Superbrand suppliers hold sway over retailers, says analyst

While many small food producers in Britain cry foul at the crippling sourcing policies of large retailers, big brand suppliers are still firmly in charge, said James Edwardes of Execution market analyst firm. This is despite growing demand for private label goods.

Speaking at the 2006 IGD Food Retailing conference in London last week Edwardes said suppliers - essentially powerful brand managers - currently hold much more clout than the international retailers, and are financially better off because of it.

The cost of goods for resale is recognised across the industry as the biggest outlay for the food retailer, and supplier price hikes are rarely passed on to the consumer. But with private label goods faring better than their branded counterparts, retailers should be demanding a better deal from suppliers.

For example, Execution's research found there has not been a single quarter in the last four years where the level of price increases reported by Tesco has exceeded Nestlé's reported price inflation.

In the last three years Nestlé's price increases in the UK market - which makes up five per cent of its core business - has exceeded that of the whole group.

"Although this data is inconclusive, it does suggest superficially that the notion that large food retailers have it all their own way in negotiations with their suppliers is a debatable one,"​ Edwardes said.

"So much for the ruthless food retailers and their hard-done-by suppliers,"​ he added.

Retailers are missing the opportunity to capitalise on the strength of their private label brands and therefore fortify their negotiating power with suppliers, claimed Edwardes.

Just a small shift in supermarket management focus could tip the balance of power.

Execution, in conjunction with pollster YouGov, surveyed around 2,500 supermarket shoppers in late May, and the overwhelming response was private label brands offered better value for money than manufactured brands. More than half respondents believed retailers' own brands offer better quality.

"I was convinced that branded manufacturers would score higher on quality than retailer brands, but at best we can say they have held their own against the retailer brands,"​ Edwardes said.

The same can be said of innovation. Customers perceived branded suppliers to offer less innovation than their private label counterparts.

Apparently, branded suppliers' fascination with line extensions has damaged consumer perceptions of innovation. But new private label goods, such as healthy eating ranges and single-serve convenience food offerings, are seen to be more relevant to consumers' changing lifestyles.

At a trade conference earlier this month Nestlé warned line extensions are damaging its UK confectionery business, and it seems as though consumers agree.

"On pretty much every level consumers seem to be more impressed with the retailers' brands than with the big name manufacturers' brands. The conclusions for both retailers and suppliers, I believe, are clear cut,"​ Edwardes said.

"For the retailers there is a need to start thinking and acting more as brand managers. Ultimately I think this would lead to reduced commoditisation across the food retail sector, better financial performance and stronger share prices. It should also strengthen the food retailers' hands in negotiation with their suppliers,"​ he said.

For the suppliers the conclusions are similarly straightforward - there is a need to re-engage with consumers.

"Many of the companies I follow are reducing traditional media spending and are attempting to engage with their consumers directly. This trend looks set to continue, indeed, accelerate. At the same time they need to deliver on quality and innovation and ensure they are seen to do so,"​ said Edwardes.

Edwardes asserted this is not just a matter of choice but one of survival. He warned if the manufacturers fail their brands will commoditise.

"Volumes will stagnate or decline and if their owners think they've had a hard time from retailers until now, they're in for some serious heartache,"​ he said.

In the UK private label purchases make up a whopping 35 per cent of total consumer packaged goods (CPG) spending, according to Datamonitor, and the figure is steadily rising.

European sales of private label goods has now reached €207bn - accounting for 23 per cent of total CPG consumption - as supermarkets supply premium, mainstream and economy ranges to capture the full consumer spectrum.