Introduction

The pervasiveness of private label in recent times is undeniable, with Australia's largest grocery retailers publicly promoting their private label strategies with extensive promotional, brand and market activation support. As the retailers continue to espouse the benefits of private label to consumers – the key being lower prices, particularly for staples such as milk and bread – private label has dramatically changed the competitive dynamics between retailers and suppliers, typically as we have seen to suppliers' detriment.

Pacific Strategy Partners has advised a number of consumer goods clients on strategies to respond to the rise of private label covering a range of questions, including price rise realization, contract negotiation and simulation of industry end states to inform private label participation decisions.

Working with these clients we have built up extensive insights into the rise of private label and its impact on the competitive dynamics across Australia's consumer goods sector. This note summarises some of these insights. For more information on this topic please contact us via email.

Executive Summary

The existence of private label on supermarket shelves is not a recent phenomenon. Private label brands such as Woolworths' Homebrand and Coles' Savings and Farmland date back to last century, well before the current incarnation of today's revamped private label brands. In those days securing a private label contract was seen as a means for suppliers to utilize excess capacity with little distraction or threat to their own brands' shares and allocation on retailers' shelves. Unfortunately many suppliers fell into the trap of pricing private label on a marginal basis, rather than reflecting the products' true value proposition. This has compounded into the significant price differentials to leading branded products and propelled the high penetration of private label in many categories. You need only to look at countries like UK and Germany to predict what Australian supermarkets will look like in a few years.

In addition to the significant challenges of unwinding, or realigning, these price and legacy value proposition issues, suppliers are increasingly competing with retailers who are changing the nature of competition with their aggressive private label strategies. Changes to these competitive dynamics (see Figure 1) are leaving suppliers caught in the cross fire and shifting an even greater balance of power to retailers:

• Private Label lines have moved beyond the value segments to compete head to head with branded players
• Selling Private Label products at or below cost to drive store traffic, particularly on staple items, is magnifying the price differential to supplier brands
• Retailers discarding the traditional profit per sqm of shelf space metric and increasing allocations for private label brands is coming at the expense of supplier brands effectively increasing the shelf space 'rent' for suppliers
• Brand support increasingly controlled by retailers with suppliers paying for varying levels of retailer support
• Suppliers without a category leading brand are finding the cost of doing business increasingly unsustainable.

Figure 1: Examples of Private Label Changing Competitive Dynamics

In this environment, suppliers of private label and branded goods find themselves in a predicament of trying to balance operational efficiency and profit objectives as market share of their brands decline, and retailers exert more downward pressure on private label prices.

To respond to these challenges suppliers need a clear strategy that defines their intended role in the respective categories, and provides both a plan to realise that intent and clarity around financial outcomes. While there is no silver bullet to these significant challenges this will galvanise the organisation around a clear direction and avoid unintended consequences of tactical decisions.

For more discussion and/or information on the impacts of private label and how to respond please contact us via email.