Coles is aiming to have private label products make up 40% 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.
This is significantly less than supermarkets in other countries. Private label products account for 41% of supermarket sales in the UK, 42% in Spain, 36% in Germany and between 27 and 32% in most other European countries.
Why private labels?
Private label products also help retailers differentiate themselves from competitors by giving them unique products.
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.
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.
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 suggests that Coles may overlook local manufacturers, instead seeking out international manufacturers to produce some ranges.
The 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.
- ^ make up 40% (www.wesfarmers.com.au)
- ^ Phantom brands haunting our supermarket shelves as home brand in disguise (theconversation.com)
- ^ currently account for (www.iriworldwide.com)
- ^ similar (www.nielsen.com)
- ^ significantly less than supermarkets in other countries (www.nielsen.com)
- ^ academic study (journals.ama.org)
- ^ may cost retailers 40% to 50% less (www.retailtouchpoints.com)
- ^ claim (www.cspdailynews.com)
- ^ Woolies private label strategy will play directly into the hands of Aldi (theconversation.com)
- ^ 8-10% premium on margins (hbr.org)
- ^ liquor (www.drinkstrade.com.au)
- ^ Myer (davidsonbranding.com.au)
- ^ Progressively higher-quality (insidefmcg.com.au)
- ^ much lower prices than branded products (www.businessinsider.com.au)
- ^ said (www.smh.com.au)
- ^ suggest (stud.epsilon.slu.se)
- ^ report from the European Commission (www.vmt.nl)
- ^ improve quality and introduce new product lines (www.nielsen.com)
- ^ Woolworths and Coles should heed simplicity lesson from Aldi (theconversation.com)
- ^ delisting (www.accc.gov.au)
- ^ minor brands will be the ones to disappear from shelves (www.choice.com.au)
- ^ will not notice the difference (www.ausfoodnews.com.au)
- ^ abundance of choice (www.swarthmore.edu)
- ^ Research shows (digest.bps.org.uk)
- ^ to compete with Aldi and Kaufland for price-sensitive customers (www.macquarie.com.au)
- ^ House-brand push boils down to capitalism's crisis (theconversation.com)
- ^ previously looked to local manufacturers to produce their private label ranges (www.ausfoodnews.com.au)
- ^ also announced a wish (www.wesfarmers.com.au)
- ^ 'Honey, I shrunk the store': Why your local supermarket is getting smaller (theconversation.com)
- ^ supermarkets are getting smaller (theconversation.com)
- ^ likely require (sloanreview.mit.edu)
Authors: Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology