Recently both Coles and Woolworths, the two dominant Australian supermarket chains (with combined share of more than 80%), announced a shift in strategy towards private labels. Coles has said that by 2007 30% of its sales will come from its own labels.
Australia is an interesting evolving case study because it has one of the very highest levels of retailer concentration yet private labels (or retailer brands) are only a small part of the Australian supermarket industry, reportedly sitting at 12% of sales or less.
Coles and Woolworths are now trying to mimic the strategy of most/all of the UK supermarkets.
But have they got it wrong ? I suspect that they have misunderstood a crucial aspect of UK retailers strategy, which isn’t surprising because I think UK marketers haven’t noticed it either.
The real success of Private Labels has been less about taking on the big successful brands, and more about quite simply improving the branding of the supermarket by putting the retailer’s brand everywhere it can be, while at the same time not in anyway degrading the shopping experience for consumers.
Let me explain….
This weekend I visited a Coles supermarket to see how their private label roll-out was going. The answer is obviously very slowly. You could very easily completely miss noticing their private labels.
They were present in only a few categories, where they seem to be trying to take on the big brands. For example, here is a picture of Coles Corn Flakes right next to the leading brand Kellogg’s Corn Flakes. The Coles packaging is good, and priced substantially cheaper – although marked as on special.
From the amount of boxes missing on the shelf it looks as if it is selling fast – though this could be misleading – Kellogg’s Corn Flakes may have been restocked more recently.
I was interested to see how Coles looked in comparison to a UK supermarket like Tesco. And the answer is very different. Tesco brands most, if not all, their fruit, vegetables, seafood, roasted chickens, meat cuts and anything that is not usually strongly branded. Coles makes the occasional, half-hearted effort, but the vast majority of such items carry no name or the name of some farms no one has heard of or cares about. A few things like packaged cuts of meat carry a tiny Coles logo. They seem to be missing the easy and obvious ways of branding their store.
So Coles have a very long way to go, and a lot to learn about branding.
I was also struck by the huge opportunity to replace thousands of obscure brands with the Coles name. There are so many ‘brands’ in an Australian supermarket that would be barely recognisable to shoppers, even the ones who buy them. These are brands that are never advertised. Some are even from large companies, like the Mars/Masterfoods Promite brand (a competitor to Australian icon Kraft Vegemite).
In short Coles could easily achieve 30% of their sales from Private Label with us (and brand managers) hardly noticing the exclusion of any brands.
But instead they seem to be concentrating on mimicking big brands. Presumably because these are high volume items. And they can encourage big brands to lower their prices – which can be a good thing.
But this comes at the cost of creating tension between major supply partners. And it increases complexity for shoppers (buying Corn Flakes is now more, not less, complicated).
A more “easy win” for a supermarket is to replace as many of the ‘non brand’ brands as possible with their label. Over many years, in different categories and countries, this is where we have seen Retailer Brands enjoy great success – replacing the differentiated but unadvertised brands. The brand that’s only on the shelf because it is the ‘super cheap’ brand, the ‘Australian’ brand, or the ‘organic’ brand. Supermarkets are full of these ‘non brands’ that take up far more shelf space than their sales justify.
Supermarkets like Tesco have, where practical, cleaned out a large number of these ‘non-brands’ (or “brands without brand managers”) and replaced them with their own label. It has vastly improved the branding of their supermarkets – your bag of tomatoes or punnet of strawberries sitting in your fridge now says Tesco (not R&J Smith fruit farm or some other such name which meant nothing to you). And, importantly, made the shopping experience easier – the number of brands has decreased with almost no loss in variety.
Sure Tesco has also tried taking on some of the big brands. But I think this part of their strategy and success has been vastly overrated. Tesco cola is not the reason Tesco has been doing well lately. They’ve done well in winning share from other retailers, not from Coca-cola.
The lesson for retailers is avoid diversifying into the business of marketing individual packaged goods brands. Retailers sell shopping experiences, that is how they compete against other retailers, and to take your eye off this ball can be fatal. Better for retailers to take the easy route of using Private Label to improve store branding by replacing brands that aren’t doing sufficient branding and advertising. And keep and support brands that are working hard to maintain and grow their consumer franchise.
And the lesson for national brand manufacturers is that if you don’t work hard to maintain and grow your consumer franchise, if all your marketing investment is simply in-store sales promotions, then you deserve to be replaced by Private Label.
Dr Byron Sharp. Professor of Marketing Science
Director Ehrenberg-Bass Institute for Marketing Science
University of South Australia