Australia’s Grocery retailers continue the march towards private label range dominance, basing their strategic decision making on two foundations, it would seem to me.
- By controlling a large section of their sales via PL, they manage to both increase their margins at the same time they reduce their transaction costs. Good trick if you can get away with it, and in the short term they certainly can, but in the long term?? Who knows.
- What works in Europe, and particularly the UK will work here. Over 40 years in this industry, this has certainly held true, what works there generally becomes translated here at some point, in some form.
However, when considering the future of PL as a part of the landscape in Australia there are a few other considerations not present in the UK, and elsewhere in Europe.
- We have large distances, and a smaller population, making the economies of scale in manufacturing and distribution that much more elusive, and less attractive. In western Europe you have 350 million, or thereabouts living is far less space than Australia occupies, with a multiplicity of manufacturing options. Just the UK has 65 million in about the space as Victoria.
- Over the last decade, the number of middle sized Australian owned FMCG manufactures has been decimated by a combination of the high $A, the GFC, and the power of the two major retailers, so there is little left. Now the $A is lower, and the opportunities emerging, they are not coming back. Imported private label products now have to carry the added cost burden as well as the substantial costs and risks of the extended supply chain.
- Where is the innovation going to come from? Medium sized suppliers have been the source of much of the innovation that has driven category growth over the last 25 years. While it is relatively easy these days to pick new stuff off the shelves in Europe and set out to copy it, the retailers still need to have the products manufactured, and often massaged to suit local tastes, not so easy any more.
- Retailers in taking their ideas from European retailers, seem hell-bent on segmenting the PL share. No longer the cheap and cheerful substitute, European PL now offers under a range of house brand labels that cover the market from ‘top’ to ‘bottom’ as well as emerging segments like organic and halal are being pushed, further eroding the power of the proprietary brand. As a marketer I ask “for whose benefit?” certainly not the consumer.
- The Private label business model that demands minimum transaction costs on both sides does not sit comfortably with the proprietary model, with its complex trading terms. In most cases, suppliers of PL also supply proprietary products, adding to the complexity of the paperwork and relationships.
- Produce is a bit of an anomaly, as there are almost no proprietary brands. Producers and their representatives have comprehensively failed over 30 years to do any sort of branding job, so consumers do not miss what they never had. However, increasingly consumers seem to be reluctant to buy anything much beyond robust commodity products from supermarkets, believing after 25 years of cricket balls masquerading as peaches, that the specialists do a much better job.
- This last point is really anecdotal. There appears to me to be a backlash coming from consumers. A typical comment made to me last week was ‘if I do not want any choice, I will go to Aldi, but when Woolies denies me a choice, I wonder why I pay the premium over Aldi’. The two majors had better be careful, they do not ‘own’ consumers, who will make their choices independent of a retailers profit considerations.
Private label is now irrevocably a part of our lives, but I doubt if there is too much more room in dry goods for share growth without compromising retailer margins, but I guess they will be very wise with hindsight. Meanwhile, the pressure on the few medium sized manufacturers left intensifies.