Sue Mitchell
April 18, 2018
AFR
Grocery retailers need to stop making copycat private label products and start thinking like branded consumer goods companies to avoid losing share to discounters amid a Millennial-led shift in shopping habits.
Management consultants BCG have urged major supermarket chains to rethink their private-label strategies and create products their customers want rather than products they are prepared to settle for.
While Woolworths and Coles have tweaked their private-label strategies in recent years – moving away from multiple tiers, improving formulations and packaging, and dropping prices – their house brand products are still perceived by consumers as cheaper, inferior versions of national brands.
Boston Consulting Group managing director Gavin Parker says the major chains risk losing market share to vertically integrated value retailers such as Aldi, which are increasingly popular with Millennials, and to major FMCG companies, which have started selling online directly to consumers, unless they develop real brands that build strong connections with customers.
“The key is thinking like a CPG [consumer packaged goods] operator by being extremely close to your customer insights and then developing products that achieve that insight and behave very much like a brand, not just an alternative to a brand at a lower price,” Mr Parker told The Australian Financial Review ahead of the World Retail Congress in Madrid this week.
“If you’re Proctor & Gamble or Unilever or Kelloggs or Mars this is how you think – you understand consumer needs, you develop products and then you go into mass distribution to get economies of scale to drive an economic advantage over your competitors,” said Mr Parker, who worked for Coles, Tesco and Asda before joining BCG in 2012.
“Our belief is this is now an opportunity for retailers.”
Sky’s the limit
Private-label food and grocery sales are worth about $18 billion in Australia, according to IRI data, and account for about 20 per cent of packaged grocery sales, less than half the 45 per cent to 50 per cent penetration rate in markets such as the United Kingdom and Europe.
BCG believes private-label products – which generate higher margins than branded goods – could become a larger part of the market if retailers invest more resources into product development, customer insights and marketing to develop house brand products capable of selling at scale and competing head on with branded goods.
“It depends how far [retailers] want to shift their business models – the sky is the limit but I could see [private label penetration] going up to 40 to 50 per cent over time,” said Mr Parker.
“I wouldn’t necessarily say it’s a driver of margin advantage, it’s more about keeping customers and share and a way to differentiate yourself from your competitors.”
At retailers such as Spain’s Mercadona, known for its proprietary beauty brands, and France’s leClerc, famous for its yoghurt, successful private-label brands outsell equivalent national or global brands instore by two to one, whereas historically retailers’ private-label brands generate half the sales of equivalent brands.
“If you can drive significant volume through very well targeted products the benefits in your supply chain and your store operations mean you can create this sustainable value and price advantage,” Mr Parker said.
“With a proliferation of proprietary brands and two-tier private label it’s much harder to do that.”
Two years ago Woolworths started phasing out its Homebrand and Select brands in favour of Essentials and the eponymous Woolworths label. Coles, meanwhile, has been rebranding most food and grocery lines under a single “Coles” brand and phasing out its third-tier smartBuy label while retaining Coles Finest for first-tier products such as Coles Finest by Laurent sour dough bread and Coles Finest Red Gum Honey.
Mr Parker declined to single out particularly good or bad examples of private-label groceries in Australia.
“Most grocery retailers around the world would say they have a strong private-label program,” he said. “Our challenge is somewhat greater than that – they need to think about this in the way a [consumer] brand would.”
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