Major packaged goods manufacturers are likely to be taking a closer look at their own-label operations following Kellogg’s decision to scrap its deal with German supermarket Aldi after less than a year.
The decision – which Kellogg says was made “amicably” with Aldi – highlights the dilemma faced by companies trying to improve margins by moving into own label (MW last week).
While the economies of scale they provide can allow manufacturers to innovate, they can also potentially undermine their own brands.
Own label’s market share continued to grow in most categories last year, proving that despite the risks, entering the market can provide worthwhile gain for manufacturers bold enough to cross the divide.
The UK is Europe’s own-label leader, according to figures supplied by AC Nielsen for the Netherlands-based Private Label Manufacturers Association International Council (PLMA), with an overall volume share of more than 45 per cent.
But own label’s major gains on named brands seem to be slowing down. In the UK in 1999, own label increases were led by gains in dairy, dry grocery, bakery and cold beverages. Dairy had the biggest increase, but it was only up 2.3 per cent in volume and 1.5 per cent in value share on 1998.
Meat, frozen food, biscuits, alcohol and hot beverages were all down, while confectionery showed no change.
These figures compare with greater growth across all categories at the height of own label’s success in the past decade.
According to research conducted by AGB for the Institute of Grocery Distribution, own label volume share increased in the bakery category from 51.2 per cent to 58.3 per cent between 1992 and 1994, from eight per cent to 12.7 per cent in the detergent category, and from 65.6 per cent to 69.1 per cent in the cheese category.
Kellogg’s decision to enter an own-label agreement with Aldi’s supermarkets in Germany came during a slump in profits and share price (MW February 24).
Kellogg was also losing ground to rivals such as Cereal Partners – the Nestlé/General Mills joint venture – which has increased its share of the cereal market outside the US from five to 25 per cent in the past five years.
The Kellogg situation proves how retailers can force even the most steadfast of companies to bow to pressure to provide own-label goods.
The cereal giant has always prided itself on holding out against moving into own label, with on-pack slogans proclaiming “If you don’t see Kellogg’s on the box…it isn’t Kellogg’s in the box”.
That reputation has been tarnished by the Aldi fiasco – highly embarrassing for senior management at Kellogg. The company has cited pressure from rival supermarkets to sign similar deals as the reason it pulled out of the Aldi deal.
Kellogg European president Alan Harris says the company will not rule out future own-label deals – but it remains to be seen whether it has the courage to re-enter the minefield.
Henley Centre director of consumer consultancy Martin Heyward says: “Consumers have access to more information, more quickly about companies nowadays.
“You can’t stand for one thing in one place and try to be something else somewhere else, because you will get found out.
“If you play silly games by trying to be a premium brand but produce cheap and cheerful stuff as well, it will go wrong. Consumers will act.”
Nevertheless, some companies thrive on own-label production. Northern Foods, owner of Eden Vale and Fox’s Biscuits, accrued two-thirds of its &£1.1bn 1998 annual turnover from own-label operations (Mintel).
But the warnings are there for own-label producers: they face damaging their own brand name.
Justin Scarborough, an analyst at Credit Suisse First Boston, says: “Manufacturers desperately need to achieve volume growth, but to do that they need significant reduction in pricing to excite consumers.
“Ultimately you may destroy the profitability of your major brand name, or, if you don’t go down the own-label road, you may find retailers going to other manufacturers.
“That’s got to be the biggest concern at a time when the brand is under tremendous pressure in Europe, losing volume to other brands and own label.
“By introducing or carrying on expanding own label, it can’t do a great deal for the quality of the brand.”
Another analyst adds: “It’s very difficult to run own label and brands together.
“United Biscuits launched own-label production on the back of its branded operation but found it destroyed pricing and profitability, through overhead costs.
“You also have the worry that supermarkets will want to replace all branded biscuits, for example, with own label.”
One source says UB’s own-label production for European retailers has fallen to about 15 per cent of total output, from as high as 40 per cent in the early Nineties. UB could not confirm or deny the figures, although a financial statement released in March 1999 revealed increased sales of five per cent in core brands, which “offset a decline in own-label sales”.
Most of the major packaged goods companies have stuck to their guns. Procter & Gamble and Anglo-Dutch rival Unilever have staunchly avoided entering the own-label arena.
Major brand owners which have made or still produce own-label products are guarded about their deals with retailers.
Kraft Jacobs Suchard has dabbled with own-label confectionery and coffee production, but its senior management refuses to say which retailers the company supplies. Heinz has also entered the own-label market, but refuses to say whether it continues to do so.
Many companies try to keep their operations secret for fear of consumers discovering that their high-quality products are available under an own-label name, at much lower prices.
Asda’s new US owner, Wal-Mart, is likely to up the stakes once more by starting a new own-label price offensive. The supermarket is to introduce three branded lines – Great Value, Sam’s Choice and Smart Price – which the retailer claims will cut customers’ shopping bills.
Wal-Mart will be keen to match the performance of some own-label categories which still appear to have room for growth.
In the health and beauty sector, for instance, products in the haircare and dental care category increased in volume by up to five per cent in 1999, according to PLMA.
Growth own-brand areas
The toiletries and cosmetics market was previously dominated by high street retailers such as Boots, but in recent years supermarkets have offered a range of own-label products at competitive prices.
Analysis by consumer information company Claritas has identified some key consumer purchasing trends from over 500,000 questionnaires received in its 1999 autumn National Shoppers Survey.
Almost two-thirds of consumers surveyed buy their cosmetics and toiletries in supermarkets.
Manufacturers still have room for manoeuvre in the own-label market. But as the Kellogg debacle with Aldi shows, experiments with own label could end in tears.