Talk to a marketing manager of an FMCG brand and you’re likely to hear that times are tough. As I explored briefly in my previous post, the Australian supermarket giants Coles and Woolworths are continually driving down the profit margins of their suppliers due to their significant buying power in the duopolistic grocery market. But beyond the supermarkets’ significant buying power, FMCG brands need to cope with the added pressure of private labels. Private label brands are those that are self-owned, self-managed and self-stocked by retailers. In the Australian grocery market, two examples are the Coles-owned ‘You’ll love Coles’ brand and the Woolworths-owned ‘Woolworths Select’ brand. As I’ll explain the increasing prevalence of these private label brands is putting the hurt on FMCG marketers, big-time.
Last week I went along to an AMI Emerging Marketers event that featured a presentation by Gale McLardie. Gale is the Marketing Manager of Tetley (one of Australia’s major tea brands) and works at the coalface of FMCG marketing. Gale cited the rise of private label brands as one of the top three biggest challenges facing the Australian FMCG industry. Gale also explained that private-label brands stifle new product development and are ultimately bad for consumers, as they are largely market-following product offerings that are cheaper replications branded products:
“Retailers need brands for innovation”
So what has led to this FMCG marketer’s nightmare?
Not long ago private label brands were seen as the ‘cheap and nasty’ alternative by the majority of Aussie shoppers, but today they are perceived very differently. Private brands’ share of the Australian grocery market has increased by 30% in five years. This has meant that significant market share has been prised away from the traditional FMCG giants like P&G, Kraft, Unilever and Lion. Private-label brands like the Woolworths-owned and controlled ‘Woolworths Select’ and the Coles-owned ‘You’ll Love Coles’ ranges are propped up by being given preferential treatment by their owner/retailers. Specifically, brand positioning strategies like prime in-store shelf placement and clever package design has contributed to the massive shift in consumer sentiment and increased product credibility.
As a result of these aggressive positioning strategies, today over 60% of shoppers perceive private-label products to be of the same quality as branded alternatives. Combine this favourable perception with the fact that Coles & Woolies can utilise economies of scale to charge lower retail prices and grocery shoppers will inevitably opt for the private label.
It’s not just the pricing and positioning of private labels that is causing headaches. The sheer range of product categories that private label brands penetrate is driving the big FMCG’s to despair. It isn’t only the staple product categories like bread and milk that are being pressured. Private label toiletries, domestic cleaning products and kitchenware goods are giving the Gillettes, Glen20s and Sunbeams of the world a run for their money.
What is clear is that the threat of private labels isn’t going away any time soon. The pressure is on the FMCG companies to continue to innovate under pressure and create competitive points of difference that are compelling enough to grab back consumer’s attention. In doing so the spotlight may come off price competition and the FMCG’s may be able to claim back lost market share.