Coles managing director defends private label strategy

Sue Mitchell
June 18, 2018
AFR

Coles managing director John Durkan has dismissed concerns the supermarket retailer’s accelerating push into private label groceries will restrict consumer choice and force suppliers to scramble for shelf space.

Coles’ private label groceries are growing 50 per cent faster than national and international brands, fuelled by consumers seeking lower prices and product innovation, Mr Durkan said.

He has defended the retailer’s private label strategy, saying Coles is increasing its range of private label products in packaged groceries and fresh foods in response to customer demand rather than forcing branded goods off supermarket shelves.

Coles’ private label brand now accounts for about 50 per cent of fresh food sales and 11 per cent of packaged groceries, but in some categories such as pasta, flour and tuna, the Coles brand occupies as much as 50 per cent of the shelf space.

“The products we delist are products customers don’t want – they’re not high-volume items that customers are demanding that we’re just taking out, that’s not happening,” Mr Durkan told The Australian Financial Review. 

“We make customer-driven ranging decisions – if [branded] products are strong, fine … we’re paying rent on this real estate and you have you be compelling to stay on our shelves’

“The Coles brand is fundamental to keeping the value of the basket at the right price and providing new and differentiated products for our customers.”

Coles sees scope to lift private label penetration in packaged groceries to more than 25 per cent or one in four, compared with about 11 per cent at present, as part of a strategy to lift total private label penetration to about 40 per cent of sales in five years.

Mr Durkan dismissed suggestions the strategy would reduce choice for consumers and force suppliers to battle for shelf space.

In categories such as pasta, tuna and flour, the Coles brand  takes up half the shelf space.

In categories such as pasta, tuna and flour, the Coles brand takes up half the shelf space.

“It’s hardly panic stations. That still suggests three out of four times the customer is going to buy a brand. That’s still quite a small amount, we should be able to go higher than that.” 

“Because Australia is such a high-priced market there’s plenty of opportunity for the Coles brand to sit underneath brands in virtually every single category,” he said. “We have this opportunity for headroom that other [retailers overseas] don’t have because they’ve been down that track already.”

Local preference

Branded food and grocery suppliers fear their products could be removed from shelves, further undermining the viability of local manufacturing. 

Mr Durkan said suppliers should either embrace private label and be prepared to make house-brand products for Coles or respond to customer demand for value, innovation and healthier products with less sugar and salt.

Coles’ preference is to source private label groceries from Australia and some of its top-selling private label products are made by local manufacturers (for example Greens Foods makes Coles chocolate chip biscuits and Norco makes its award-winning ice-cream). 

But in some categories and products Coles has been forced to source from overseas and has established strategic alliances with two retailers in North America and Europe to tap their supply base and product development capabilities.

“We only go offshore if we can’t get it in Australia,” he said. “There’s a whole lot of products that we can’t get here.”

Citigroup analysts have described Coles’ house brand push as ‘risky”, saying that if Coles moves too far, too fast it could reduce customer choice, reduce its differentiation with Aldi and lead to lower sales productivity or sales per square metre.

Coles private label products are at least 10 per cent and as much as 25 per cent cheaper than equivalent branded goods, so Coles needs higher private label volumes to offset lower shelf prices.

“If we stood static we’d deflate ourselves but the purpose of this is to grow our business and the Coles brand is a way you can convince customers to shop with you,” Mr Durkan said.

“I see us growing our overall footfall [and] any mix change we have in terms of lower prices would be more than offset by volume of customers.”

“If we have the same products at the same price as Aldi and we’ve got all the other things like fresh food and customer service and no queues at the checkouts and in-store bakeries, it’s another reason why you wouldn’t go anywhere else.” 

Analysts have questioned whether incoming Coles managing director Steve Cain, who takes the helm from Mr Durkan in September, will share his enthusiasm for private label brands.

However, Mr Durkan believed Mr Cain, who worked at Asda in Britain, which has high house-brand penetration, would be keen to pursue the private label strategy. 

“I would have thought sensible development of the Coles brand at the right price at the right margin would be a compelling story,” he said.