As regulators attempt to stifle relationships between supermarket chains and suppliers in Israel, retailers are increasingly turning to private label store brands to increase profits. Aaron Priel reports on how retailers and suppliers are coping with the change.

The decision by Israel's antitrust commissioner Dror Strum to put a damper on the relationship between supermarket chains and big suppliers, which has contributed greatly to retail profits by providing sales incentives and other fringe benefits, has prompted food chains to increase the number of store brands on offer, to the chagrin of suppliers.

The trend to offer consumers the chain's own private labels, some of which are produced by international food companies, is gaining ground in the marketing policies of leading food chains, as they realise "that the profitability of store brands is higher than that of the products the stores purchase from outside suppliers, even though store-brand products cost the consumer less," according to a survey in Ha'aretz.

Store brands can be used as a bargaining strategy against suppliers because the chain stores control the shelves and can enlarge or reduce the space allocated for each product, "depending on its profitability." The main victims, so it seems, are the small brands that cannot invest large sums on marketing.

Yoram Dar, Blue Square's CEO, was quoted as saying that Blue Square did not wait for the Antitrust Commissioner's decision before investing more in the chain's own brands. He admitted that there is a lot of centralisation among the big suppliers in Israel, "so the only way to increase profits is to create a store brand. If we achieve gross profit of 25% for regular operations and 35% for the private label, it means a marginal increase in Blue Square's profits."

Store brands cost less
Blue Square's Leader Price brand products account for 9% of the chain's sales, whereas in the USA store brand sales are between 10% and 20% of total sales, and in Europe this figure is between 15% and 20%. Blue Square, according to the survey, offers some 650 products in 40 categories, while periodically examining the possibility of adding more categories, with a goal of reaching between 10% and 20% of total sales.

Club Market, the third largest supermarket chain in Israel, introduced its store brand, Premiere Club, in February this year. 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 now accounts for 4% of Club Market's sales, and the company aims to increase this to 7% by the end of 2004 and 20% within a few years. The survey shows that Premiere Club products cost between 15% and 20% less than competing brand names, and already account between 15% and 30% of sales in their product categories.

Avraham Kringel, Osem's managing director for marketing, admits that Osem-Nestlé, Israel's leading food manufacturer, does not view competition from store brands kindly: "It is unfair competition." Osem-Nestlé is fighting back by strengthening its brand "and making sure its products have sufficient quality and innovation to provide consumers with good reasons to maintain their loyalty to the brand."

Store brands struggle in chocolate sector
In view of the continued economic slowdown, prices play a major role in consumers' decisions, though trade sources agree that store brands will have a tough time competing in categories where brand loyalty runs deep, such as coffee, cosmetics and chocolate. Both Super-Sol and Blue Square have store brand products in this last category, "and neither has generated a significant share in sales." Store brands also face difficulty competing in categories in which the big name brands are waging price wars, as well as the problem that discount stores often offer national brands at the price of store brands.

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Jacob Tribitch, founder and CEO of Tiv Taam, the largest non-kosher food chain store in Israel, maintains, according to the survey, 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 specialisation, as Tiv Taam has with meats and sausages."

Quality brands or cheap alternatives?
SuperPharm drug store invested millions of dollars to publicise its Life brand, based on the strategy that sometimes products are not particularly inexpensive, as is usually the case with store brands, but their quality is on par with that of high-end brands.

Yair Asael, VP for sales is quoted as saying that "SuperPharm views Life as a direct extension of the chain and not only as a cheap brand in an economy package." This approach enabled SuperPharm to penetrate fields ruled by brand names.

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." In the long run, shelves will display a limited number of brands in each category, mainly the store brand and brands that have strong marketing and advertising backing, and as a result products from small and medium-sized suppliers will be pushed off the shelves.

The solution to this problem, according to Yaakov Ginzburg, Club Market CEO, "is for small manufacturers of quality products to become the suppliers for the store brands," the survey concludes.