The brutal battle for shelf space
Supermarkets are bidding farewell to less profitable products.
Supermarket shelves are about to undergo a dramatic transformation. The wild abundance of products and brands in every category, from fruit-flavored yogurt to gourmet coffee and high-end shampoo, will soon be a thing of the past, as manufacturers and chain stores trim their inventory in response to the economic slowdown.
"As demand declines, we are reducing the variety on the shelves," said a senior source at one of the big supermarket chains. "The big manufacturers will have to discontinue products with low sales, such as fancy coffees and salads, and focus on items that sell in bulk quantities."
The source said that big manufacturers will likely try to muscle in on the market share of their smaller competitors, attracting attention by launching new products, something the small companies cannot do right now.
Even so, Moti Keren, CEO of Unilever Israel, confirmed that for the foreseeable future, the company will be much more cautious about launching new products.
"Consumers will be buying more basic products, such as cornflakes without any additives," said Keren.
Still, Keren believes that the company will not be trimming the variety of the products it offers.
"There are still people with money, and there is no need to go crazy and lose market shares. We also have to think about the morning after the crisis," he said.
Less variety on the shelves depends not only on the manufacturers, but also on the chain stores, which are interested in offering consumers only the bestselling and most economical products. The result will be the disappearance of brand-name niche products and products made by small manufacturers. At some chain stores, this cutback is no longer a forecast, but a reality: Recently Blue Square announced it was reducing the variety of products at its new chain, Mega Bool, by 15%.
"We are getting rid of the products that don't sell well," says a senior manager of another supermarket chain.
"For example, if there used to be 14 kinds of oil, 20%-30% will be removed from the shelves. This is also a good tactic for putting pressure on suppliers. In places where there is no branding or distinction between products, we are going to suppliers and telling them that we will take them off the shelves if they don't lower their spreads."
At the same time, the supermarket chains are promoting their private labels. "In the future there will be two or three products from the big manufacturers, like Osem and Unilever, plus the private label," predicts Rafi Sheffer, CEO of Brand for You, which owns the private label of Israel's fourth largest chain - a group of six private chains that have joined forces. "There is an absurd situation in Israel: 7 million people are being offered a variety more suited to 60-70 million people."
Co-op Israel is planning to launch a private label in March 2009. Co-op CEO Rami Mandel figures the new brand will push less profitable brands off the shelves, but not in all the categories.
"The Israeli consumer can shop elsewhere if he does not find what he's looking for, so we have to offer him everything he needs," says Mandel. "I don't believe we will stop stocking premium products or consumer favorites."
Keren is not daunted by the rising power of the private labels.
"Private labels are actually good for big manufacturers, because the chain stores will put only the two leading brands beside their own label," says Keren. "In that type of market, the small manufacturers will find it very difficult to survive. I can absorb lower profits for a while, but some others cannot. The smaller manufacturers can survive by packaging their products under the private labels."
The smaller companies are aware of the danger awaiting them and are reassessing their strategy. "We will probably be removed from the supermarket chain shelves because they are much stronger than we are," says one small foodstuffs manufacturer.
"The battle for shelf space has become brutal. The chains can put more pressure on the manufacturers these days, because they know that if they don't lower prices, they will be out the door.
"The chain stores are forcing the manufacturers to pay their operating cost differentials. The chains are already pressuring us. They change the name of a branch to become eligible for discounts under their contracts with us."
"The small manufacturers cannot grow into medium-sized companies, and the medium-sized ones are getting crushed from all sides," continues the manufacturer.
"Their costs are rising and they can't expand their distribution networks countrywide because the big manufacturers are blocking them.
"The consumers might be getting lower prices, but in the end they will have fewer choices. What's more, the manufacturers will have to reduce the quality of their products - there will be less sesame on the bourekas and plastic bottles instead of glass ones. Without noticing it, the products on the shelves will suddenly not be as good," he adds.
Like us on Facebook and get articles directly in your news feed