Private label will double its market share to half of all goods sold in supermarkets by 2025. This represents a challenge and an opportunity to the food industry.
That’s the conclusion of a new report by Rabobank, the Netherlands-based financial services group.
The Producing Both Brands and Private Label report says that co-production of B-brands (‘second tier’ brands) and private label is a fairly risky strategy which can pay off but only if the private label part of the business is economically viable on its own and is fully embedded in the supplier's strategy.
These B-brands already suffer from overcapacity, according to Rabobank, and being able to make the most efficient use of their assets is crucial to their profitability. As a result they will have to focus on cutting costs and find new strategies to maintain production capacity.
If you can’t beat them, join them
One option is to adopt an ‘if you can't beat them, join them’ approach and move into producing private label products as well but it is a risky strategy, says the report.
As the pressure on smaller, second-tier suppliers rises, many will look to private label goods as a way to retain their scale and make the best use of their production facilities. By locking in new private label supply contracts, they may be able to offset, or at least alleviate, the pressure on their branded production volumes.
However, while this may work in the short term, it is not as straightforward a strategy as it might appear, says Rabobank.
The dual-tracking approach
The danger for those that adopt a dual-tracking approach, as the strategy is known, is that they weaken their bargaining position in relation to their branded products which rests on the information asymmetry between supplier and retailer as to the supplier's cost base, pricing structure, and innovation pipeline.
Private label suppliers have to disclose more of this information, so dual trackers may find their negotiation position undermined with potentially detrimental impact on their profitability levels and brand power.
Successful negotiating strategies include:
Firewalls: By using completely independent sales teams, activity-based cost accounting or splitting the branded and private label businesses by geography and/or market segment, the brand and private label production can coexist, allowing the dual tracker to benefit from the economies of scale but making it difficult for food retailers to back them into a corner.
Opportunistic: Brand suppliers may fill spare production capacity on an ad hoc basis. This makes it difficult for a food retailer to get a grip on the dual tracker but it can increase earnings volatility.
Defensive: A private label specialist may be using fancy brands to augment the overall product offering and facilitate the needs of specific customers. Typically, the supplier is not supporting these fancy brands with any marketing effort.
Category Management: Consumer knowledge of the brand supplier may prove a valuable asset in order to maximize the shelf return for the food retailer by offering different price points, creating a win-win situation for both retailer and brand supplier.