The global market share of private label food products is expected to double, from its current 25% to 50%, by 2025, according to a new report from the Food and Agri Research division of Rabobank, an international financial services provider.
The report, however, also concludes that top or "A" brands are expected to retain their market shares. It's the smaller, often local, "B" brands that will face mounting downward pressure on volumes, as retailers stop carrying them in favor of using their shelf space for their own private label brands.
Rabobank outlines 11 drivers behind the projected private label growth. One of the most critical is that regardless of economic conditions, consolidation among retailers in developed markets, including the U.S., Western Europe and Australia, will continue. That consolidation will remove the main factor that has been holding back full-scale growth of private label: the economies of scale required for cost-effective production levels.
While recent statistics have pointed to a halt in the rapid growth of private label that was seen during the worst of the recession, and brands overall will recoup some of the share lost to private label, the historical trends show that they never totally recoup those losses, according to the report.
The lingering effects of the recession on consumers will drive private label expansion across the globe for years to come, say the analysts. Those effects include consumers' raised awareness of private label (aided by the introduction of "premium" private label brands), which has in turn spurred expansion of "hard discount" retail formats (warehouse clubs, dollar stores, "everyday low price" mass merchants and supermarkets) and increased competitive pressure on service-oriented supermarkets for lower price points and non-price differentiators from discount food retailers.
In addition, the private label supply chain is becoming increasingly professional, which is likely to lead to higher-quality private label products at lower prices. A major driver is the growth of private label supplier specialists -- suppliers that are increasingly achieving volume by serving both B brands and private labels -- a strategy that often accelerates the deterioration of the B brands, according to Rabobank.
On the other hand, top brands' roles vis à vis private labels are expected to actually gain importance. Rabobank expects their market shares to at least hold, if not increase, versus private label.
Private labels, in addition to yielding higher margins for retailers, give them important leverage in negotiating with brands. But at the same time, retailers very much need A brands. Consumers value in-store competition and want brands to benchmark the price competitiveness of their supermarkets, and food retailers need top brands as their price/quality anchors within each product category, the report points out.
If retailers compete too aggressively on price against top brands with their private label brands, they will end up lowering the retail prices on their private labels, as well as reducing their own overall profitability within product categories, creating a downward price/quality spiral.
The effects of private label on A brands over the past five years have been limited, Rabobank's statistical analysis shows. Strong brands have been able to outpace market growth in more than half of the food/beverage categories.
Furthermore, while growth potential in developed countries within mature categories such as beer, margarine and frozen pizza is limited, strong brands have major opportunities in gaining share in less developed regions.
In recent years, large multinational food/beverage manufacturers have been "actively targeting the top three positions in selected product categories" in developing countries, in part by acquiring "local hero" brands or non-core brands of other multinationals, the report notes.
"Our research shows that private label and A-brands are an inseparable combination," sums up Sebastiaan Schreijen, associate director, processed food and retail at Rabobank. "But whereas two's company, three's a crowd, this report is an early warning to B-brand suppliers to adapt their strategies to survive."