As it is, just five or six major supermarket multiples account for some 80 percent of the UK grocery market. Key Note says this concentration has enabled retailers to “harness the economies of scale that are so important in successfully developing own labels.” Of course, they are the same policies that have allowed packaging buyers to drive down prices in an over-supplied market. The major grocery multiples argue that they operate in an extremely competitive retail environment. Efforts to attract customers include continuous price-cutting campaigns, often featuring large mark-downs on own-brand products. Prices on these are easier to cut compared with branded items because they obviously generate more profit.
As for the food producers and other suppliers, they are now heavily reliant on, or solely committed to, producing retailers’ own brands. By the same token, some brand producers are contracted to manufacture private label brands that compete with their own. Key Note observes that this close relationship will be tested as competitive pressures and substantial investments by the retailers put pressure on suppliers to reduce their prices.
Interestingly, a report from the European arm of the Private Label Manufacturers Association in Amsterdam says online reverse auctions are stirring controversy. It seems that retailers increasingly use them to purchase own-brand products. Manufacturers say the increased use of auctions threatens to turn private label products into a commodity business, while retailers believe that auctions reduce their costs and increase buying efficiency.
The PLMA says auctions have made a big impact in the UK and France. They are widely used to source basic products, but many manufacturers are worried the auctions may eventually include value-added products. With their emphasis on price, online auctions create opportunities for suppliers operating in areas with low labor and product costs, such as Eastern Europe, India and the Far East.
Some manufacturers and retailers think online auctions will be a short term phenomenon. Within a few years, they say, auctions will drive procurement prices to the lowest possible levels. Once this has occurred, retailers will have to look elsewhere for significant cost savings. The auctions may continue, they say, but their primary purpose would be to reduce transaction costs and attract new suppliers.
Private label suppliers argue that online auctions will lead some retailers to sacrifice private label quality for immediate cost savings. As one consultant says: “The real danger in these auctions is that they put too much attention on product cost at a moment in time versus long-term delivered cost over time.”
To ensure product quality, manufacturers say detailed specifications need to be established before an auction takes place. Even with these specifications, however, auctions often don’t take into account valuable services that can't be quantified. “Auctions often put no value on the services a manufacturer can provide to a retailer in terms of product management, new product development and the many other things that can help,” one supplier says. It puts into perspective the debate about the growing use of auctions and similar e-commerce schemes to source all types of printed matter.