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Mar 29, 2011

Stacking the shelves: the rise and rise of home brand products

As the pricing war between Coles and Woolworths heats up, there are concerns the push toward home brand products could see consumers left with less choice in their trolley. In part one of an ongoing series, Crikey examines the rise of generics -- and market power.


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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22 thoughts on “Stacking the shelves: the rise and rise of home brand products

  1. Tim nash

    I am going to go against the tide here and argue for the home brand generic product.
    I do most of my shopping at the larger supermarkets and have observed a sophisticated change in supermarkets generic product. It’s not just home brand potato chips and orange juice anymore. Generic products are beginning to become innovative and introduce new products that had never existed in that market beforehand.
    Yesterday I purchased a Woolworths brand Portuguese tart- I cannot get one in Newcastle at any bakery. It’s the same with so many other products. The introduction of more generic branding can bring about more change and variety not less.
    In the past supermarkets gave shelf space to competing products, anyone browsing in todays supermarket encounters a freezer filled with 19 different kinds of margarine. With the generic product it serves no purpose to market one product like this, it does however open up shelf space to different varieties of the same product.
    Australian producers don’t always loose out either, some are getting a raw deal like milk farmers (and that is unfair) but many others that we never hear from are finding a market for their product that simply never existed before.
    Supermarkets have new products that demand new resources and increase their sales by being innovative. They have utilized their own shelf space something which any idiot could of predicted and sought to drive down the prices of their raw materials which any producer would do.
    Eventually Coles and Woolworths will invest in land and in primary producers finally completing the cycle becoming a mini communistic food collectives an unusual outcome for a capitalistic enterprise

  2. Parnell McGuinness

    Hang on just a sec – I think we need to take a step back from the hysteria.

    For years we have been told that what’s inside the home brand can is the same as what’s in the branded can – but without the pretty exterior and expensive marketing campaign.

    There are, simplified, two reasons why someone might not buy a cheaper brand:
    1/ An increasing skepticism of advertising (or less convincing advertising), OR
    2/ For quality reasons.

    So either people are not convinced by the quality advantage of the more expensive products anymore or they are less willing to pay for an expensive ad campaign to go with their baked beans on toast. Why is this a problem?

    Alternatively, is the thesis that our taste buds are declining so we’re more willing to eat crap? Because if so, that’s a whole different topic.

  3. wayne robinson

    I like generic products.

    I don’t like having too much of a choice. Who needs 50 different brands of soap. Andreas Eschbach in ‘Ausgebrannt’ said you only need two brands of each product; the cheapest and the best.

    I like to be able to go to the supermarket and be able to quickly pick up the products that I’m used to, so I also buy branded products.

    A little gripe … A certain brand of flavored yoghurt in 6x200ml packs was unavailable for 2 weeks, because the packaging was being redesigned. It’s just appeared again on the shelves, in 6×150 ml packs, for much the same price!

  4. Allison

    Husband has been saying this for yonks, support home brand at your peril, we will end up with less choice and more expensive products.

  5. InSilence

    There is far more choice in English supermarkets such as Sainsburys and Tesco than there is in Australian supermarkets and home brand products dominate sales there. For far too long in Australia brands have been selling food at ridiculous prices due to the lack of competition – home brands are finally providing that competition. I try and buy as many home brands as possible – the quality is usually just as good as brands and substantially cheaper. I have no interest in trying to keep Paul’s milk a viable business if they think that charging $4 for 2l of milk is good value.

  6. FunkyJ

    Consumers don’t care about this shit. They don’t care about what the government will say. They want cheap prices and quality goods.

    Marketing, marketing research, advertising, re-branding, and packaging “brand name” products is make those products more expensive than their “private packaging” equivalents.

    Instead of reducing these overheads, brands reduce the quality of ingredients whilst raising the cost of their products. So whose fault is it really if they suffer because of competition?

    This is just another example of an industry tied to old 19th and 20th century models of business, stuck in the past, and afraid to take risks. In an age where TV, radio and print are becoming obsolete as separate mediums, they’re unwilling to change their attitude towards competition, marketing and most importantly, consumers.

    And most annoying of all, instead of responding to consumers needs, they’re using the Government as police to protect their dwindling profits, wasting our tax dollars on stupid inquiries that will only end up hurting consumers more.

  7. Santo Calabrese

    I may have this wrong, but if Coles and Woolworths ditch the brand name products that people are familiar with, why bother with Coles and Woolworths when Aldi are offering product that is not a recognised brand anyway?

  8. David Marnie

    Another superficial commentary on supermarkets without reference to the success of Audi supermarket chain and its threat to the current business model.

    Expect more from Crikey than recycled op ed pieces.

  9. Parnell McGuinness

    Dear Wayne,

    Let us never impinge on your right to choose not to have choices. Or your outrage at not being able to choose (or not to choose? I’m getting so confused) a certain flavour of yoghurt, because it’s at the yoghurt fat farm, losing 50 grams.


  10. michael crook

    Not to to mention the low nutritive value, high nitrogen content, fruit and veg sold by these giants from monoculture farming.

    It is time to break these corporations up, they have too much power and too much market share.
    Woollies are the biggest owner of pokies in Australia (11,000) and the largest purveyor of alcohol, so they inflict a hell of a lot of damage on the Australian people.

    Boycott Coles and Woolies, Aldi is far cheaper, and allow their check out people to sit down, and IGA is, generally, more friendly.

  11. emily.r.crawford

    I agree with Insilence.

    The grocery market in the UK is both more competitive on price and offers more choice as well as (lately) making a virtue of good supply chain/ farmer relations.

    I am just back from 5yrs in London and am astonished at how accepting Aussies seem to be of the totally rubbish deal they’ve been handed from the Big Two. Aussies are getting taken for a ride and used as patsies for big margins, as the SMH recently pointed out.

    This is my rough and ready comparisons of grocery shopping here and in the UK (and a link to the SMH piece):

    This debate seems more concerned about market share of big producers than consumers. Since when were we worried homebrands would knock Kraft or Heinz off its over-priced pedestal than the fundamental issue of competing to give consumers a good deal ?!

  12. Barbara Boyle

    Cheaper prices and quality is just what I get buying at my local farmers’ markets.

  13. Had Enough

    The ACCC head needs to be fired and today and they need to install people in there that know retailing.

    Woolworths and Coles are trying to liquidate smaller competitors, so they will be left in duoply status and then they will raise prices like flags on a pole.

    The rebates and allowance they shaft from suppliers is unique in the World.

    Grocery Watch was a GREAT idea. Craig Emerson was weak like ACCC and Coles/Woolworths easily fooled him.

  14. UpCountry

    I believe that the real reason the big two are pushing home branding is to break down the shoppers allegiance to the well know brands. Sounds simple enough but there is a catch to it and you probably wont see it on the checkout side of the self.

    Once the Home Brand is established and branded product is diminishing from the selves the home brand can then start to pressure the suppliers of the various items, either through a tender system or just plain bullying “supply at this price or else’ type arrangement.

    Suddenly the origin of the products can change from month to month depending on who has the cheapest supply price. The alarm bells should be ringing for Australian suppliers as they will not be able to compete with subsidised and poorer quality overseas product.
    I have already noticed that some home branded products that started out using Australian product have moved to foreign supply. You really need to check the pack every time you buy to where it might have come from.
    Given that Australia has some of the best food standards in the world then this substitution is of real concern.

    The sort of company that will be able to supply this type of arrangement will probably be the larger corporate type and thus making it harder for smaller companies to compete.
    It is certainly a recipe for reduced competition in the longer term and probably higher prices.

    The Home brand will be pushed hard to reduce the quality over time and try to extract as much profit as possible from it and then it will probably start to segregate with words like “Premium, 5 star” ect sold for slightly more to try and give the brand some credibility.

    Without much competition on the shelf they will probably get away with it.

  15. Had Enough

    @ UpCountry

    Woolworths predicted that when Aldi came to Australia, they would get around 3% marketshare. Their share in the states where they operate is approaching 10%. So WW and Coles have countered with the own brands. If you recall the old Woolworths and Coles hime brands were is terrible looking packaging. They have revamped this.

    In the UK, where there is MORE competition (not here thanks to ACCC and Emerson), the homebrand share is around 55%.

  16. Mike Jones

    Bigger margins on home brands coupled with lower shelf prices means that the producers or the consumers – or both are getting screwed.

    For simple products like a packet of refined sugar, clearly the producer cops it. Manufacturers of say biscuits would be crazy if they didn’t differentiate their private brands from home brands by reducing the quality of home brands to something close to cardboard – or exploiting cheap 3rd world labour through imports. They are teaching consumers that “cheap = low quality”.

    The difficulty I think for consumers is that if one does not want to play that game, one must search for private labels elsewhere – those who can survive or even grow on lower volume, premium quality and higher prices. So the convenience of one stop shopping at a supermarket gets sacrificed in the name of pursuing quality products elsewhere.

    It’s important to read the labels – e.g. cat food. Cats need a fairly high protein level in their food to stay healthy. Much higher than dogs. The cheaper brands ALWAYS have marginal to unsustainably low levels of protein – and within those protein levels, they pad with poorer quality vegetable proteins. It’s a hidden false economy and a hidden rip-off.

    As far as Aldi goes, I think the experience of shopping there is just too weird. There’s the canned tomatoes – over there between the chain saws and the toilet paper……

  17. Had Enough

    @ Mike Jones

    Most of the food home brands are made in the same factories as the brands. Not much is offshore.

    We need to THANK Aldi, for what they have done to keep prices in check.

    They have done more than ACCC and their USELESS INEPT leadership.

  18. MukaTikus

    Most of “our” brands are foreign owned so who gives a crap about them. IGA has hot checkout chicks. Coles and Woolies don’t.

  19. Clytie

    If you buy a particular product for its taste or quality, it’s a bit worrying how fast some of these are disappearing from supermarket shelves. These items are crowded out by yet more “home branded” groceries.

    One example for me is Dilmah tea (from a plantation both family-owned and conscientiously-run in Sri Lanka). Our Woollies used to have quite a range of Dilmah, including the Earl Grey teabags I know and appreciate. Then the “home brand” tea bulked out, and nearly all the Dilmah vanished from the shelves. Now I have to get my teabags online: fortunately Dilmah have an excellent website. I note quite a few Australians on that site, commenting with frustration how they couldn’t get this main-market tea from their supermarket anymore.

    This is only one example, but I’ve experienced this with a number of quality products which used to be on supermarket shelves. I’ve talked to some suppliers, and they mention the increasing difficulty of buying shelf space at all (yes, they have to pay to have their products on shelves), the increasing price charged, and a growing disinterest from Coles and Woollies in having them there at all.

    I’ve been poor and hungry, so I can perfectly understand the attraction of homebrand prices, and the need to assure oneself that those products are “really just as good”. If you’re not poor and hungry, compare the quality yourself, and consider the impact on local produce. Imported food generally does not meet our food standards: it contains much higher levels of pesticides, and is packed in factories which do not observe standards of cleanliness, safety or decent wages. Indeed, how could you pay producers and workers decently, and pack food promptly and healthily, while paying for intercontinental transport, and still undercut local food?

  20. michael crook

    Well said Clytie, while not everyone is able to do as we do, and start a community garden in our suburb. nonetheless the impact of this has been nothing short of extraordinary. We now get over 50% of our veg from a chemical free environment, and boy, hasn’t our general health improved because of this. Woolies etc, sell veg that is grown in a monoculture environment in carbon depleted soils. That is why despite the good looks it tastes like shit and has little flavour. It also has too high levels of nitrogen from the growth accelerants.

  21. Dominick Murphy

    I worked for 15 years as a Buyer within the Grocery industry and although I have not been directly involved in the industry for 10 years I still enjoy visiting my local supermarkets every week and report what I see on Twitter under myAUsupermarket.

    The current Price War in the supermarket industry is driven by two issues; Coles requirement to recover market share that it has lost to Woolworths in the last 10 years and a timed based incentive offer to the Coles management team that Wesfarmers has imported from the UK.

    When did the Price War begin? If you had kept your supermarket catalogues for the last 12 months you would have seen the underline activity that lead us to where we are today. In June 2010 Coles were promoting MasterChef with Curtis Stone. This was very successful and started to annoy the Fresh Food People because Coles were starting to enter the Fresh space.

    On 12th July 2010 Woolworths launched their catalogue with a front cover headed “4,400 Shelf Prices Reduced”. The Coles catalogue of the same week contained a 2 page spread on the Coles brand with the Promise 100% Satisfied or 100% Refund.

    In August 2010 Coles countered the Woolworths price reductions by introducing us to “Down Down – Prices are Down” with a 2 page spread of Coles brands in their catalogue.

    On 16th September 2010 ALDI entered the game with a catalogue which stated “Switch to ALDI exclusive brands and Save”. The 2 page spread contained 13 ALDI products for $49.07 against 13 Branded products that looked similar in packaging for $72.15 save 32%. The fine print advised that the survey was conducted in 6 stores in 2 major chains on the 30th August. A review of the catalogues for Coles and Woolworths for the date in question showed that none of the Branded items were on Special that week, which made the “Permanently Low Prices” philosophy of ALDI very impressive against the High/Low approach of their competitors. On 23rd September ALDI via their catalogue told us that “Permanently Low Prices – Just Got Lower! – Look what we reduced in August”. It no doubt would have helped their survey to reduce the prices before the end of August.

    The 8 cent reduction on fuel was introduced by Coles for the key period leading up to Christmas. This was quickly followed by Woolworths matching the offer for it’s customers.

    Now we have the Milk War. We did not complain when Woolworths reduced the price of 4,400 products in July 2010 … so why are we complaining when Coles reduced the price of one item in 2011?

  22. Had Enough

    I agree with @Dominick Murphy

    Consumers lost the grocery war when in June 2009 Minister Craig Emerson scrapped grocery watch, on the basis that it was too difficult for the Supermarkets to extract prices for certain products by store across states on a regular basis.

    Having been part of the team that installed the first scanning store in Australia in 1982 and hundreds since, then EFT and then their data warehouses and other central systems, this extraction task has never been easier for the major Supermarket chains. So easy in fact, that with the modern IT tools they all have, it was probably a few weeks work and testing at most for a couple of people.

    So why did the Supermarkets convince Emerson that it was not feasible? The big 3 Australian Supermarkets already have the best trading terms than any other Supermarket chain globally, gouging suppliers (and in turn consumers) with rebates and allowances usually 12 – 20% of the cost price, on top of the 35 – 50% gross margins. Oh and then there is the settlement discount of another 3.75% unless, you are happy to be paid in 75 days. We wonder why our grocery prices are so high compared to other countries, and some of our locally made products are cheaper to buy overseas!

    Minister Emerson’s then Department and indeed the ACCC need some spine, clear mandate and accountability….quickly.


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