots.
You get the picture.

The conflicting roles of Coles and Woolworths, as both supermarket channel partner and product (private label) brand competitor, places national brand owners at a huge disadvantage. They are not only facing a new breed of competitor in the supermarkets, they are also encountering a ‘take no prisoners’ attitude. Significant discounting by private label brands in 2011 spurred global Heinz executives to describe the Australian market as an ‘inhospitable environment’ for suppliers.

The lot of many national brand owners is further complicated by the fact they also supply the supermarkets with their private label products. They have rationalised their role in supplying what is essentially a competitor, on the basis of lowering their overall unit costs of production, reaffirming their relationship with the supermarket, and believing if they did not do it one of their competitors would. Regardless of their reasoning they are being complicit in a significant restructuring of their own market.

The growth in private label is building the dominant position of our supermarkets to the point where they can dictate where our food products come from and the terms on which they are delivered. This will inevitably lead to an increased proportion of product being sourced at lower cost from overseas with the potential to threaten the viability of many local food producers.

Veteran food industry consultant Dr McKinna says that while food production costs such as labour, energy, freight and compliance are rising, the retail price of virtually every supermarket food category has dropped 5% in the past 18 months, with milk and bread prices down 30-50%. He said 50% of all food sold by the major retailers was now marketed at a sale price. While Coles may have based their business strategy on ‘Down Down, Prices Are Down’ it does not mean the interests of the food industry are being well served.

Given the role private label brands are playing in reshaping the landscape of the food industry we have a somewhat radical suggestion: Why don’t we make the whole thing far more transparent?
Why not make it mandatory to declare the manufacturing source of products on the pack? This would allow consumers to identify whether the private label product they’re considering is sourced from the same factory as the national brand or not. If it is and has the same ingredients, then for most it’s a no-brainer to take the lower price. However, for a food manufacturer with national brand equity to protect the decision to also supply to the supermarkets, their private label products becomes one of brand suicide.

As a result, the majority of national brands would no longer agree to supplying private label products. The supermarkets would have to form relationships with second and third tier manufacturers, who may not have the volumes to deliver the low unit prices the supermarkets are demanding. National brands would have to get on with what they were created to do: build their brands. It may also result in the supermarkets having to vertically integrate by taking ownership of some of their supply sources. This in turn means they would have to build new skill sets and confront some of the same operational risks their current supply sources face. If they can do it better than the national brand players, then it will be on merit not muscle.

Total transparency of food product manufacturing would change the rules of engagement significantly. The respective roles of brand owner, food manufacturer and supermarket would have sharper clarity with no one – including consumers – left feeling exploited.

Peter Singline & Dave Ansett
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