OPINION | "Every recession we hear how Private Label is going to grow rapidly. Yes, during a recession, consumers focus more on cost cutting and switch to lower priced brands, and if Private Label is available in an acceptable form (product quality and price), it does become a viable option for some shoppers.
However, recession or not, if a brand is low priced (within 30% of private label), with negligible differentiation (in product and brand) and more easily substitutable, it is always going to be under threat of being removed from shelf.
From the retailers’ point of view the outgoing brands dollar retailer margin could be lower than private label, while the percentage margin is about half (see table). And if the brand is anyway declining it becomes a no-brainer.
The major reason why retailers like to grow Private Label is simply profitability. With normal supplier owned brands, grocery retailers typically make about ≋25% gross margin. With their own brands or Private label brands this margin can be close to 50% or more which helps improve their overall profitability.
For example in the table if Private Label did not exist the average category retailer margin would be 26%. With 15% Private Label share this number moves up to 30%, and if we take Private Label share to European levels of 40%, the average category retailer margin could be as high as 36%. A full 10 percentage points above if Private Label did not exist.
One might then ask, why don’t retailers only sell Private Label if it is so much more profitable? Great question and the answer is not straightforward.
When Private Label grows rapidly, branded players lose market share and profits as they try and fight private label with short term measures like price promotion and reduce investments in advertising and new products. Long term the category starts shrinking (value erosion) without adequate consumer marketing investment and new product innovation.
Beyond a certain level of Private Label market share, the job of driving category growth and innovation shifts from branded players to the retailer. And that is not easy if the main driving force of a Private Label program is lower price, which is what we see mostly in New Zealand. Most categories would shrink dramatically in value if Private Label doubled its market share overnight. We know that in New Zealand the average Private Label share is below 20% while European markets lead with 40% to 50%. Their history, dynamics and profitability are quite different.
Looking at the chart you can see Brand C is not far in price to Private Label and is in decline. We are obviously looking at this simplistically as Brand C might have a robust innovation pipeline just about to be launched, and/or might have a very good relationship with the retailer, or is just about to double its margin offered to the retailer (I have never seen that happen though). However, based on just the metrics on the chart and table, it seems Brand C would be the easier one to delist for the retailer to drive growth in its private label offering.
Across most categories, if you look hard enough you will find at least one Brand C, maybe more? Some of those Brand Cs have remained insulated for long in the New Zealand market, thanks to matey relationships and perceived brand strength built on past laurels which still seem to guide some commercial partnerships, though this keeps evolving.
So, what can brands do to minimise being at risk of de-listing due to the growth of Private Label? Simply grow and offer an acceptable margin. This though is easier said than done. Lack of relevant, differentiated and continuous innovation is the major reason why many high market share brands start losing range width to private label. The question FMCG category heads and brand owners have to ask themselves is, what role is our brand playing with the consumer, and what role does it play with the retailer? Think hard if this is unclear.
If you have identified you are managing a Brand C, well done, and hopefully you are putting an aggressive and urgent program in place to negate any delisting risks. We know the smarter Private Label managers may not wait eternally to show you the door."