Good news for Oz food makers, Woolies private label plan may be unsustainable
Woolies, as it is more commonly known, had announced in November that it had firmed up a five-year plan to double its customer take‐up of private label products that have seen a growing demand in the past year.
The news was predictably met with disappointment across the local food processing industry that has long been vocal about the negative impact of private label on their businesses.
But there might still be some respite as a report from UBS Wealth Management Research Service has questioned the feasibility of Woolies’ private-label plan.
UBS retail analyst Ben Gilbert said in the report that at best, Woolies is likely to achieve only a 50% increase in five years on private labels, which is far behind the norms in other western nations.
Gilbert revealed the penetration of the private label category in Australia remains far below the global average, and less than half that of France, Germany and Britain.
Penetration
According to Gilbert, Woolies generates more than AU$5.5bnin sales from generic labels, of which AU$2.5bn comes from in-house brands, Select, Macro and Home Brand. The rest are unbranded private labels such as bread and milk.
“A doubling of penetration would take it to roughly 8%. Consultation with the private label industry suggests this target may prove optimistic based on overseas experience,” he added.
“The growth aspirations put forward by Woolworths, while realistic, are ambitious in our view and would require significant growth from the Select and Macro brands,” he said.
Gilbert also remarked that the relatively low level of private label penetration in the antipodean nation reflected the concentrated nature of the Australian food and grocery business.
“We have found more concentrated markets such as Australia have placed a lower emphasis on private labels until competition has increased, as in [German discount supermarket] Aldi's entrance in 2001,” he added.
According to Gilbert, the concentrated market meant suppliers were increasingly reliant on fewer retailers.
“This gave Woolies and its rival Coles increased market power with suppliers, meaning that the private label business was not required as a profit driver.”
