Private label manufacturers are enjoying a sustained period of growth and increasing share in European markets – market and consumer trends provide a tail wind to support continued strong performance. However, the gatekeepers of this land of opportunity, grocery retailers, are having to manage several cost challenges, the impact of which will inevitably flow down the value chain. Manufacturers will need to actively meet this cost challenge to benefit from the positive outlook for private label products.
According to PLMA and Neilsen's 2020 research, growth in private label volume share across Europe has been consistent. The Aldi and Lidl effect continues to be felt by the largest grocery retailers; in terms of physical competition – Aldi has just opened its 900th UK store in Berkshire – and in breaking down barriers to non-branded goods. While penetration of online ordering and delivery may check this growth, it will by no means reverse the trend; Aldi continues to target to operate 1200 UK stores by 2025.
The negative economic impact of the COVID pandemic on consumers is tangible – unemployment had increased by 0.8% to 4.8% from April to September (ONS), however this does not account for the impact of the end of the furlough scheme, now extended to March 2021, and the second set of lockdowns across the UK and Europe. The value offered by private label goods will be incredibly important to consumers in 2021 and beyond, fostering further increases in market share for private label goods.
At the same time grocery retailers are gearing up to hold share through the recession by providing better value to their customers – this means they will aggressively tackle the cost of their value chain. For the avoidance of doubt, the honeymoon is over. The partnerships created between retailers and manufacturers to meet the stunning level of demand early in the pandemic, will be broken as retailers seek cost improvements across the supply chain.
Private label manufacturers that want to play need to be able to meet the cost demands and sustainably deliver profit over the life of the contracts they win. If you haven’t already been examining your cost base and commercial strategy, you must act now.
Our recent experiences in this area suggest you start with the following:
- Know your business:
- Get clear on where your business makes margin – by customer, SKU, contract
- Understand what has moved since contracting, build evidence to support or defend margins
- Leverage data analytics to improve contract cost and pricing accuracy
- Move on the conversation with your customers from price:
- Give customers value – don’t focus on price
- Proactively engage and lead the conversation on consumer insight, innovation, and value engineering opportunities
- Engage in joint problem solving, look to build deeper relationships
- Improve operational effectiveness and efficiency:
- Drive operational effectiveness and efficiency
- Minimise direct and indirect costs