Coriolis Chart Watch Q3 2004

Chart Watch is an online publication featuring a brief view into our latest thinking on the evolving food and fast moving consumer goods industry. It is sent to subscribers four times per year.

Top Line: The experience of the United Kingdom suggests that tertiary brands will bear the brunt of private label growth in Australia.

So what? In a short space of time, the main Australian retailers have announced intentions to massively increase their private label programs as a percent of sales.

Private Label Growth Targets Announced in 2004

(2004)

Source: various published articles; Coriolis analysis

Should manufacturers panic? Is this the long predicted private label apocalypse? Are Australia's supermarkets about to rapidly follow the lead of United Kingdom retailers to the lofty heights of 55% private label?

The short answer is no. The long answer will take some work...

Australian retailers have a long and mixed relationship with private label. Hot and Cold. Go and Stop. For over twenty five years. In 1987, the earliest year for which I can find reliable data, private label accounted for 11.7% of packaged grocery sales in Australia. In 2003, private label accounted for 11.9% of sales in Australia. Sixteen years for 0.2% market share growth.

Let's benchmark this performance with other countries

Growth of Private Label in Select Countries

(% scanned grocery; 1987v2003)

Source: various; Coriolis analysis

Australian supermarket retailers have clearly delivered the poorest performance of any comparable country.

It is very easy to make excuses for this poor performance: the decline of Franklins, the focus of Woolworths on manufacturers brands, Coles Myer's boardroom struggles, the strength of Australian icon brands, the "special" nature of Australian consumers, etc, etc.

I'm going to propose a different reason - no one had a vision and was willing to lead. When we look at other countries where private label has shown strong growth - be it the United Kingdom, Canada, Switzerland - one retailer has always led. And in many cases that retailer has been family owned or controlled.

Take Canada. In 1976, four people from Loblaws Supermarket traveled to the United Kingdom and Europe to study the growth of private label. They were Galen Weston, heir to the international Weston family business founded in 1882, with interests in Loblaws Supermarkets, bakeries, dairies, candy factories, salmon farms, and pulp and paper mills, Graphic Designer Don Watt, Loblaw's President Richard Currie, and Executive Dave Nichol As a result of this trip, top management had a shared vision and made a commitment to develop and grow private label in their stores. The legendary Dave Nichol ran the program.

Their first attempt, a range called Exceptional Value launched in 1975, failed.

Their second attempt, the No Name generic range, emulated Carrefour's Produit Libre, was better planned and resourced. Loblaw's developed a six-point strategy: product selection, quality testing, packaging, advertising, display and guarantees.

Nichol enforced strict quality guidelines. Seventy food technicians at Weston's Diversified Lab worked at quality control; professional test panels judged each product. In March 1978 the company launched 17 No Name products. The No Name launch was accompanied by a massive television and billboard campaign - price comparisons, testimonials, in-store support, the works. Nichol went on television to support the launch.

In 1984 the company launched the President's Choice brand - Nichol being the president and the signature behind President's Choice. Again, the company invested significantly in food technologists, product development, advertising, marketing, in-store support and all of the other tools of a successful branded product company. In addition, the company hired experienced people from Marks and Spencer, Sainsburys and other leading global private label retailers. New and unique products were designed using proprietary formulations developed internally.

President's Choice was a huge success in category after category. By developing high quality products and marketing them well, President's Choice succeeded even in categories that had traditionally been strongly branded, such as cola, cookies and coffee.

To support the new range, Loblaw's published the Insider's Report, a monthly publication profiling the history, development and characteristics of new products.

President's Choice then launched a number of sub-brands, including Memories of... (unique flavours) GREEN (environmentally friendly), TGTBT (Too Good To Be True), Club Pack (targeting Costco), Exact (pharmaceuticals), Organics, and Mini Chefs (food for children)..

When Nichol left the company in 1993 the private label sales of Loblaw's had grown to C$1 billion and spawned a raft of imitators, from Wal-Mart's Sam's Choice to Coles Myer's Australia's Choice.

It also provided the blueprint that numerous private label consultants and ticket-clippers sell around the world as original thought. In addition, Loblaw's and President's Choice has been the subject of numerous books, magazine articles, conference presentations and business school case studies.

Today, after twenty eight years of investment in product development, advertising and promotion, private label accounts for about 37% of Loblaw Companies sales. In addition, all of the other major Canadian retailers have followed Loblaw's lead, imitating their strategy, range and products.

As Loblaw's, and numerous other international examples show, success in private label takes time. Why?

1. People are creatures of habit. Research has found evidence of strong and stable product-preference patterns due to product differentiation advantages of established brands. Philip Kotler in 1997 found that “19 out of 25 companies who were market leaders in 1923 were still the market leaders in 1983, sixty years later.” Convincing consumers to give up long used brands won't happen overnight.

You can only lead customers so far and fast. When Sainsbury's in the United Kingdom, a global leader in private label with a hundred years of private label development, pushed private label towards 60% of sales in its stores customers rebelled. Customers complained about a lack of selection, sales declined and Sainsbury back tracked.

2. Products must deliver on quality and performance. As Bob Marley said: "You can fool some people sometimes, but you can't fool all the people all the time." If a consumer buys a private label product and it doesn't perform, they are unlikely to buy it again. In addition, their bad experience with that product is likely to be carried over to the whole range.

3. Performance requires technology and in-house expertise. Once you get beyond a few true commodities, most products sold in a supermarket incorporate significant intellectual property, in terms of manufacturing capabilities, trade secrets and formulations, patents, and other non-public knowledge. A retailer may want a diaper/nappy that performs as well as Huggies, but if there isn't a private label manufacturer with access to the technology to supply it, it isn't going to happen. The growth of private label in a country requires a corresponding growth in the private label supply base.

4. Brand building requires significant expenditure in above the line advertising over an extended period of time. Retailer's brands are still brands and there are no shortcuts to building a strong brand. Commitment and continued investment of large amounts of money over decades is required to build a strong brand. However, the more retailers grow their own brands, the more they become like branded manufacturers themselves.

5. Sales and range are linked. The more market share a retailer wants for private label, the more products they need to launch. Unfortunately, diminishing marginal returns kick in quickly in a supermarket. Experience of retailer after retailer suggests that while the first 500 lines may deliver on significant share, each incremental share point requires proportionally more skus and more investment.

Ok, enough big picture. Let's return to Australia. Coles put up the following chart in their recent analyst presentation...

We hate to disappoint them, but this is unlikely to happen. Thirty percent of Coles food and liquor division sales will not be private label in three years. Why? Review the list above and ask how Coles (or any other Australian retailer) will address these issues in 36 months...

1. Coles customers won't change 20% of the content of their average basket in three years.

2. Coles has been offering them private label products of variable and inconsistent quality for more than twenty five years. In that time they have probably burned a few bridges that will take time to repair. Coles face a skeptical consumer audience carrying baggage from past performance experiences.

3. The Australian private label supply base doesn't have or is unwilling to supply the technology required across a wide range of categories. While there may be some opportunities to acquire or use IP from other retailers, the scale of this is small at best. Growth will primarily occur at the rate determined by local manufacturers.

4. There has not been historical long-term commitment to above the line brand building (as opposed to price and item) by Coles to create a strong private label brand to date. A deep and meaningful brand that resonates with consumers cannot be created in the next 36 months.

5. Loblaws needed about 5,500 skus to reach 30% private label. Using this as a benchmark, if Coles currently has 2,000 they will need to research, develop, design, launch, promote and support an additional 3,000 in three years, or almost 20 a week. And these products will need to quickly succeed against well entrenched brand leaders. World leader Sainsburys achieves about 15 per week.

The objective here is not to pick on Coles, the same analysis applies to attempts by Woolworths, Metcash, Foodland or Franklins to grow their private label range rapidly. Coles has just been the only group to give a clear goal in defined timeframe and so provide a useful case study.

This isn't to say private label will fail in Australia. One the contrary - we believe private label will (finally) grow strongly in Australia over the next decade as Australian retailers finally adopt global best practice. More importantly, we believe some management at Australian supermarket retailers have finally embraced the vision of private label and have made the required long-term commitment to implementation.

What are the implications for manufacturers of this - albeit slower than planned - growth of private label?

First, make sure you are the market leader. The experience of the United Kingdom market indicates that the number two, three and four brands in a category take all the damage.

In fact, if you are the brand leader, the growth of private label may actually strengthen your position as you move into an oligopoly position. If you aren't the brand leader, but your category is relatively fragmented, get out your checkbook, buy up some of the smaller players, and move yourself into a clear leadership position.

Second, innovate. Investment in new product development and innovation is the interest you pay on your current sales and market share. In FMCG innovation is driven by either new products or new packaging.

Easy to say, hard to do? In the past, we have helped a number of Australasia manufacturers achieve profitable growth. We look forward to helping you.

We have recently written a complementary report providing an overview of Private Label in Australia. This report should be read in conjunction with our older report Towards Private Label Success. Both reports are large - right click on these links and choose "Save Target As..." to get your own copy.

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