Insight: Private label ousting big brands as cost of living crisis grows

Axfood AB

24/08/2022 13:31

By Richa Naidu
    LONDON, Aug 24 (Reuters) - Tomasz Łuksza, who took over his
father's Polish confectionary business just over a decade ago,
has a problem he's not unhappy about: European supermarkets want
more gummy bears and chocolate-covered marshmallows than he can
make.
    "We're seeing at least two times the demand of last year and
we can't take all the orders," said Łuksza, managing director
and owner of 3 Topole, which supplies the private label brands
of French retail giant Carrefour  CARR.PA  and several other
European supermarkets.
    Private label sales have been on the rise for years, but a
global cost of living crisis driven by soaring energy prices
appears to be turbo-charging the trend. 
    "Consumers are starting to be more price-aware," Łuksza
said. "Inflation is making them want to save money so they're
looking for cheaper alternatives and private label seems to be
the answer."
    An 85-gram bag of Haribo Golden Bears on Carrefour's website
in Poland costs 3.49 zloty ($0.73), while a 100-gram bag of
Carrefour Classic Żelki misie gummy bears, made by 3 Topole,
costs 2.69 zloty. 
    In Europe, private label sales already account for a larger
chunk of grocery purchases than in North America. Sales are
expected to grow this year, according to the Private Label
Manufacturers Association, though it did not give a figure.
    Of all staple food sales in Western and Eastern Europe last
year, more than 29% and 9% respectively were private label
purchases, according to Euromonitor. In the hygiene and tissues
sector, the figures were 41% and almost 19% respectively. 
    Though own label manufacturers face the same cost pressures
as branded product rivals, they can rely on guaranteed demand
from retailers who specify what goes into the product, how it's
packaged and how much it will cost. Retailers are also more
likely to swallow price increases on own label products because
they are more profitable for them than branded items.
    "Private label is one of the tools that they will use to
convince shoppers to continue to walk through those doors rather
than walk through the door to their competitors," said Andrew
Walker, client knowledge director at market researcher Kantar.
    In contrast, branded product manufacturers face increasingly
fraught negotiations with retailers. Britain's biggest
supermarket Tesco  TSCO.L  removed Kraft Heinz  KHC.O  products
from its shelves earlier this year after failing to agree
pricing with the manufacturer.  urn:newsml:reuters.com:*:nL4N2YP2UC
    In June, consultancy McKinsey & Co surveyed 5,000 shoppers
in Western Europe about their shopping habits. Roughly 40% of
respondents said the biggest change they had made recently was
to try new private label products.
    Increasingly, consumers are happy with the quality, taste,
variety, and innovation in private label products - and sticking
with them, McKinsey Associate Partner Angus McOuat said.
        
    'SMASHING IT'
    Behind labels such as Tesco's "Finest" and Carrefour's
"Simpl" are thousands of businesses that make food and personal
goods on behalf of the supermarkets. These firms are often small
operations that serve several retailers at the same time, from
low-cost Lidl to John Lewis' high-end Waitrose stores.
    Their products are sold at a discount to the brands of
companies like Kraft Heinz and Nestle  NESN.S , which spend far
more on product innovation and marketing. 
    In the UK, sales of private label products are at record
levels, according to Kantar, with sales up 7.3% in the 12 weeks
to Aug. 7 and holding 51.6% of the market. 
    Family-run cheese maker Joseph Heler Cheese has seen sales
to discount stores Aldi and Lidl - which mostly sell private
label products - rise sharply in the past year. 
    "Aldi and Lidl are absolutely smashing it at the moment,"
Gregor Abell, Joseph Heler's sales and marketing director, said.
    A 400-gram block of Aldi private label cheddar costs about
2.29 pounds ($2.70). A similar-sized block made by Cathedral
City, Britain's biggest cheese brand, costs more than 4 pounds.
    Seventy percent of Joseph Heler's 120 million pounds in
annual turnover are from own-label products for retailers, Abell
said.
    Aldi said it was well positioned for further growth in
private label sales. Lidl declined to comment.
           
    BETTER DEALS
    Rising energy prices, record inflation and an anticipated
recession are pushing European shoppers to look for better
deals, retailers say.  urn:newsml:reuters.com:*:nL8N2ZF6CK  urn:newsml:reuters.com:*:nL8N2ZY112
    "Everything now is moving to cheaper solutions," said
Manolis Giamniadakis, commercial manager at Tsililis, Greece's
biggest producer of tsipouro spirit. 
    Tsililis supplies Germany's second-largest supermarket chain
REWE and Ahold Delhaize-owned  AD.AS  AB Vassilopoulos with low
priced spirits and wine. A 700 millilitre bottle of REWE Feine
Welt London Dry Gin, made by Tsililis, costs 12.99 euros, versus
a 22.99-euro bottle of Bombay Sapphire London Dry Gin, according
to REWE's website.
    Swedish supermarket chain Axfood and Belgian discount
retailer Colruyt both told Reuters they had seen greater demand
for own label goods in recent months.
    Even upmarket stores are relying more on private label.
    "In the last six months, we've seen a large increase in
orders from the biggest retailers in the country," said Nissim
Nissim, director of UK confectionary business Sweet Me Keep Me,
which supplies department stores like Harrods and John Lewis.  
    Ahold, the owner of more than 20 retail brands including
Albert Heijn in the Netherlands and Stop & Shop in the United
States, is seeing private label demand rise across all its
regions, and especially in Europe. 
    The supermarket group is relying more on private label
suppliers because big brands are charging too much, CEO Frans
Muller told Reuters, citing "hard negotiations." 
    "I am not completely happy with how the big international
vendors talk about inflation and what kind of price increases
they bring to us," he said. "We cannot justify those price
increases to support their own profitability."
    About half of Ahold's business in Belgium, the Netherlands
and Luxembuorg is private label, as is nearly a third of its
U.S. business. Own-brand sales were up more "moderately" in the
United States, but Muller expects growth to speed up.
    "We see increased private label share," Muller said. "This
will not stop."
    ($1 = 0.8322 pounds)
    ($1 = 4.8015 zlotys)

 (Reporting by Richa Naidu
Editing by Matt Scuffham and Mark Potter)
 ((richa.naidu@tr.com; Follow me on Twitter https://twitter.com/Richa_Writes;
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