The sky is falling: House brands become more important in Australia
Experience shows it's an opportunity for good brands to stand out
House brands, or private labels as I better know them, are in the local news, because the two main supermarkets have announced they will dramatically increase their use.
Australia's competition watchdog has announced a suspicion of market-power abuse, with some brand owners cheering in the background. This is not very impressive of the ACCC.
Private labels are common in many retail environments. Australia's experience of private labels is a bit immature. Until the arrival of Aldi, Australian supermarket private labels were dressed up to look like prison escapees, in sensationally ugly packaging. Give your kids a Home Brand lunch-box snack, and the whole school knows. Aldi's almost entirely private label; the products are mostly good quality and the packaging is close enough to A-brand not to cause embarrassment.
Private labels expose the added value of traditional brands. Genuine new entrants face a range of entry barriers, in particular distribution: just getting on the shelf is a marathon.
(see one example: Carmen's museli)
So existing brand owners have not had to rely too much on the added value of the brand; they had large incumbency advantages blocking competitors from the shelf before consumers ever got to make a choice. All that exploitation of supermarket power was not much fun in price negotiations, but at least the number of players in the negotiation was limited.
A supermarket-owned private label doesn't have those barriers. The competition becomes brand-on-brand. That's a bit of a shock. Some brand-owners thought they had it tough in Australia already, but perhaps they're suddenly feeling nostalgic for the good old days.
The sky is falling
Sophisticated FMCG businesses already have a stable of brands; think of all the laundry detergent brands that come from the same factory. Cheaper brands have always had a place on the price ladder, serving as a price-reference for consumers who are prepared to pay more, while earning volume from cost-conscious shoppers. The new private labels will encroach on these second-tier brands; they'll suck margin out of brands that may have been over-priced.
It's no coincedence that this move to increased private labels coincides with more European management in the Australian supermarkets (including the arrival of Aldi).
In Europe top-tier FMCG manufacturers are mostly quite happy to tender for private label business for two reasons.
- Firstly, because it supports manufacturing volumes.
- Secondly, controlling the category on the shelf helps manage the price ladder and product mix.
The supermarkets definitely want to keep selling premium-priced products to customers willing to pay, and strong brands will be the winners here. In my experience, if a brand-owner drives mix improvement and sells more premium products in the category, the supermarket is delighted, as long as they have a competitive private label offer to maintain traffic. In the major categories, private labels don't change the fact the profit optimisation can only come from serving a range of price points. You can't do that with only one brand. Aldi is cheap and lacks premium brands. But Aldi does use multiple brands, because even for Aldi, the logic is the same: you need different brands to maximise profit.
Brand value has to come from somewhere. Brands need to innovate to continually refresh the offer. The Australian supermarkets are notoriously difficult for new entrants; that's what the ACCC should investigate, perhaps.
Financially, now is the time to make sure cost price models are cash-based and highly accurate, to make sure volume impacts can be immediately understood when making price offers and calculating profitability. Also, make sure the tender/pricing tools have flexibility in packaging options. It's also time for brand owners to show the supermarkets that they know the product category better; innovation is key.