Name brand producers are now realising that home brands will not cede market share quickly. Competing directly with new premium home brand offerings could mean a lengthy price war with an uncertain result.
Instead, another solution has dawned: the business model is being adapted to accommodate making home brand products for supermarkets and then offering a premium brand.
By controlling the production of the home brand, these producers can also make sure it tastes significantly different to the premium brand offering, which makes up most of their market share. Some consumers will always prefer, and pay for, the taste of the name brand over that of the home brand.
Producers make money two ways – profits on margin and profits on turnover. Rarely is both possible. But by producing the supermarkets’ home brand products alongside its premium offering, name brand manufacturer can make the margin profit on the name brand product, keep the brand value high on the books, and make a nice profit from a high volume, low margin strategy on the home brand product.
This model makes it difficult for other name brand producers to knock the company out of the market because of the strength in volume and in margins, even if the margin strategy is essentially a niche offering.
This means supermarkets are now some producers’ best friends, giving them the opportunity to not just access the market but to also make profit two ways without harming the name brand.
For supermarkets, this change has meant a greater control in the supply chain than ever before as suppliers now no longer see them as competitors but very valuable customers. They can start raising the margins and volume as new generic brand product lines are introduced, stretching further and deeper into key categories.
This makes home brands very valuable customers of the suppliers. Retail outlets with already very small market share such as Aldi and Metcash, will be placed under further pressure on prices as the larger retailers can use volume and margin to target them, even if they introduce their own generic brands or use unknown brands to take market share at the low end of the price spectrum.
Core ingredient suppliers like farmers will also feel sustained pressure on their own margins as long-term contracts give very little room to move and not much incentive to invest in their business operations.
Then there is the danger of the taste between name and home brands no longer being able to be discerned or noticed by consumers, which would mean at the end of the day that price would probably win and therefore the home brands would obliterate most of the share of the name brands.
And for us humble consumers? Well whilst we still remain loyal to the name brands by nearly two thirds, more and more are willing to put up with a “close enough is good enough approach” that will see the continued growth of the generic brands.
David Spencer is a Professor of Economics and Political Economy at University of Leeds.
This article was originally published at The Conversation. Read the original article
