In-house labels are proving a big hit for Coles
THEY’RE cheaper than brand-name groceries, but they no longer have to look that way.
Far from the plain-wrapped budget offerings that had little to recommend them than rock-bottom pricing, the new generation of “home brand” products now account for almost a quarter of supermarket sales.
Private label products — the term retailers use to denominate in-house brands — make up 23 per cent of supermarket revenue, up from around 10 per cent in 2000.
Greg Foran, director of supermarkets, liquor and petrol at Woolworths, says the shift was catalysed by German discounter Aldi’s entrance to the Australian market in 2001, with the economic downturn accelerating the trend in more recent years.
“If you’re going through a global financial crisis, you often see discounters such as Aldi and generic products grow faster than branded products, which is a reflection of people having less money and those who do have money wanting to spend less,” he says.
However, Australia is still a long way behind Britain, where private label has a market share of around 45 per cent, highlighting the growth that is possible in the local market.
Foran says Aldi, which stocks private label products almost exclusively, fundamentally changed the rules on private label for Coles, Woolies and Metcash, the wholesaler behind the IGA chain of independently owned supermarkets and owner of the Black & Gold private label brand.
“Instead of running a product that is perceived to be of lesser quality, Aldi actually improved the quality stakes and kept the prices down.
“That creates a competitive reaction across the marketplace,” says Foran.
Rod Evenden, general manager of Woolworths private label division, says Woolies has upgraded the quality of about three-quarters of its private label products, which are ranked from the basic white-labelled Home Brand at the bottom end to the mainstream Woolworths Select, which is pitched as a competitor to market-leading brands.
“Every product that we put on the market, we grab the market leader in the category and benchmark our product against it . . . if it comes up as acceptable to customers it goes into the range and if not, then we go back and reformulate it until we find something customers do like,” he says.
Coles merchandise director John Durkan says that while customers demand name-brand quality, they still expect to be able to save money by buying private label.
“If it’s not priced at a discount of 15 per cent or more, there’s no rationale for a customer to buy,” he says.
Given that they don’t have to compensate suppliers for the value associated with their brands, supermarkets are able to deliver these savings while still banking higher profits than they would selling branded merchandise, with figures from retail sector consultants Coriolis putting the average gross margin on private label products at 35 per cent, compared to 25 per cent for branded goods.
“We don’t have all the overheads of a huge marketing budget, all that proprietary stuff, so it’s a much lower cost and that translates into the price the customer pays,” Durkan says.
Since being taken over by Wesfarmers three years ago, Coles has completely overhauled its private label offering, closing down the “You’ll Love Coles” brand launched under previous management. “One thing that customers told us when we first arrived was that they didn’t love Coles at all, so it was quite a misnomer,” Durkan says.
The new mainstream brand, simply badged as Coles, instead features more subtle “quality promise” badging offering refunds if customers don’t feel the product is up to scratch.
Both the major chains have also introduced a number of “pseudo-brands” — products that appear to be mainstream branded goods but on closer inspection reveal small print saying they have been “packed for” Woolworths or Coles.
It’s a strategy Aldi has used almost exclusively, stocking its supermarkets with a limited range of about 1000 products, most of which bear a striking resemblance to market-leading brands but are actually in-house labels.
At Woolworths, Foran says pseudo-brands make up just a handful of the 2000-strong private label portfolio, but in some segments — such as miniature chocolate bars designed to mimic market leaders Mars, KitKat and Bounty — they are seen to have more appeal than a standard private label.
“We know that if we call it Home Brand, it won’t sell as well because the product is put in kids’ lunch boxes or given as an afternoon snack, so there will be a stigma associated with that for children,” he says.
At Coles, Durkan says Coles has employed the same strategy with skin-care products, launching an in-house brand rather than try to push a Coles-branded moisturiser.
“Customers have high expectations and it’s quite an expensive category, and Coles isn’t known for the science behind that, so we made a skin-care brand called Derma,” he says.
Rowena Vitarelli, shopping in Coles’ Tooronga supermarket in Melbourne’s east with daughter Amelia, says she mainly buys private label products for commodity items such as milk, cat food and flour.
“I’ll give other things a go, like paper towels, when they’re the cheapest, and canned fruit or salmon, and then if I don’t like it, I’ll go back to the brands, but for something like milk I can’t see the point in paying more unless I’m buying organic,” she says.
However, Vitarelli admits that she does find herself being swayed by the upmarket packaging of the new-look private label.
“It definitely makes a difference — when it’s actually got Coles branding on it you think it’s better than the really cheap stuff, but that might just be because it looks prettier.”
But she confirms Durkan’s suspicions on the limits to which private label can extend, ruling out buying private label personal care products after years of loyalty to branded items.
“It might sound snobby, but I wouldn’t buy face cream from a supermarket,” she says.