For decades, own label businesses have been viewed as commodity players snapping at the heels of big brands. However, they have been steadily gaining ground. Our most recent UK Food & Drink 150 revealed, for the first time in 30 years, own label businesses have nosed ahead of brands in terms of return on capital.
The rise of own label from a cheerful bargain loitering on the lowest supermarket shelf to a challenger of big brands started with the consumer. A focus on quality, design and marketing over the past decade has altered attitudes to own label. Tesco’s Finest and Carrefour’s Reflets de France became accepted as high-end fare, allowing retailers to grab higher margins. Elsewhere, Aldi and Lidl helped remove own label’s stigma, with beauty editors extolling the virtues of Aldi’s Lacura face cream.
A third tailwind for own label came with technology. When you can compare price and quality at the touch of a button, big names become less relevant. This is particularly true of brand-disloyal millennials.
For too long, branded producers believed own label producers survived at the mercy of retailers. Yet this challenge has proven to be own label’s making. Aware that a retailer could switch a contract to a competitor on a whim, the sector was forced to become agile, delivering flexible innovation on a large scale while keeping costs low. Many created an international footprint to reduce dependency on a single retailer, and the smart ones diversified ranges, too. Italian chocolate spread manufacturer Nutkao, for example, customises its product to serve the basic grocery market as well as high-end gourmet channels. Meanwhile, brands failed to keep pace. Many legacy names remain stymied by large organisational structures and a risk-averse corporate culture. Now, when faced with pressure from an insurgent brand, own label is out of the starting gate while big brand is still looking for its horse.
Not all branded producers have been slow to react. In 2016, Nestlé created Froneri, a joint venture with own label ice cream producer R&R. Together they can offer retailers a total category solution, strengthening relationships and the objectivity of category advice they can provide.
Branded producers must follow Nestlé’s lead in learning from own label. This could include hiring own label talent and adopting best practice such as developing deeper relationships with retailers and more responsive supply chains. In other cases, it is worth considering combined business models, or indeed working with an own label producer to take on co-manufacturing of smaller, fast-growing brands. What is certain is this once poor relation to branded producers has come of age and cannot be ignored.
Will Hayllar is partner and head of consumer goods at OC&C Strategy Consultants