Private labels debate: should we get over it?

The debate over private labels at grocery stores rages on but one beverage industry veteran, Peter Brooks, has told grocery manufacturers bemoaning the rise of private labels to ‘get over it’.

“It’s a fact of life and that’s where the future is heading for some categories,” he said.

“The fact is whether it’s Coles, Woolworths or Aldi, it’s their business and as long as their shareholders are happy I don’t think anyone else can do anything about it – you can fight it all you like, but that’s not going to help.”

Brooks has been bottling water, juice and soft drinks for 40 years. His company, Tru-Blu Beverages produces branded drinks as well as private label beverages for many of the major retailers.

His comments come as Woolworths’ private label brands are expanding two to three times faster than national brands. It’s an indication consumers are happy with the retailer’s approach to double the sale penetration of house brands.

Managing director of Australian supermarkets, Tjeerd Jegen told AFR total sales across Woolworths’ house brands like Homebrand, Select, Gold and Macro, had increased by “low double-digits” this year.

This is two to three times the rate of growth in national and international brands, where deflation has hampered top-line sales growth.

Private label products make up 6 per cent of stock-keeping units on Woolworths shelves and 10 per cent of total sales.

According to Nielsen’s Homescan survey, private label brands at Woolworths now make up 18.3 per cent of packaged grocery sales, up from 16.8 per cent in April. Coles’ private label brands make up for 20.5 per cent of packaged groceries, down from 20 per cent two years ago.

Jegen said customers are ‘voting with their feet’ and like the better value and choice private labels have to offer.

In a major study published by Harvard Business School Press in 2007, titled ‘Private Label Strategy’, it said there is an innate conflict between manufacturers and retailers as customers and retailers as competitors.

There have been complaints private label brands were rising faster than proprietary brands because of strategies by retailers that gives partiality to private brands.

Suppliers have complained private labels are selling more than branded goods because brands are being taken out of shelves, reducing consumer choice.

The Australian Food and Grocery Council has rejected suggestions consumers are welcoming retailers’ private label approach.

“We know that choice is being restricted and therefore competition is also being restricted under the private label strategy,” AFGC chief executive Gary Dawson said.

“Clearly consumers have to choose from what’s in front of them, and there’s no lack of complaints about what’s happened to their choice.”

Suppliers have complained to the Australian Competition and Consumer Commission that retailers have taken their brands off the shelves for private labels unless they agree to decrease prices, pay extra fees or agree to supply house brands.

Suppliers have insisted retailers quarantine or ‘ring fence’ their private label and branded grocery buying teams to block supermarkets from using confidential supplier information to create and market private label brands.

But both Jegen and Nielsen’s executive director retail services, Kosta Conomos, have rejected this idea.

“When you are mixing a decision on the best mix for a category you need to look at the overall proposition – that’s not necessarily brand versus private label but the tiers within the category in terms of good, better, best and understanding where duplication is required,” Conomos said.

But ACCC chairman Rod Sims has said the watchdog is seriously considering ring fencing as part of its investigations into the abuse of market power by major retailers.

In July last year business information research firm IBISWorld predicted the share of private label products will rise significantly over the next five years and will make up over 30 per cent of supermarkets sales by 2017-18.

IBISWorld general manager (Australia) Karen Dobie had said private label products have been one of the fastest growing divisions over the past ten years. Growing costs of living, further worsened by the carbon tax, meant more consumers were expected to choose private labels as a cheaper alternative.

Dobie said spending on private labels is set to reach $31.8 billion by 2017-18, a growth of nearly 50 per cent compared to five years ago and a 33 per cent share of total supermarket sales.

“In 2007-08, private labels accounted for just 13.5 per cent of total supermarket sales- meaning the segment has grown by more than 85 per cent over the past five years,” she said.

The research had shown the growth in market share of private labels across many product categories, including butter, bread, fresh milk and liquor. Market share of liquor in 2012-13 was 8 per cent, compared to just 2 per cent in 2002-03.

In March, Food Magazine reported wine producers in Australia were becoming concerned over the supermarket giants’ growing interest in wine.

There were reports Woolworths had registered interest in the collapsed Barossa Estate Winery, and Western Australian wine producers were fighting the supermarkets’ plans to open liquor shops in Margaret River.

Wine Industry Association of WA general manager Aymee Mastaglia said competition between Coles and Woolworths would reduce prices and overpower cellar doors and independent retailers.

She stated supermarkets buy wine in bulk from wineries and bottle them so they look like they are from boutique wineries, when they are actually private label products.

“Even if consumers want to support local business, they often don’t realise they are buying the supermarket’s private labels,” she added.

Choice reported last year private label products can yield huge profits even though their prices are lower than branded goods.

This is because, as Coles merchandise director John Durkan said: “We only have to advertise Coles.”

Durkan also said the retailers set up individual research development areas, and work with suppliers who supply many people, to cut cost. Manufacturing is streamlined.

Supermarket shelves are not flexible. There is little space for growth after the preliminary supermarket floor plan. If there are two brands competing for shelf space, and one brand is owned by the supermarket, there is little doubt who will get that shelf space.

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