Private label products are taking over supermarket shelves

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Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

Coles is aiming to have private label products make up 40 per cent of its product range over the next five years. This increase will apply across multiple tiers of products, with a focus on quality, innovation and new strategic global relationships.

More supermarket-owned brands will mean lower prices for consumers and greater margins for the retailer. But the move could significantly impact Australian suppliers as their branded products are delisted and supermarkets seek out cheaper manufacturers overseas.

In Australia, private label products currently account for 18.1 per cent of all retail dollar sales. The proportion is similar in North America (17.7 per cent).

This is significantly less than supermarkets in other countries. Private label products account for 41 per cent of supermarket sales in the UK, 42 per cent in Spain, 36 per cent in Germany and between 27 and 32 per cent in most other European countries.

Why private labels?
In one academic study, 85 per cent of the retailers surveyed said “improved margins” was their main reason for investing in private label products.

A private label product with features and quality parity with national brands may cost retailers 40 per cent to 50 per cent less to manufacture and distribute to customers.

Some American convenience stores claim gross margins of up to 72% on private label bottled water, for instance, compared to 45% on branded alternatives.

Overall, supermarkets see an 8-10 per cent premium on margins for private label products over branded ones.

Private label products also help retailers differentiate themselves from competitors by giving them unique products.

Private labels have increased their footprint across many retailers, including discount department stores, liquor and convenience stores and traditional full-line department stores like Myer.

The flipside of private label expansion
The main fears about the continued growth of private label brands are that it could discourage suppliers from innovating with their products, jeopardise the livelihoods of smaller, independent suppliers, and ultimately result in less choice for consumers.

Consumers are currently benefiting from increased competition. Progressively higher-quality private label products are available at much lower prices than branded products.

Just a few years ago then Woolworths CEO Grant O’Brien said the company would put customers “before” suppliers.

Some researchers suggest that increasing private label ranges could impede innovation in the food industry. This is largely because branded manufacturers will have less incentive to invest in new products only to have them copied by the contract manufacturers who produce private label goods.

But a recent report from the European Commission actually found innovation in the food supply chain is not under pressure. And a quick wander through any major supermarket will illustrate the effort supermarkets are making to improve quality and introduce new product lines.

Smaller, local independent brand manufacturers and wholesalers could be exposed to “delisting” – where a supermarket does not renew a supply contract in order to free up shelf space for its own private label alternatives.

Naturally, if Coles is aiming to increase the proportion of its own branded products, minor brands will be the ones to disappear from shelves, not major brands like Coke, Cadbury or Nescafe.

As for less choice, most shoppers will not notice the difference, or may enjoy the shopping experience more.

Supermarket shopping is notoriously a low-involvement, mundane and habitual task. Shoppers often visit the same supermarkets, buy the same products and browse the same aisle. In fact, studies continue to demonstrate that the “abundance of choice” is problematic for many shoppers, who simply seek an “optimal choice”.

Research shows that when faced with a “good, better and best” option, people choose the one in the middle. This is why we see supermarkets offering very basic generic private label products all the way through to “select” and “finest” options.

Accordingly, a successful private label strategy hinges on leveraging perceptions of both price and value. Private label products are a key weapon for Coles and Woolworths to compete with Aldi and Kaufland for price-sensitive customers.

Australian supermarkets previously looked to local manufacturers to produce their private label ranges. However, Aldi, Kaufland, Costco and Lidl have found success by leveraging their global sourcing strategies, providing both quality and economies of scale, and so lower prices.

This appears to be on the cards for Coles. It has also announced a wish to develop new strategic global relationships to realise its 40% private label target.

This suggests that Coles may overlook local manufacturers, instead seeking out international manufacturers to produce some ranges.

Coles’s announcement comes as supermarkets are getting smaller in the face of rising costs. Together, these trends could have long-term implications for the Australian grocery industry.

The ConversationThe presence of more private label goods will likely require domestic manufacturers to themselves produce more private label goods to minimise offshoring. But, in doing so, manufactuers will commoditise themselves, thereby giving retailers even more power.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.

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Total Comments: 16
  1. 0

    Always wondered why there was so many types and sizes of hair shampoo and other similar products on the shelf, I don’t need this? But then the penny dropped.

    They weren’t doing this for me, they were doing it to occupy more shelf space in the supermarket and promote their product.

    So what are private label products going to do for me? Nothing.

  2. 0

    Read the labels. If not GROWN in Australia don’t buy it unless you like food grown on contaminated land in China. It’s often a misleading game but the description of choice to avoid printing where food is grown is “packed by…”. That way it can come from anywhere and not be disclosed. It should be disclosed.

    • 0

      MICK are you not going to buy your favourite tomatoes from Italy now?

    • 0

      I agree MICK.
      While travelling across northern China by train I saw many wet areas and ponds that were literally fluro green by over fertilising.

      I drank a beer in Hangzhou with lots of Chinese writing all over it but in English it did say that the beer does not contain formaldehyde which is great but what have I been drinking?

      The Chinese don’t have safety controls. They just want to turn over a buck. Think of why many Chinese want our baby formula food – because its safe and theirs is not!

    • 0

      It is far worse than that Phoenix. You have heavy metals been dumped in farming areas and now the food is contaminated. Why else would the Chinese want to buy our clean food?

    • 0

      Come on folks.

      Of course the supermarkets are only buying cheap imported garbage so they can reduce our costs.

      Haven’t you noticed all those flying pigs recently too.

  3. 0

    Increased competition is driving up the private label mix for a number of reasons but mostly because it increases the retailers level of control. Those supermarkets which have no private label will be the first to go under when the price war gets serious.

    • 0

      I don’t understand your rationale. If there is no choice then there is no price war.

    • 0

      Adrianus you are talking about the multi-nationals which are mainly in the suburbs of large cities. The smaller rural supermarkets and shops do have access to a cheaper brand than private brands and these are often better value than those the multi-nationals have on offer.

    • 0

      Coles has always run a special on $24 nescafe at $16. Woolworths is getting aggressive and undercutting them at $14. Not to be out done, Coles is going lower again at $12. This cannot happen with private label. Consumers habitually support what they know. The price war is here already and will get more aggressive.
      AutumnOZ, it will make no difference to your rural outlet selling cheaper brands, the big guys will grab those cheaper brands that the rural guys have established a market for and undercut them with volume purchases.
      Retail is now pretty cut throat, through increased competition and cost pressures. The tipping point could be higher power prices.

  4. 0

    I buy private labels because I find monopolies unconscionable. The consumer and the company who provides the product are being held to ransom by two or three supermarket chains.
    They have bought the milk industry to its knees.
    Every time I see an own brand product I look for the alternate private brand and I am almost always guaranteed a better product.

  5. 0

    Can anyone tell me why I have to log in each day?

    • 0

      Because it makes me smile.
      I can vent all the world’s issue without it mattering one iota and then go out and enjoy my day!
      PS It also keeps me abreast of what is happening in the retirement world – and I can converse with a lovely group of people who can spell and don’t swear.

  6. 0

    My husband and I made a decision to only buy produced in Australia products (takes longer to shop), but now find we buy more fresh food. I rarely use pre-packaged food and buy locally produced milk. We’ve starting growing our own vegies and won’t buy fruit or veg that is from overseas.

  7. 0

    We have a fantastic, large IGA which has masses of interesting and different products, although mainly imported. It’s in a separate section, so you know what you’re getting. And now that the new Australian made labelling laws are filtering through, you can see at a glance what % is made here, and that’s what I go for. I always buy, for instance, Dick Smith’s Peanut Butter, Ardmona Tomatoes etc. They may cost more but I’m prepared for that to help keep Australian businesses and jobs going. Once they’re gone, China would become a huge option – no thanks.



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