Discussing his paper ‘Consolidation in Private-Label Supply Inevitable’, Sebastiaan Schreijen from Rabobank told FoodManufacture.co.uk that he expected own label to double its market share to 50% within the EU by 2025, upping the pressure on smaller or lesser-known branded suppliers.
At a seminar on 'Strategies in the Retailing Industry' in late May, academics Ratula Chakrabory, Paul Dobson and Jonathan Seaton noted that retailers favoured own-label to promote their own name and customer loyalty, and as a means of weakening the bargaining position of brand owners by demanding increased discounts or incentive payments.
Brand lookalikes
In packaging terms, "brand lookalikes" in everything from cola to biscuits also meant retailers hitched a "free ride" from brandowners, in exploiting their "'double agent' role as both brand producers' customer and competitor," the academics said.
Nonetheless, both retailers and consumers needed A-brands, said Schreijen, where the former needed them as quality-, but also price benchmarks that prevented the erosion of own-label margins, while consumers expected choice and the presence of familiar names.
Instead, the own-label boom – with UK retailers driving premium own-label products in particular – would hit the less high-profile B-brands, he said, with anticipated volume losses “expected to weight heavily on production utilisation rates” for B-brand food manufacturers, given that many food categories suffered from over-capacity.
“As asset utilisation rates are key to staying out of the red, the volume squeeze will fuel severe price competition on the B-brand and private-label supply side,” he said.
The way out for B-brand suppliers was in pursuing market niches (and potentially higher prices in the push towards A-brand status) or greater production scale, Schreijen said, but they needed to “pick their battles carefully”.
Product perception was vital, Schreijen said, but suppliers faced a stark choice between increasing perceived product value and thus prices achieved with retail customers, or cutting costs and potentially competing in mainstream private label. “Trying to do both at the same time seldom leads to a win-win situation,” he added.
Consolidation wave
The rise of own-label at the expense of B-brands – with suppliers pushed to specialise (to survive) in fewer lines and trim costs (leverage overheads, increase asset utilisation, reduce waste and switching times), inevitably meant industry consolidation within own label, Schreijen said.
“The companies struggling for survival tend to be small in size and large in number; severe price competition turns this race to specialise into a consolidation wave,” he said.
“In the most mature categories, very few companies with relatively high costs and relatively low prices remain in the market…divided between A-brands, niche brands and a few large private-label producers.”
Schreijen said one bright prospect for those who survived the consolidation wave was “scale and internationalism”, which could reduce client dependency within one country alone and also strengthen their position on the sourcing side.
Obviously, different categories develop at different rates, and Schreijen noted that chocolate, baby food and beer were areas with a low current incidence of own label.
Conversely, the chilled ready meals category has a high incidence of own-label products, he added, noting that own-label products would not make massive inroads across all segments at once, although the “whole line” was moving upwards.
Immediate opportunities lay with lines in the middle, Schreijen said, where there were already some own-label products, and therefore sufficient volumes to attract retailers towards further private label sales.