Coles signs private label deal with Sainsbury’s

Sue Mitchell
November 11, 2019
AFR

Coles will source private label groceries from British retailer Sainsbury’s as part of a plan to lift house brand sales to 40 per cent of total sales over the next few years, a move analysts say could boost earnings by 10 per cent.

Coles signed a three-year white label agreement with Sainsbury’s last week and expects to start stocking the first new products – including packaged food and household, health and beauty products – by the end of the 2020 financial year.

Coles chief executive Steven Cain wants Coles to become an own-brand powerhouse known for the quality and value of its house brands, to differentiate its range from Woolworths and Aldi and to offer exclusive products that can’t be bought elsewhere.

Greg Davis, Coles chief executive for commercial and Express, said the Sainsbury’s sourcing agreement would enable the supermarket chain to introduce innovative products faster than they could be developed and tested by local suppliers, while potentially allowing Australian suppliers to provide goods to the UK.

“A lot of innovation, especially in fast moving consumer goods, comes from around the world – this is about getting it to Australians faster,” Mr Davis told The Australian Financial Review.

“I see this as a test and learn, a chance for us to bring products across and also a chance for us to open doors for Australian suppliers to send products the other way.

“The closer we work together with Sainsbury’s, the more Australians will get innovation faster, and the more we work with [Sainsbury’s] there’s potential for products to go back the other way as well.”

Mr Davis said it was a big opportunity for Coles but declined to put a value on sales under the deal. He said the number of products available would change depending on the time of the year, likely peaking at Christmas.

Private label products sourced from Sainsbury’s will be towards the mid- to upper-end of the market, rather than budget products designed to compete with Aldi, and are likely to carry the Coles brand or ‘phantom’ brands.

Mr Davis declined to detail specific products. “I don’t want to give Woolies a year to get a head start,” he said.

Playing catch-up

The deal with Sainsbury’s comes about two years after Woolworths signed an agreement to source private label products it was unable to source locally from Swiss buying group European Marketing Distribution, which has annual turnover of more than €216 billion ($347 billion) and has 13 retailer members in 20 countries.

Coles increased its private label range by more than 1200 products last year, lifting private label sales to 30 per cent of total sales, or $10 billion.

Mr Cain wants private label sales, which typically generate higher margins than national brands, to reach 40 per cent over time.

Analysts have questioned whether the 40 per cent target is too high but say if Coles can get the strategy right, it could boost earnings before interest and tax (EBIT) by 10 per cent.

“We expect private label penetration to be a key driver of EBIT upside,” Macquarie Equities analysts said in a report earlier this year. “Every 1 per cent lift in private label penetration is likely to add about 1 per cent to Coles EBIT.”

Coles’ same-store sales fell for the first time in 12 years.

Macquarie estimated the margin on private label sales could reach around 7.5 per cent, more than double Coles’ average margin of 3.7 per cent.

However, Mr Davis suggested 7.5 per cent was too high. “Supermarkets are about low margin, high volume,” he said.

Private label has grown dramatically in Australia over the past 10 years as Coles and Woolworths have increased their house brand range to better compete with Aldi. But market penetration remains well below that in the UK, where Nielsen estimates it’s about 46 per cent.

Sainsbury’s is the second-largest grocery retailer in the UK after Tesco, with more than 16 per cent of the market. It was a pioneer in the development of own-brand goods, which now account for 50 per cent of its total sales, generating annual sales of about £9.5 billion ($17.7 billion).