12 December 2007 - The emergence and burgeoning growth of Private Label (PL) / store brand foods is a known fact. The current issue for PL manufacturers is to find a method of sustaining the growth of PL brands.
Retailers have an inherent role in the success phenomena of PL foods. The European retail sector is recognised globally as being well-developed and one of the most organised. Besides, the favourable demographic and psychographic attributes contours the growth of PL foods. European retailers have capitalized on consumer trends and behaviour, as well as local market needs in promoting PL products. Some key strategies that have shaped the store brands include:
The above factors coupled with brand equity of stores and "fast follower" tactics have so far groomed growth in the market. Presently the PL foods market is at a cross roads, with striking brand attributes, which blur the line of differentiation from the national brands. The functional, organoleptic and emotional image of many PL brands is now equivalent to multinational brands, which represents significant progress, as PL brands were previously perceived with an inferior taste and quality. The PL manufacturers' are currently focusing on value, premium, health, convenience and organic product ranges. This not only runs parallel with national branded products, but also dilutes the multi-category Unique Selling Points (USP) of these products. The consumer perception of PL brands has undergone a drastic shift from "cheap-low quality" to "value for money". More households and a younger consumer group are now familiar with PL brands. Furthermore, retailers' shelf space arrangement drives purchasing decisions in favour of PL products.
However, fast consolidating retailers are steadily gaining bargaining power when compared to PL manufacturers, who are highly fragmented. Though, the latter are also in the phase of consolidation, the variability is high when compared to the retailers. Most consolidation within the private label sector is aimed at achieving economies of scale, greater supply-chain leverage and an expansion of the product offerings.
Among the PL manufacturers, the increasing demand for store brand products and ongoing consolidation has spurred fierce competition in the market place. The robust competition has forced PL manufacturers to compete mainly on a reduced contract price in comparison with national brand products, which offer only a marginal cost advantage to the PL manufacturer. In a cascade effect, they are therefore compelled to compromise on production costs.
At this juncture, the role of the other participants in the value chain is further compromised, such as the role of the ingredient suppliers. The ingredient manufacturing sector is another highly fragmented market, which is characterised by intense competition and an increasing Chinese intervention. Chinese manufacturers are active especially in the commoditised additive and ingredients sectors, such as vitamins, selected flavours, preservatives and intense sweeteners, and can undercut the competition. The global ingredient manufacturers are strategically positioned to cater to the multinational food manufacturers, providing a customised service and products. As a consequence, small scale manufacturers and Chinese producers eventually focus on increased volume. These manufacturers can cater their supply to meet demand, as required by a larger proportion of PL manufacturers who have higher bargaining power and an increased degree of product flexibility. As a result, PL manufacturers, who have already compromised on production costs, must then pass the price pressure to ingredient manufacturers, with an inadequate guarantee on the supply of consistent high quality ingredients.
The end result of this interplay of bargaining powers between the supply and demand factions can be a depreciated product quality of PL brands. If this continues, the outcome can be detrimental to retailers' brand equity and also disrupt the synergy that retailers and PL have shared to date.
It is now evident from the turnover of leading retailers such as Tesco and Sainsbury that PL contributes a large proportion of their increasing profit margin, as well as a significant portion of their total revenue generation. In order to sustain the favourable market share of PL in the short term, retailers should be focussed on shrinking the price gap between National and PL brands for selected categories, predominantly those products that are premium, healthy and organic in origin. This would not only favour all participants throughout the value chain, but will also help to enhance the brand image of retailers and deliver high quality foods to consumers.
In the longer term outlook, ongoing consolidation at all levels of value chain would restructure the industry, with fewer and larger participants providing a higher economy of scale. The industry is also becoming more attractive to private equity players, which favours this restructuring. From an economic perspective, restructuring would offer better principles in feasible commercial food retail operations.