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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.

Tom Cowie

Crikey journalist

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 comments

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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.

    Sincerely,
    Parnell

  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.