Australian shoppers have seen private labels multiply on the shelves at Coles, Woolworths and IGA, both under the retailers’ own brands and ‘exclusive’ brands.
This shift is expected to continue. Coles, for instance, aims to have private labels make up 40% of its product range by 2023. 
A few years ago, retailers focused their private labels only in basic categories such as rice, sugar and dairy. Now, private labels are also penetrating premium categories such as pet food, honey and baby nappies.
More private labels mean lower prices for consumers and better margins for retailers. Some argue, however, that their presence reduces market profitability by downgrading category value, shrinking shelf-space and slowing the pace of innovation.
We think the truth is more complicated.
Downgrading category value
Private labels are price-oriented, therefore they expect high volume in return. In some categories, private labels can afford to be 50% cheaper compared to the brand leader. This pricing strategy could dilute a category’s value, not only by taking sales from branded names but also by forcing them to lower their prices.
But this strategy is also the best way for Coles and Woolworths to compete with stores like Aldi and Kaufland, which have leveraged their global sourcing strategies to achieve lower prices.
Check out the taste test we did on supermarket burger sauces for examples of pricing strategy.
Private labels are getting more and more facings on the shelf, shrinking the space for other brands. As a result, brands are competing for the remaining shelf space and ultimately spending more money.
The most notable effect this change will probably have, however, is more local, independent brands will likely be delisted (i.e., their supply contracts will not be renewed) and disappear from the shelf. Bigger brands probably won’t be affected.
Reducing the pace of innovation
On one hand, private labels make goods more accessible to shoppers by offering premium categories at affordable prices. On the other hand, there is some concern that they can also slow the pace of innovation in certain categories.
A common argument is that brands aren’t motivated to keep innovating and investing when their new products will be copied by private labels.
Although this argument sounds reasonable, the Harvard Business Review argues that private labels can actually boost innovation. One article says:
‘Premium private labels now have enough appeal for consumers that they are leading the way in creating entirely new categories‘. 
They do this by giving manufacturers a chance to try out their product ideas at significantly lower costs, since the retailers take on the responsibility for advertising and promotion.
This idea was echoed by Bill Trainor, the General Manager of the Australia/New Zealand branch of the Private Label Manufacturers Association. He said:
‘Retailers use PL as a way to differentiate their offering, and there is significant growth particularly in the “premium” PL tier, which is where a lot of the innovation occurs’.
For an example of PL innovation, take a look at that taste test I mentioned earlier.
Whether you’re a big brand or a smaller independent brand, it’s important to monitor the private labels at Coles, Woolworths and IGA.
They’ve been moving quickly into other categories and launching new products all the time. To stay in the game, brands must execute flawlessly on the shelf by reducing voids, staying on top of replenishments and ensuring availability.
If your brand leaves empty space on the shelf, private labels won’t hesitate to take it over.
If you want to track how your brand is performing compared to competing private labels, sign up to Aglo Community Galleries and see hundreds of photos from Coles, Woolworths and IGA in minutes.
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