Woollies overly ambitious about increase in private label products: analyst

A new report has revealed Woolworths’ plan to rapidly increase its private label products is overly ambitious.

The UBS report found the supermarket giant will probably not double the number of private-label products in stores, as it predicted at an investor briefing last month.

Retail analyst Ben Gilbert was quoted in the report as saying Woolworths and Coles will most likely increase the presence of their private label products from 18 per cent of those in stores to 24 per cent by 2014-15.

The figure would still leave the percentage of private label products in Australian supermarkets well below that of France, Germany and Great Britain, he said.

Australian manufacturers have been calling for tougher regulation on the increase in private-label products for most of the year, saying it is pushing them out of the market.

The dairy industry says current milk prices are “unsustainable” and HJ Heinz labelled the supermarkets “inhospitable” for Aussie manufacturers.

The Australian Food and Grocery Council (AFGC) commissioned a report that revealed 130 000 jobs would be lost in the food and grocery sector by 2020 if the current environment continues.

He estimates Woolworths makes over $5.5 billion in sales from generic labels, making up about 18 per cent of its supermarket sales, of which 8 per cent or $2.5 billion is Woolworths’ in-house brands, Select, Macro and Home Brand.

When Woolworths stated its intention to double penetration Gilbert said he interpreted this to mean doubling of those brands.

Doubling the penetration would take it to about 16 per cent but consultation with the private label industry suggests this target may prove optimistic based on overseas experience, and as such we have based our analysis on a [rough] 50 per cent increase in penetration.

Gilbert said a 50 per cent increase in penetration of the Woolworths in-house brands would drive a 57-basis-point increase in earnings before interest and tax margins over five years.

”The growth aspirations put forward by Woolworths, while realistic, are ambitious in our view and would require significant growth from the Select and Macro brands,” he said.

Gilbert said the low level of generic label penetration, when it’s compared to other countries, in Australia shows a more concentrated Australian grocery business.

”With the exception of the US we have found that markets with higher levels of concentration have lower levels of private label penetration,” he said.

”More concentrated markets such as Australia have placed a lower emphasis on private label until competition has increased, as in [German discount supermarket] Aldi’s entrance in 2001.”

“High levels of concentration also meant suppliers were increasingly reliant on fewer retailers.

“This gave Coles and Woolworths increased market power with suppliers, meaning that generic label business was not required as a profit driver.”


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