Suppliers given formula to succeed against grocery retailer “private brands”

  • November 15, 2012
  • Kate Carey

A national cross-sectional survey of more than 1,000 grocery shoppers by a leading Australian retail consulting firm, Bain & Company, has found that retailer-owned private label products are well established and are being purchased by most grocery shoppers in Australia. The Bain & Company report said that seven in ten consumers are already purchasing private label products.

The Bain & Company report titled “The new reality for grocery suppliers in Australia,” said that suppliers of groceries face a host of challenges that are new to Australia including price deflation, parallel imports, more sophisticated allocation of shelf space by the retailers, and the growth of private label products.

David Zehner, head of Bain’s Australian practice and co-author of the report said that too many suppliers had merely relied on annual price increases to hit their profit targets, but were unable to do this now.

“Suppliers are being forced to lift their game. The winners will invest and innovate in new insights, in their brands, in new products, and in reducing costs—and many will need to make hard choices about how and where to focus,” Mr Zehner said.

Bain & Company expressed the view that suppliers can fight back by embracing seven “winning rules.” The report identifies these and said they are encompassed in the following principles:

  • Rule #1:  Play the right game: Based on its study of hundreds of product categories, Bain concludes that while scale determines returns in most industries, in consumer products, the nature of the category—whether a premium category or a value one—matters more.  For example, a market share follower in a premium category typically earns higher margins than a leader in a value category.  This understanding has endured two decades of massive industry disruption and continues to predict which consumer products companies will be most successful.  In premium categories, leaders must invest in brands, innovate and constantly trade consumers up.  In less premium categories, suppliers must secure scale advantages and lower cost positions.
  • Rule #2:  Win the battle for the shelf: With the fight for profitable shelf space only to intensify, suppliers must begin thinking like retailers rather than ignoring the looming battle.  How will the categories evolve?  How quickly will private label grow?  Will this category evolve to be more premium, or more value-driven?  Which products in the category are substitutable in consumers’ minds?  Bain’s research finds that the number one brand has an opportunity to consolidate its leadership of the category as the private label grows.  For the number two and number three brands in a category, working proactively with the retailer is essential for survival.
  • Rule #3:  Be lower cost: The best suppliers constantly strive for efficiency, and this has never been more important than it is today.  Low-cost suppliers have more funds to invest in marketing and innovation—and if necessary, into more generous trading arrangements with the retailers. When prices are stable or falling, high-cost suppliers are always at risk.
  • Rule #4:  Don’t count on price rises, but move net price up: As private labels grow and the major grocers battle for perceived superiority on value for money, it will be harder than ever to negotiate price increases with the major retailers.  The best suppliers are boosting net prices in two ways.  First, they look for opportunities to improve the premium nature of the category in which they compete.  Companies introduce a range of new—and more expensive—premium products that encourage consumers to trade up.  It’s a move that helps retailers, as well as suppliers.  Second, the best suppliers are investing in more sophisticated pricing strategies to grow net price without necessarily moving list prices up.  Many suppliers still use simplistic models for price elasticity, failing to set prices strategically relative to the right benchmark products.
  • Rule #5:  Make collaboration “just what we do”: Many suppliers still rely primarily on a single touch-point with the retailers that sell their goods.  A member of the sales force interacts with the retailer’s buyer.  But imagine the many benefits of enabling multiple touch-points: a fast moving consumer goods (FMCG) company finance, supply chain or marketing representative talking to his or her counterparts at the retailer.  Not only would it strengthen the supplier-retailer relationship, but it also would generate a continuous flow of insights that could be used to benefit both parties.
  • Rule #6:  Drive growth outside the majors: For most FMCG suppliers, Woolworths and Coles will remain top-priority customers for the foreseeable future.  But there are also opportunities to grow outside of the two major retailers, and a more diverse mix of distribution channels is often favorable for suppliers.  For example, one reason Australia’s major brewers remain highly profitable is that they invest heavily to market to pubs, clubs, restaurants and convenience stores, in addition to the supermarket-owned chains.  For other suppliers, diversifying will mean focusing on grocers other than Woolworths and Coles, such as Metcash, Aldi and Costco.
  • Rule #7:  Be ready for “the call”: Despite their best efforts, many suppliers still will receive a dreaded call from retailers, informing them that their products are at risk of being de-listed.  Being ready for the call means being realistic about what you can achieve in any given relationship, recognizing the balance of power between supplier and retailer.  In each category, pre-emptively model the downside risk, the actions you could take to mitigate that risk and how your customers and competitors might react in different situations.  Only by understanding your “plan B” can you be properly prepared for the negotiation.

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