Private label is stealing a march on brand names, and nowhere is this truer than in the food sector. Grocers may be driving private label, but it's not necessarily bad news for consumers, or even manufacturers. Catherine Sleep reports.

This week's announcement that leading Australian grocers are launching high-end private label ranges has prompted industry observers to anticipate a decline in consumer choice. Coles Myer will launch three private label ranges - budget, midrange and premium - while Woolworth's new private label groceries are pitched as being equivalent to branded market leaders.

This follows a trend well established in other markets. In the UK, for example, private label accounts for 35% of spending on consumer packaged goods (CPG). In 2005, consumer spending on private label goods totalled GBP39bn (US$68.1bn), and Datamonitor predicts that this will have increased by 25% to GBP48.7bn by 2010.

Private label is on the increase but it is also changing. Long gone are the times when private label, also known as own label, own brand or retailer brand, was synonymous with the seven pence can of baked beans. Low priced and low prestige, private label products were originally targeted squarely at the budget-conscious shopper.

There are still ranges with names like Basic or Value which cater for this demographic, but private label ranges increasingly dominate the higher end of grocery categories too. Enticingly named lines such as Finest, Taste the Difference or The Best unmistakably differentiate premium private label from budget counterparts, while sophisticated artwork and expensive packaging reinforce the message.

Private label is also extending its reach into specialist food categories. UK drugstore chain Boots produces a range of private label baby food, while this week Tesco announced it would be launching its own range of heart healthy foods to include a cholesterol-reducing yoghurt, probiotic drink, spread and milk containing Reducol.

Some observers grimly predict the rise of retailer brands will compromise product diversity. Responding to the move by Coles and Woolworths, the Australian Consumers' Association magazine Choice said that these changes will probably result in savings for shoppers at the cost of consumer choice, as smaller brands are edged out.

"The top one or two market-leading brands will remain on the shelves, but smaller brands may be squeezed off to make way for private labels," Choice spokesperson Lisa Tait commented.

It is true that individual consumers may be disappointed to see some brands disappear, but an increase in private label will only marginally impact upon market forces which already prevail. Any product needs a critical mass of buyers in order to survive, and whether competition comes from private label or other branded goods arguably makes little difference. Brands with negligible support would probably have gone under whether the competition came from other brands or private label.

In fact, retail analyst Bernice Hurst sees an upside for consumers, telling just-food: "Private label can be just as reliable and trustworthy as name brands and can help to improve competition and force standards up. Faced with half a dozen cans of baked beans, consumers will only go for the cheapest as long as they like the taste. If they don't, they will probably keep trying others until they find the one they prefer. Own label is unlikely to make brands disappear but it might well make them improve."

Warren Thayer, contributing editor of specialist US title PL Buyer, believes that while private label might leave shoppers with fewer choices, the quality of that choice may be improved. He tells just-food: "To make room for the new upmarket private labels, slower-moving brands have been removed from the shelves. In most cases, this 'SKU rationalisation' was overdue, as retailers were carrying too many products anyway."

Coles and Woolworths are treading a well-worn path that other retailers will seek to emulate. "These store brands offer a quality experience that truly differentiates the retailer from others, since shoppers can't get these products anywhere else but at the chain that sells them," says Thayer. "Retailers such as Wegmans, HEB and Costco have led the way in the US, along with Loblaws in Canada. The strength here is differentiation from the competition, higher penny profit and higher gross/net margins."

Manufacturers of secondary products which are squeezed out will find scant consolation in this, but they can negotiate a benefit. They need not inevitably suffer when grocers launch private label ranges; they must ensure that it is to them that retailers turn when sourcing their private label lines.

Many have already done this, with Australia's largest quoted food company Goodman Fielder recently downplaying the effect of private label on its balance sheet. Goodman Fielder's chief financial officer Andrew Beck argues that companies such as his can mitigate the threat from private label by securing themselves a slice of the pie. Grocers have to source their private label products from manufacturers and Goodman Fielder is happy to supply them. While margins may be lower than from branded goods, such an arrangement allows manufacturers to concentrate their marketing activities on their own higher value branded products, thus saving money elsewhere.

Private label is here to stay so manufacturers had best adapt. Both famous brands and private label will need to be innovative in product development, packaging and marketing to make sure they land in the consumer's basket.