The Rise of Retailer Private Labels - Threat and Opportunity for Australia's Food Industry

16 November 2005

The rise of retailer private label products is both a threat and an opportunity for Australia's food industry, according to a report from leading global agribusiness financier Rabobank.

In its just-released Global Focus Report on private label strategies, Rabobank says that the private label is a global phenomenon, which has achieved significant penetration in every developed country, and also has some presence in many developing countries.

"In the majority of cases, its market share is continuing to rise," the reports says.

"In Australia, retailers are moving to increase the penetration of their own brand via the development of 'premium' private label products, and in doing so, they are changing the nature of their business and retailer/supplier relationships, and ultimately challenging traditional business models in the food processing sector."

Processors have a range of strategies available to them as they adjust to this most recent change in the retail landscape - standing still is not one of them.

Rabobank food processing analyst, Tim Hunt says the take-home food retail market is the largest and most important channel that Australian food processors have to the consumer, accounting for around 76 per cent of food retail sales.

"For suppliers, the concentrated nature of the retail sector means two things: firstly, Woolworths, Coles and Metcash have substantial market power when dealing with suppliers, and secondly, due to the high share of suppliers' sales accounted for by these retailers, their strategies have important flow on impacts on the food processing sector," Mr Hunt says.

New retailer strategies

Retailers have succeeded in establishing a significant foothold for private label in the Australian market - with 15 per cent of sales (by value) of packaged groceries now accounted for by private label (including Aldi sales).

However, private label has underperformed in the Australian market, with penetration low compared to many other similarly developed countries, Mr Hunt says.

"Growth has slowed in recent years and only limited progress has been made in developing higher quality 'second tier' private label products," he says.

Each of the three largest Australian retailers has recently unveiled strategies to increase sales of private label packaged goods. Coles Myer is leading the charge with plans to increase private label penetration to 30 per cent of all sales in Coles and Bi-Lo supermarkets by 2006/07, up from 13 per cent today.

The drivers behind the new private label strategies of Coles, Woolworths and Metcash are somewhat different from those which initially drove generic private labelling into the market place.

"Instead of slashing prices to defend against discounters and build store traffic, 'premium' private label is about differentiation, competing directly with brands and increasing retailer control over product categories," Mr Hunt says.

By developing 'premium' private label ranges offering high quality products not available anywhere else, retailers hope to build store loyalty, retail brand equity and ultimately higher margins.

Potential penetration of private label in Australia

The impact on food processors of the renewed focus of Australian retailers on private label will clearly depend in part on how successful these strategies are. Retailers will have to overcome several obstacles if they are to achieve 20 to 30 per cent penetration in the Australian market.

"Coles and Woolworths will need to develop greater trust in retailer/supplier relationships than has existed in producing generic private label if processors are to invest the resources and time in developing 'premium' private label ranges," he says.

"On the consumer side of the market, retailers will also have to overcome consumer association of house brand with base quality products, and ultimately consumers will have the final say in whether the current private label strategies of retailers succeed."

Overcoming these obstacles has proved elusive for Australian retailers to date. Overseas experience suggests it is achievable, but will take more than just a couple of years.

Impact on food processors in Australia

Increased private label penetration and the development of 'premium' private label ranges will have significant impacts on food processors in Australia.

Supplier numbers are likely to continue to reduce (part of a longer term trend in manufacturer consolidation), lower ranked brands will be cut, 'premium' private label manufacturers will be asked to align with retailers and specialist producers may develop in time.

While still early days in the evolution of 'premium' private label in Australia, both supermarkets and suppliers envisage a more stable and partnership driven approach for 'premium' private label lines.

Competitive pricing will remain a key, but as supermarkets build brand equity based on quality and innovation, the field of available suppliers narrows, as does the capacity of supermarkets to auction down prices and switch suppliers.

Further, supermarkets will be more likely to recognise the investment made by suppliers in product and packaging innovation.

One development seen offshore that is unlikely to be replicated in Australia is retailers manufacturing private label products themselves.

Australian processors face a range of strategic options in positioning themselves for the further development of private label in Australia, Mr Hunt says.

"Companies looking to maintain a branded business will need to have a strong suite of brands, preferably ranked one or two in their category, or a strong niche position. Companies will need to continually invest to maintain brand strength and engage in research and development as well as advertising and promotion."

Processors looking to supply generic private label will have to be low cost manufacturers with a good grasp of their own cost structures.

'Premium' private label manufacturing will require different capabilities, Mr Hunt says.

"Processors will need to be innovative and have strong research and development capabilities and be willing to partner with supermarkets to achieve whole of category growth," he says.

"Wherever a processor is selling to supermarkets they will have to stay close to their customer and ensure they understand their strategy."

Some Australian processors may opt to focus on the development of alternative market channels for their products. The route trade, food service and export markets all offer viable alternative channels depending on the strengths of the individual processor.

These strategic options are not mutually exclusive. There is plenty of opportunity to blend two or more of these options in a successful business model, Mr Hunt says.

"Private label seems unlikely to create growth opportunities for the food processing sector as a whole. Broadly speaking, food prices will fall, consumption will not rise, a greater share of margins will be passed to retailers and, at least in the short term, industry capacity utilisation will not increase."

However, as with almost any market development, some players stand to benefit from the development of private label in Australia, while others will find the competitive landscape more difficult. In particular, private label creates a real opportunity for players with processing expertise who have typically operated outside the retail space to gain a foothold in the market.

Rabobank Australia is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and, in recent years, has twice been awarded the title of the world's safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1900 offices and branches. Rabobank Australia is one of Australia's leading rural lenders and a significant provider of business and corporate banking and financial services to the Australian food and agribusiness sector. The bank has 46 branches throughout Australia.

Contact

For further information please contact Denise Shaw, Public Relations Manager (Tel: +61 2 8233 8744) or email on sydney.pr@rabobank.com.

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