The recent report from Rabobank on the growth of Private Brands has been picked up by the mainstream news media all around the world, this article from the New Zealand daily The Dominion Post filters it though a New Zealand lens that is still remarkably similar to other markets.
Private brands vying for shoppers
Grab a shopping trolley, wheel it around your local supermarket, and have a look at how many private label goods now fill the shelves.
Also known as “own”, “store”, and “retailers”‘ brands, private labels compete for attention among something like 30,000 brands at any one of our average-sized supermarkets.
Progressive Enterprises, one of the two big supermarket players, estimates it has 1600 private-label products out of the 30,000 or so products on sale.
Some of the private-label goods can sometimes be much less expensive, with specials capable of placing the house brand at a significant discount, even as much as 50 per cent. This could be greater still for both supermarket groups’ lowest budget brands.
A recent report from Rabobank on private labels said they would increase from the current 25 per cent of the food retail market to 50 per cent by 2025.
Industry players said the global figure was higher than in New Zealand, where private label goods were currently estimated at 15 to 20 per cent of goods on supermarket shelves.
Having said that, it really depends on the category of goods – private-label milk, for example, is already well above the 50 per cent mark because some consumers perceive it as a commodity rather than a strongly brand product.
The rising price of milk, subject now to a potential regulatory inquiry, has also played a part.
It was the global financial crisis, which the world is now slowly recovering from, that sparked the upsurge in private labels as shoppers were forced to become more price-conscious.
“We’ve seen that already with milk where label products are really only about 13-15 per cent now and that was about 50 per cent in 2005,” said Katherine Rich, chief executive of the Food & Grocery Council and chief lobbyist for the fast-moving consumer goods industry.
Once universally frowned upon as being inferior in quality, private labels can be found to offer not just better price, but a better product. The effects of the recession, Rabobank contends, will fuel further private-label expansion for years to come.
Historically, brands have been unable after an economic recovery to recoup all the share losses they made in tough economic times.
The good news was that shoppers would still have access to familiar brands but also greater access to lower-priced private-label goods, Rabobank said.
“A-brands will retain their importance for retailers to anchor categories’ price levels and give consumers choice and familiarity.”
EVERYONE’S a winner – except smaller B-brands. They will have to change their game and shoot for either the premium market through innovation in a new product or specialise in a private label.
Private labels mean greater margins for the retailer, which historically watched as brands gained strength through advertising and promotional efforts.
Rabobank’s report said brand suppliers were able to take a larger share of the profit at the expense of retailers’ margins. From the retailers’ point of view, making your own label and hanging on to a greater share of the manufacturing margin through economies of scale and a reduced cost base makes sense. Private labels have also helped beef up their negotiating power with suppliers and build consumer loyalty.
What’s at stake? The food section of the fast-moving consumer goods sector is big business, with supermarkets accounting for a little over half of retail food spending here, estimated at $25.9 billion annually. The Food & Grocery Council describes it as a cut-throat business.
Little wonder, then, that the two ruling supermarket players, Foodstuffs (New World, Pak ‘n Save and Four Square) and Progressive (Countdown, Foodtown and Woolworths), are uber-competitive.
Foodstuffs is still slightly ahead of the game with 57 per cent of the market, according to data from research company Nielsen. Both big supermarket players offer a huge range of store-brand goods.
As to Rabobank’s suggestion that private labels will account for half of what’s on the food retailers’ shelves by 2025, Ms Rich thought that was an “ambitious prediction” for New Zealand.
“It’s quite hard to generalise across everything in a supermarket because a home brand or a private label works for some categories but for others it could be the kiss of death,” she said.
It’s a bit of a contentious issue in the industry as supermarkets have to balance gaining better margin against potentially eroding the goodwill of the branded product suppliers. Within her membership, Ms Rich said, there was a range of views, from those who see private label as an opportunity and those who see it as a cost. It was favoured by those who could boost their factory output by making another product specifically for the supermarket.
Where local manufacturers lose out is when they don’t win the contracts to supply the products which are then imported from the likes of Southeast Asia and China and their sales end up being eroded.
“I think they [the supermarkets] know it would be a fast way of burning suppliers’ goodwill given the compact nature of the sector … relationships matter here because of that,” Ms Rich said.
Ultimately, the decision rests with the shopper – the one paying for the goods.
Retail analyst Tim Morris, of Auckland’s Coriolis Research, said shoppers were creatures of habit, nowhere more so than on food. “They push their shopping trolley around the supermarket in a bit of a daze, they’ve got to buy hundreds of different items, they are low commitment,” he said.
Some favoured one brand, others just grabbed something that was on special. “They’re relatively like advanced robots. They’re not going through the stores as a scientist would examining each product, they’re trying to rapidly get through and go on with their life – things are occurring on auto pilot.
“The whole advertising industry is built on this idea of selling the sizzle, not the steak. We all understand the game. That’s what it is.”
Industry consolidation has changed the amount of shopper choice in label brands.
The major brand players are rallying around fewer, bigger brands, eliminating the smaller ones. “Companies like Procter & Gamble used to have 20 or 30 different detergent brands and they [whittled] those down to a handful. All the major players are doing that,” Mr Morris said. But he believed there were limits to how much market share private labels could attain.
“In the UK clearly the retailers went too far. It was over 50 per cent more than 10 years ago, that came backwards. People actually got a bit turned off by it. Within that there were categories that were 80 per cent and there were categories that were 5 per cent.”
Consumers were slow to change their shopping behaviours, Mr Morris said. Coles in Australia thought it would attain 30 per cent saturation for private labels within three years from the existing 12 per cent or so, but failed to do so, he said.
“People are not going to change the contents of a third of their shopping trolley in three years, no matter what you do.”
Expect a slow rise, then, of private labels within New Zealand, and it will be the label brands that prove they are worth the extra spend or capture shoppers’ taste buds with innovation that will outdo the competition.