Store brands squeezing out small manufacturers
The decision by Antitrust Commissioner Dror Strum to put a damper on relationships between supermarket chains and big suppliers, which contributed greatly to retail profits via providing sales incentives and other fringe benefits, is liable to result in the promotion of store brands (private labels), to the chagrin of the suppliers.
The profitability of store brands is higher than that of the products the chain stores purchase from outside suppliers, even though store-brand products cost the consumer less. Store brands can be used as bargaining chips against suppliers because the chain stores control the shelves and can enlarge or reduce the space allocated for each product, depending on its profitability. It is already evident that the main victims of this policy are the small brands that cannot invest huge sums on marketing.
"We didn't wait for the antitrust commissioner's decision before investing more in our store brand," says Yoram Dar, CEO of Blue Square. "There is a lot of centralization among the big suppliers in Israel, so the only way to increase gross profits is to create a store brand. If we achieve gross profits of 25 percent for regular operations and 35 percent for the private label, this means a marginal increase in Blue Square's profits."
Blue Square's Leader Price brand products account for 9 percent of the chain's sales, whereas in the United States store brand sales are 10-20 percent of total sales and in Europe this figure is 15-20 percent. Blue Square offers some 650 products in 40 categories and Dar notes that the chain periodically examines the possible of adding more categories, with the goal of reaching 10-20 percent of total sales.
Clubmarket, the third largest supermarket chain in Israel, introduced its store brand, Premiere Club, this past February. Some 450 products are produced for Premiere Club by the Casino Groupe, a French conglomerate that also makes products for the Leader Price label. Premiere Club products currently account for 4 percent of Clubmarket's sales, and the company's goal is for 7 percent by the end of 2004 and 20 percent within the next several years.
"When competing for the consumer's money, we have to become more efficient," says Clubmarket CEO Yakov Ginzburg, "by reducing the number of competing products on the shelf and strengthening the store brand. This saves the consumer money while improving the company's profitability."
Premiere Club products cost 15-20 percent less than competing name brand products and already account for 15-30 percent of sales in their product categories.
Osem does not view competition from store brands kindly.
"The store brands take up much more shelf space and display space relative to their sales in many categories," says Osem's managing director for marketing, Avraham Kringel. "The chain has full control of the brand, manufacturing the products, setting their price and ensuring their prominent place on the shelf." Kringel feels this is unfair competition and says that Osem is fighting back by strengthening its brand and making sure its products have sufficient quality and innovativeness to provide consumers with good reasons to maintain their loyalty to the brand.
Due to the prolonged economic slowdown, prices play a major role in consumer decisions, but everyone agrees that store brands will have a tough time competing in categories where brand loyalty runs deep, such as coffee, cosmetics and chocolate. Both Supersol and Blue Square have store brand products in this last category, and neither has garnered a significant share of sales.
Store brands also have difficulty competing in categories in which the big name brands are waging price wars, such as laundry detergents and dishwashing liquid.
Another problem faced by store brands is that the discount store chains often offer national brand products at store brand prices. To combat this the retailers are trying to build their store brands on quality and uniqueness as well as on price.
Only specialty items
Jacob Tribitch, founder and CEO of Tiv Taam, the largest non-kosher food chain store in Israel, feels that the role of the store brand is to distinguish a chain from its competitors and to sell store-brand items only in categories in which the chain has developed proven specialization, as Tiv Taam has with meats and sausages.
"I want to buy the best brands at the best price so that consumers will receive good value for his money," says Tribitch.
Another store brand is SuperPharm's Life brand, and the drugstore chain has invested millions of dollars to publicize and build it up.
"Life's strategy concept is that sometimes products are not particularly inexpensive," explains SuperPharm's marketing vice president Yair Asael, "as is usually the case with store brands, but their quality is on par with that of high-end brands. SuperPharm views Life as a direct extension of the chain and not only as a cheap brand in an economy package."
This approach has allowed SuperPharm to penetrate fields ruled by brand names, such as sunscreen lotions. In Spring 2003 SuperPharm began marketing Life brand sunscreen. Data provided by Moshe Zilberstein, general manager of Fischer Pharmaceutical Laboratories indicates that annual sunscreen sales in Israel total NIS 65 million and that 25-30 percent of these sales are at SuperPharm stores. Asael says that sales are split among Life with 25 percent, Dr. Fischer with 60 percent (down from 70 percent in Summer 2002) and Skin-Guard by Agis with 15 percent (down from 20 percent last summer).
In 2002 SuperPharm also sold sunscreen products by Nivea and Piz Buin and their combined market share was about 10 percent. They were removed from the shelves with the launching of Life's sunscreen products.
Asael views the success of Life's sunscreen products as proof that Life products are perceived as high quality and notes that the reason SuperPharm felt it was worth entering this category was the high price of the products. Life's sunscreen products sell for 15-20 percent less than those of Dr. Fischer.
Zilberstein notes that the drop in sales of Dr. Fischer sunscreen products is confined to SuperPharm stores, due to the introduction of the Life products, and that the company has compensated by expanding its distribution system.
"We are not alarmed by the competition," says Zilberstein, "but are contending with unfair marketing conditions. Life enjoys priority for shelf space and the whole chain has been recruited to promote its success, including the cashiers."
Zilberstein believes that when the prices of Dr. Fischer's Ultrasol brand products are reduced for "end of season" sales, customers will come back to the brand they know for its quality. Dr. Fischer also manufactures store brands for overseas chains and Zilberstein reports that the company's products account for 40 percent of the sales in their categories on an annual basis, generating $50 million in revenues.
Senior sources in the food industry say that store brands illustrate the power of the chain stores and that there is a structural conflict in a system in which the retailer is also a manufacturer. The sources contend that eventually, shelves will display a limited number of brands in each category, the store brand plus brands that have strong marketing and advertising backing, such that products by small and medium suppliers will be pushed off the shelves.
Ginzburg's solution to this problem is for the small manufacturers of quality products to become the suppliers for the store brands.