Eli Greenblat
June 1, 2012
The Age
ONE of the world’s most successful supermarket bosses, Sir Terry Leahy, who took the British chain Tesco from a struggling, third-ranked competitor in its home market to one of the biggest grocers in the world, has a message for Woolworths and Coles: there is a limit to how much private label goods can dominate their shelves.
Sir Terry knows what he is talking about. Tesco helped drive the proliferation of private labels in Britain’s supermarkets, and when Woolworths revealed its new strategy last year to match a resurgent Coles and improve its own bottom line, it named Tesco as the world’s leading supermarket when it came to house brand penetration as a proportion of total sales.
”Like so many strategies it depends on how you execute,” Sir Terry told BusinessDay from London. ”The UK consumer has always trusted private label, as much as anything because of Marks & Spencer, and Marks & Spencer is 100 per cent private label, and so the UK consumer were used to that offering and then Tesco developed it for a wider market and has had a lot of success.
”But there is a natural level, or natural limit, from sector to [supermarket] sector, between 30 and 50 per cent, and it’s very important that you let the consumer choose. Don’t force the choice for the customer.”
For Tesco, that limit is roughly 40 to 45 per cent of all sales, and the retailer stands out among its global peers in the penetration of unbranded groceries. Woolworths and Coles are believed to have a private label penetration of only 10 to 15 per cent – but are keen to increase that quickly. Kroger and Safeway in the US have closer to 25 per cent private label penetration, Walmart (US) and Britain’s Sainsbury’s more than 40 per cent.
Sir Terry sounded a note of caution to manufacturers and suppliers who have been grumbling as their branded goods are replaced by supermarket-owned groceries on shelves. ”That’s not necessarily a bad thing for manufacturers. Some manufacturers will concentrate on brands only and some will concentrate on private label supply.”
He said supermarkets needed to have close relationships with these suppliers. ”The entire reputation of that organisation [supermarket] is dependent on those [private label] products and therefore you have to make sure the product you buy is safe, high quality and attractive.
”Therefore you have got to make sure you are paying the suppliers enough so that they can invest in their business. It just makes no commercial sense for a supermarket like Coles or Woolworths to press down on costs so much, because it’s their name on the label.”
Under Sir Terry’s guidance, Tesco increased the number of its British stores from 568 in 1997 to 2482 in 2011, when he retired. It increased the number of foreign stores from 190, mostly in France, to 2329 in 13 countries. Annual sales rose from £13.8 billion to nearly £60 billion in 2010.
Sir Terry said online sales would be a key driver of growth for supermarkets in the future.
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