IPLC Research Report 2017: Driving Private Label Growth through Collaboration

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How Private Label Suppliers in Europe Experience the Relationship with their Retail Clients.

Introduction:

The market for private label products continues to grow throughout Europe but at the same time we have seen the concentration of retail food market share move into a few hands, with the top 5 retailers controlling over 70% of the market in most European countries.

This has created a market where a few powerful buyers interface with many suppliers. In economic terms this is called a quasi-monopsony. With over capacity in manufacturing in many product categories this has created an environment where there is major downward pressure on pricing and margins for private label suppliers. The process of retailer consolidation has had, and continues to have, a major impact on the manufacturing industry.

We have also seen the rise of the Discounter. What started as a German format has now spread across the whole of Europe through either the expansion of Aldi and Lidl into other European countries

For a private label manufacturer, a contract to supply a retailer may represent a large proportion of their business, whilst one contract for a retailer will represent only a small fraction of their overall business, potentially creating a very one sided relationship. From recent discussions with key manufacturing partners it became clear that many private label suppliers were reluctant to express their views on this imbalance and what this means on a day to day basis.

At IPLC we felt that the conditions that prevail in the market required better understanding from the manufacturer’s point of view, specifically on the relationships that they have with their main customers across the key areas of:

  • Collaboration
  • Communication
  • Innovation
  • Quality
  • The negotiation process
  • Supply Chain

We also felt that it may provide a useful reference for retailers in understanding the issues from the manufacturer’s point of view.

Conclusion & recommendations:

When we reviewed all the results of the interviews we realised that the clear majority of comments were negative, however when asked how they rated their relationships with their customer base most answered as “good”

Firstly, we decided to report the findings in a true and honest way, secondly, we concluded that most of the comments were given in an open way on how to improve the current situation for all parties involved.

The private label market is one in which tough negotiations prevail, that is the way of business and this will not change. However, if the system fails to get the best product at the best cost to the end consumer then there is something wrong in the process. This research would suggest there are several inefficiencies in the current process.

Some of this comes from too much power on the buying side of the equation, so that the quasi monopsony works to the benefit of the big retailers. Our analysis of the data shows that the single biggest issue is the constant change of contacts which in turn leads to a lack of product and category knowledge. This is followed by a real concern that if only price is the deciding factor that over time quality will be eroded to the detriment of the private label market.

It was interesting to note that the suppliers’ answers showed that only 61% of their customers had what our respondents considered to be adequate controls in place to monitor product quality on a consistent basis. This means not all suppliers are operating on a level playing-field so a true and fair comparison on quality may not be possible. This view is supported by the results in our research that in 20% of the categories, they consider the branded quality to be better than private label.

One other aspect that stood out was that respondents felt that the Discount channel was viewed more positively for many elements of the trading relationship outperforming Retailers for:

  • Product and category knowledge.
  • Speed and efficiency in processes.
  • Planning.
  • Trust and loyalty.
  • Focus on quality.

At IPLC we have already highlighted the way Retailers can adapt their ranges to meet shopper needs3 perhaps they should also look at the Discounter channel approach to working with suppliers. We appreciate Retailers have much wider and deeper ranges to work on which brings added complexity, but lessons could be learnt.

The opportunity to build long term relationships would be to the benefit to all parties. We heard recently of one supplier creating 5 to 10 year contracts supported with investment in new production capacity, so it is possible. This would however mean less tendering and more genuine collaboration to drive category development and growth. Closer working on innovation and the product development process would be a prerequisite ensuring customers could tap into the wealth of knowledge that is in the manufacturing base of private label companies.

On a final note, a more balanced collaboration based upon mutual respect does not necessarily result in a weaker outcome. As one major Retailer once said to us “Hard on the content but soft on the relationship” seems to encapsulate an approach that could build sustainable relationships whilst maintaining competitive conditions.

For the full report in pdf please click here.

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