A new IRI report indicates that small and mid-sized manufacturers are losing ground in both volume and value to private labels. The drop precipitates the risk of a return to a ‘price war’ strategy in H1 2023, according to analysts.

The latest biannual ‘FMCG Demand Signals’ report from IRI has revealed that Private Labels now make up 36 per cent of total FMCG value sales in Europe (amounting to e216 billion) – up from 34 per cent as reported by IRI earlier this year. Strong market performance has taken place across all European markets, particularly in Spain where Private Labels now make up 47 per cent of total FMCG value sales; followed by Germany and The Netherlands (both at 39 per cent). The UK and Germany continue to lead Private Label sales in absolute value.

Forensically unpacking the impact of the pandemic, inflation and the cost of living crisis on over 230 FMCG categories, 2000+ product segments and over a 100 million SKUs across the US and several of the largest European and Asia Pacific markets (France, Italy, Germany, Spain, UK and Netherlands); the report covers data from in-store purchases and a survey in 12 global markets.

Targeted return to lower everyday prices

It details how fewer promotions by retailers post-pandemic has made way for a targeted return to lower everyday prices across a basket of 150 consumer staples this year, to help mitigate the impact of food-price inflation. Retailers are trying to manage the impact of rising prices by optimising the range, pack sizes and price points, although strategies differ by category and value tier – and one of the biggest beneficiaries has been Private Label.

“Private Labels have traditionally offered lower prices to shoppers,” comments Ananda Roy, Global SVP, Strategic Growth Insights, IRI, “but these are not sustainable, and inflationary price rises have been greater than on well-recognised brand names. Yet this has not dampened demand – especially in the Chilled and Fresh, Ambient and Frozen segments in food categories.

“Our research has shown this is because around 60 per cent of consumers believe Private Labels are as good at National Brands on quality, innovativeness, sustainability, trust and delivering on claims, with 25 per cent saying some Private Labels are ‘even better’ than National Brands,” continued Mr Roy. “This is a significant shift from previous periods.

Impacting “the squeezed middle”

“It’s fair to say that Private Labels are poised to be the ‘third competitor’ to National Brands in several FMCG categories, having transformed to strategy-led, data-driven and differentiated substitutes. Their ability to grow value, volume and attract new consumers is a growing risk to smaller and mid-sized manufacturers – the ‘squeezed middle’ – who could begin to struggle to match Private Labels competitively as economic conditions worsen,” warns the analyst. 

“IRI anticipates that a price war is increasingly likely in early 2023 and thereafter as the outlook for FMCG demand darkens,” he added.

Another recent trend is among UK retailers who have created new products with artisanal food brands from small manufacturers or restaurant chains, to add brand recognition and quality perception in their Private Label portfolio, in order to command a premium margin.

Post-pandemic shifts

Throughout the pandemic, national brands outperformed Private Labels – with consumers feeling comforted by buying brands they knew, trusted and could easily find in-store or online in challenging times.

 

In the current inflationary environment, Private Labels are returning to pre-pandemic levels as consumers question their loyalty to National Brands, and retailers expand the range of high quality, innovative and well-priced options. Discounters have expanded their portfolio of small-format stores in town centres and residential neighbourhoods, making these products available to a wider group of consumers who may not have been willing to travel to out-of-town stores previously. This has led to value sales growing +5.4 per cent in the year-to-date 2022 (+3.0 per cent MAT 2022). Notably, only Italy is showing robust growth in both Private Labels and National Brands.

The growth in 2022 to date is being primarily driven by food categories (+5.3 per cent), taking its contribution to e191bn, with Chilled & Fresh, Frozen, and Beverage categories all expanding. Notably though, the Alcohol category has seen a decline of 5 per cent (or £3.4bn in value sales) to July 22 in comparison to a year ago, and 6.7 per cent in the year-to-date 2022.

Read the full report here