Small and mid-sized FMCG brands heading for ‘price war’ with private labels

Supermarket private labels increased their share of food sales from 35.8% in the second half of 2021 to 37% in the year to May 2022, according to new data from IRI.

InflationA “price war” is likely to kick off on supermarket shelves in the first half of next year, analytics firm IRI predicts, as small and medium sized FMCG brands are increasingly squeezed by private labels amid the pressures of inflation.

The “squeezed middle” is already losing volume and value, IRI finds. In the year-to-date (YTD) to May 2022, medium sized manufacturers had a 25.4% share of food sales, down from 26.1% in the second half of 2021. Similarly, small brands saw their share of food sales decline from 14.1% to 13.8%.

Meanwhile, supermarkets’ private labels increased their share of food sales from 35.8% in H2 2021 to 37% over the YTD to May. Inflation has risen even further since then, and consumer concerns about the cost of living over the winter months is likely to drive an increasingly rapid move towards cheaper private label goods, IRI says.

Indeed, NielsenIQ recently found that private label now accounts for 53% of FMCG spend, up from 52% a year ago. In addition, the research found that 27% of consumers say opting for own-brand products over brands will be one of the key ways they tackle the cost of living.

Focus on your core range, recognise consumers are making very hard choices.

Ananda Roy, IRI

Concerningly, medium and small sized brands have fewer tools at their disposal than large manufacturers, including private labels, to mitigate the effects of inflation and this increasing competition, says Ananda Roy, international senior vice president of strategic growth insights at IRI.

“The large national brands have availability; they’ve managed to meet spikes in demand and adjust to dips. They also have brand recognition,” Roy tells Marketing Week.

Many larger brands have learned how to “avoid getting sucked into a price war”, he adds.

“They focus on their core range. They justify the premium that consumers pay and are very clear on what makes them unique and differentiated.”

Meanwhile, small and mid-sized brands are more affected by issues like supply shortages and energy costs, which impact their margins, Roy explains.

Categories like alcohol and confectionary, where there will be a desire to liquidate stock after Christmas, are particularly likely to find themselves at war, IRI predicts. Retailers and brands will likely turn to lower prices to keep margins.

Smaller, artisanal brands in categories like alcohol and cheese will be at risk of getting cut out completely from consumer baskets, says Roy. He gives the example of shoppers choosing to buy just cheddar rather than a variety of cheeses, as consumers look to cut out luxuries.

“This is why we say focus on your core range, recognise consumers are making very hard choices,” he says.
The best way to make your brand vulnerable to private label is to commodify it

In a price war, there are no winners, Roy concludes. “Of course, in the short term consumers love this kind of scenario because they see a decline in prices, except that it is not sustainable for manufacturers and retailers.”

Elsewhere, IRI’s head of manufacturers Steph Cullen says it will be those on the lowest incomes that are most feeling the impact of inflation and having to make the hardest choices.

While the current rate of inflation in the UK is estimated to be 13.2%, it is more likely to be in the range of 18-20% in food retail, the firm estimates.

“It’s the lowest income consumers that have actually seen the 18 to 20% inflation,” Cullen explains.

“The more affluent shoppers, they can switch to a cheaper retailer. They can switch things out of their basket, by either choosing not to purchase at all, if it’s a discretionary item or switching to cheaper alternatives,” she adds, pointing out that many low-income shoppers were already doing these things before inflation kicked in.