In a report released yesterday by the Australian Food and Grocery Council, the share of Australian supermarket private labels sales is expected to rise to 40-50%. The report,    2020: Industry at a Crossroads describes this as a level consistent with mature markets. Many angry manufacturers blame this on the high concentration of Coles and Woolworths; in contrast, I believe the high concentration is more likely to explain why private labels in Australia are currently only 25% of food and grocery sales, much lower than comparable markets elsewhere. Please see my earlier article for more on that point: Private labels and supermarket competition

Despite the facts in the report, the report blames this apparent normaliastion of the food and grocery market on the high concentration of Coles and Woolworths.

It also acknowledges other factors which are more likely, such as the high AUD.

Being positive, some advice is given to local players:

 

(from  2020: Industry at a Crossroads)

Brand equity doesn't come from simply being on the shelf. It comes from innovation.

So where is capital expenditure going?
Mostly into cost reduction and capacity increase: more than 80% of expected capex is in these categories.
The survey indicates that only 11% of near-term capex is going into new product capability.
So local players are gearing up for more volume and lower unit costs. This could be interpreted as getting ready for low-margin private label volumes. Is this wise?

The report believes that at current exchange rates, 70% of private label products will be imported, so the demand on Australian production will fall just as our manufacturers are apparently investing in capacity. The other concern is that the report expects large scale investment in high-capacity Asian production.

Local manufacturers will struggle to compete on price given these head-winds, regardless of capex.

I think they should be gearing up for flexible, diverse manufacturing with an emphasis on innovation and local trends. This is how high-wage manufacturing survives in Europe. At Philips in Europe, we took the initiative of sourcing entry level products from China before the retailers, and kept control of the category and the supply chain.We invested substantially in innovative, consumer-focused products (including sourcing of more or less stunt innovations) and lead the market in followiung local trends, which increased our added value as category leaders with respect to the grocery chains. Above all, we delivered very high service levels and enormous flexibiity through our local manufacturing capacity. 

This is more likley to be the path to success for Australian food and grocery manufacturers.