It was reported this month in The Grocer that for the first time, private label has overtaken branded products as the primary driver of innovation. The retailers who built their categories on the back of brand investment are now outpacing those same brands in new product development (NPD).
This shift has been coming for more than 20 years, accelerated by the advent of loyalty card data. But it is not good news in the long run and shouldn’t be mistaken for a measure of retail brilliance.
The NPD endurance test
For brands, launching genuine innovation through a major retailer is an endurance test. Range reviews are infrequent. Buyer attention and commitment is short. The demand for immediate performance in sales data and margin contribution multiplies the scrutiny on consumer research and compresses the timeline within which any NPD must prove itself.
That is before you account for rationed shelf space, listing fees, promotional investment and compliance costs. The system is not designed for experimentation. It demands certainty and in doing so incentivises brand-tweaking, rather than genuine innovation.
Own label operates under entirely different rules. The retailer is both client and decision-maker. There is no external sales process, no hostile negotiation and no threat of early delisting. A supermarket that wants to trial a new format, flavour or concept in its own-label range simply does so – and enjoys the upside or exits with minimal exposure if it doesn’t work.
So brands have retreated into line extensions and reformulations they can pass off as innovation. Major retailers have watched on as German discounters take market share and demand differentiation from own-label suppliers, reinforcing the view that brands no longer drive it.
Many branded manufacturers have compounded this by migrating their infrastructure away from independent brand innovation, redirecting R&D and consumer marketing investment into retailer own-label specifications. In the current commercial environment, these are rational decisions. But they are not the step-changes that built categories in the first place.
Retailers as gatekeepers
Aldi and Lidl have accelerated this dynamic considerably. As predominantly own-label businesses, their growth alone shifts the proportion of innovation away from branded NPD. To compound the dynamic, their long-term supply partnerships – across categories from confectionery to wagyu beef – provide the kind of commitment that branded manufacturers are routinely denied at the major supermarkets.
There is a deep irony in retailers positioning themselves as customer champions when their model systematically disadvantages the entities most capable of genuine innovation. Retailer data, heavily skewed toward their own shoppers rather than the broad category, reinforces this problem.
Private label overtaking brands for innovation is not a triumph of retailing. It is a measure of how thoroughly the system has been tilted against external risk-taking. The gatekeeper has become the innovator largely because it made entry too costly for anyone else.
The fix is not complicated. Retailers need to lower their barriers to entry, offering longer launch windows, changing their listing fees and tying buyer incentives to category growth, not just margins. Only then will they benefit from better innovation from brands. For their part, brands need to make the case more forcefully that their differentiation is worth the shelf space – and back it with investment.
David Sables is CEO of Sentinel Management Consultants
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