If you’ve received a glossy supermarket catalogue in the mail recently, you’re aware the battle for Australia’s $80 billion grocery docket is well and truly on.
Coles is eager to assure shoppers its prices are “down and staying down”. At Woolworths, it’s a price knockdown (“and staying down!”). Even IGA customers can save a bundle thanks to its “locked down low prices”.
So where are these dollar dazzlers coming from? Many from the push towards private label, or home brand, products, a trend which industry experts say could spell trouble for the food manufacturing industry. They’re worried consumers will be left with less choice on the shelves, while an ever-increasing amount of suppliers being forced out of business will jack up prices.
The big two of Coles and Woolworths are today facing the music at a Senate inquiry into diary prices and cuts to generically branded milk, eggs and bread. The discounts have angered farmers, manufacturers and suppliers who say lower prices will create an unsustainable food industry. Consumers and producers will be the losers, they say, as smaller players are forced out by the big chains.
One supply chain source, who has dealt extensively with the big two but did not want to be named for fear of a backlash, says there is an increasing allocation of shelf space to cheaper house brand products and it’s hurting branded goods.
“Private label is exploding,” the consultant told Crikey. “It’s hurting manufacturers of branded products, even the multinationals are hurting.”
While customers might win in the short term through cut-price milk and bread, those savings will be lost as other prices are forced up, he says. Billions of dollars of products are being brought into Australia under generic branding, industry sources say, with many of it manufactured overseas for prices much lower than Australian products.
Another supply chain manager told Crikey the range on the shelf is being “decimated” by house brand products.
The figures speak for themselves: according to Nielsen, home brands represented 24.5% of supermarket sales in the September quarter of 2010, up from 23.2% in the last quarter of 2009. Sales of generic brands are higher in some categories than others: eggs and sugar, for example, are predominantly sold as home brand, while biscuits and fruit juice are dominated by branded sales.
A recent Eye On Australia report found 40% of respondents are buying house brand products more than they used to, while 65% strongly agreed that home brand products are just as good as the branded stuff. That represents a substantial increase from 2005, when home brand sales represented 12% of grocery sales in financial terms and 19% of volume sales.
As customers leave more room in their trolley for generic products, the big chains are responding in kind by devoting more shelf space to what is produced under their own name. Coles currently has about 3800 generic products that cover its three brands — Coles brand (mid-level), Coles Smart Buy (basic) and Coles Finest (premium). Five years ago it had around 1600. The average store has between 20,000-25,000 lines on its shelves.
While the exact numbers are closely guarded by the big two, Coles has said in the past house brands provide double-digit sales growth.
Some commentators have attributed Coles’ fightback against market leader Woolworths to its home brand strategy, which began in 2005 after former Coles CEO John Fletcher announced a push for house brands to represent 30% of all sales by 2007. Ian McLeod was brought in by new owners Wesfamers to hone the policy as Coles CEO in 2008.
McLeod was formerly a key part of the management team that turned UK retailer ASDA into one of the largest chains behind supermarket giant Tesco, where house brands have been a part of the grocery environment for years. At Tesco at least 50% of all products are house brand offerings and there is a growing belief the big two are implementing the house brand blueprint mastered by goliaths like Tesco.
Coles has said its home brands typically offer 5-6% more gross margin on sales than equivalent brands, while Woolworths says it “can clearly make a better margin” on private label. House brands offer better margins for the big supermarket chains because production costs are lessened by cheaper packaging and marketing costs.
The chains can also alter the quality of the product on offer, while giving its house brand superior presence in store. One supply chain source said it was becoming harder for smaller suppliers to get on the shelf.
“You can see their range is shrinking,” a supply chain manager told Crikey. “The only brands you see on the shelves are the big brand names. It’ll probably end up that you’ll have three or four brands and a host of generic brands. And that’s no big secret; that is quite actively the strategy of the big two.
“The consumer won’t swallow it, only having one choice. Consumers in Australia like choice.”
Indeed they do. According to the Eye On Australia report, more than half of respondents were concerned their favourite brands seem to be disappearing from the supermarket shelves, while 74% think that Coles and Woolworths have too much dominance.
Together the two giants control between 55% and 75% of the market share for grocery items. According to Woolies and Coles it’s closer to the former, while industry observers think it’s more like the latter.
A supply chain expert told Crikey that, despite short term price cuts, the consumer was not realising the full advantage of the benefits of lower prices, while producers had to live with tighter margins because they’ve “got no other choice”.
“It gets pretty tight,” he said. “Nobody would argue that generic products aren’t a necessity. But I think it’s the strategy and subversion that’s probably a little bit damaging.”
Woolworths, not to be left behind, has around 2000 house brand products — the basic Home Brand, as well as the more exclusive Select brand and health-orientated Macro brand, which altogether take up about 7% of shelf space.
Analysts believe house brands make up between 10-20% of Woolies’ sales, though again those numbers are kept secret. In 2006, Woolworths had about 1400 generic brand products on its shelves.
Woolies and Coles have said in the past the move to private label has come off the back of the popularity of German retailer Aldi, who entered the market in 2001 and have since grown to command a market share of around 5%. Aldi’s model is almost entirely based around private label products, with 5% shelf space reserved for “must have” brands like Milo and Vegemite. Aldi notched a net profit of $91.94 million for 2009, a 27% improvement on 2008.
Third force IGA — which claims an almost 20% market share — has also seen sales growth in its two private label offerings. The independent grocer’s budget Black & Gold label grew 4% in 2010, while the premium IGA Signature range grew 7%.
Meanwhile, at the checkout, numbers are good. Last year, Woolworths recorded a 10.1% increase in full-year profit with a forecast for growth of 8-11% for the current year, although that forecast was downgraded recently because of the recent floods and New Zealand earthquakes. Coles owner Wesfarmers saw a 33% increase in profit to $1.17 billion for the first half of the current year, with a resurgent Coles recording earnings of $575 million (up 18.3%) to provide the lion’s share of the company’s result. Last year, IGA owner Metcash reported a rise in net profit of 12.4% to $227.6 million for the 12 months to the end of April.
*Tomorrow, in our ongoing ‘Stacking the shelves’ series, Crikey looks at the growing political backlash against private labels and manufacturer concerns about market power. Do you have a story about operating within the supermarket environment? Send us an email or leave an anonymous comment.
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