Samantha Enslin-Payne
Private label products, although currently a relatively small portion of retailers’ sales, are expected to become a more significant contributor as retailers, facing intense competition, look for ways to boost their margins.
Chris Gilmour, an equity analyst at Absa Investments, said on Friday that private label products offered higher margins for retailers as they did not have marketing costs and fancy packaging to pay for.
Gilmour said private label penetration by food retailers in South Africa, which 15 years ago was about 12 percent to 15 percent, had hardly moved. In comparison, private labels accounted for 50 percent of sales at Asda, Walmart’s UK subsidiary.
Nielsen’s Global Private Label Report, released in March, said the global average for private labels was 14.9 percent, although in Europe it was higher at 35 percent. In South Africa Woolworths is the exception as it is predominately a private label business.
Gilmour said as Walmart became a force, intensifying competition among retailers, one of the ways Pick n Pay, Spar and Shoprite could recoup margin was to invest in private labels.
Private label products should be between 20 percent and 30 percent cheaper than branded goods, as they are at Asda. But in South Africa this is not the case, where store brands are sometimes more expensive than branded goods.
In addition, food in South Africa was generally far more expensive than in the UK, with detergents for example often four to five times more costly in South Africa than in the UK, Gilmour added.
Gilmour said the fact that private labels were not significantly cheaper than the equivalent branded product was most likely because manufacturers in South Africa were either unwilling or unable due to capacity constraints to supply private label products.
Higher food and grocery costs in South Africa in general also pointed to manufacturers not being globally competitive.
Whitey Basson, the chief executive of the Shoprite Group, was reported as saying that local manufacturers were unable to supply in sufficient quantity for private labels and so Shoprite would source offshore. Pick n Pay chief executive Nick Badminton recently concurred with this view, Gilmour said.
A spokesman for the Shoprite Group said through its private labels Ritebrand in Shoprite and Housebrand in Checkers, the group aimed to provide customers with the cheapest products on the shelf without compromising on quality. “By saving on packaging and labelling costs for these products, the group provides shoppers with the opportunity to save on products that they need in order to afford the products that they really want.”
The Checkers Housebrand range has almost 300 products.
The spokesman, however, would not elaborate on the group’s plans for private labels, saying to guard its competitive advantage in the market, the group deemed information on its private label strategy as strictly confidential.
Badminton said last week at the release of Pick n Pay’s interim results that private label products constituted 15 percent of overall sales, or 29 percent if fresh food was included.
Peter Arnold, Pick n Pay’s acting merchandise director, said the launch of rebranded Pick n Pay private label products coincided with the start of the recession in 2008. These house-brand products proved popular with “our financially cautious customers” since retailers typically experienced an increase in house-brand sales during a recession.
Some of Pick n Pay’s best-selling private label products include chicken, milk, canned fish, sugar, facial tissues, oil and household cleaners. Pick n Pay would also not disclose its strategy on the rollout of private label products.
Last week, Pick n Pay launched a new up-market private label range, Finest, which will offer premium items such as Kalamata olives from the Greek Peloponnese, organic coffee from Antigua, fine Belgian chocolate and premier South African rooibos tea.
Gilmour said Pick n Pay’s Finest range “looks utterly stunning, tens times nicer than Woolies. This is fancy stuff. It looks lovely. But who on earth is the target market? I can only assume Pick n Pay feels there is a gap, but I am not sure that gap exists.”
But Pick n Pay may be onto something as the Nielsen Global Private Label Report said private label brands, which were in a position to compete on value and quality, provided an opportunity for retailers to differentiate themselves and lead the way with innovation to help build and sustain the image of the entire franchise.
Woolworths is an example of this. Zyda Rylands, the Woolworths managing director of food, said the food catalogue was made up primarily of Woolworths private label goods, the advantages of which were brand integrity as the company worked directly with suppliers and jointly assumed responsibility for product development, production, marketing and distribution.
To ensure the ongoing quality of Woolworths products, the company worked closely with suppliers. For example, “to ensure that we offer customers fresh fruits and vegetables we have developed a strict cold chain protocol where Woolworths products are kept in an optimum temperature range from the farm to our store shelves,” which helped to extend the shelf life of certain products. Rylands added that Woolworths introduced other brands in stores to enable customers to complete their main grocery shop at Woolworths.
Private labels generally are aimed at the cost conscious consumer. The Nielsen Global Private Label Report said the “value-conscious” shopper was a trend that was likely to continue even as economies staggered out of the recession and rehabilitated.
A 2010 Nielsen global online survey of more than 27 000 respondents in 53 countries found that more than half of online consumers said they purchased more private label brands during the economic downturn, 91 percent said they would continue to do so when the economy improved.
The report said generally middle- to higher-income consumers in developing countries were often the first to be positive towards private labels as low-income shoppers needed higher levels of trust in a product because they could not afford to make a mistake.
“Better to spend a little bit more than to waste money on a product you are not satisfied with,” the report said.