McBride chief executive Mike Handley is not interested in peddling sob stories about the plight of the own label supplier battling the crushing power of the supermarkets. But some of them have been playing a dangerous game of late, he says.
“The multiples’ mantra since Wal-Mart arrived in the UK has been cost, cost, cost. But it’s easy to forget that own label brands are not just worth millions in retail sales - they represent the name over the front door. If retailers don’t protect that, they are chipping away at their own brand franchise.”
After a decade at the helm of the UK’s largest own label household goods supplier and with 25 years of experience at companies such as Cadbury Schweppes and Ranks Hovis McDougall under his belt, Handley knows a thing or two about how retail buyers operate.
“It’s a trite truism, but if retailers don’t have suppliers that can do the same job as Procter & Gamble, Lever Fabergé or Reckitt Benckiser without the branding, they can’t fight the big brands,” he argues. To press home the point, he offers to provide a list of “the dead and the walking wounded” - own label companies that have called it quits or called in the receivers in the past four years. However, the outlook for McBride remains positive, he insists.
The leading brands do not have an automatic right to shelf space and own label penetration is growing rapidly in many of the markets in which McBride operates, says Handley. “Who’s to say that 50 years from now retailers will even sell manufacturers’ brands?”
Handley is fiercely proud of McBride’s achievements. “We are the number two supplier by volume in many categories - not bad when you consider we are competing with Procter & Gamble, Lever Fabergé and Reckitt Benckiser.
“Own label penetration in our sectors [household goods and personal care] is just less than 25% in the UK - and there is no reason why retailers should not take a 30% share in the long term.”
While sales in the UK remained static at £228.5m in the year to June 30, 2003, the UK is “not a nil growth market”, he insists. “I’ve been in own label on and off for 27 years. There have been flat patches - the latest coinciding with the growth in internet auctions, Wal-Mart’s acquisition of Asda and the Competition Commission inquiry. But we always come out the other end.”
He predicts growth in the UK will come from constant innovation, increasing own label penetration - in areas such as laundry detergents - and from superior customer service, which won McBride the prize for the best own label supplier in The Grocer Gold Awards in 2003. There is also a renewed focus on driving sales in the convenience sector through niche value brands such as Clean ’n’ Fresh, Captivate and Surcare, which grew sales by 24% in the year to June 30, 2003.
Overseas, where sales grew 8.6% to £272.9m over the period, growth will come from increasing own label penetration, which is still way behind the UK in most markets.
The news that Morrisons is likely to acquire Safeway is probably good for McBride, he says. “Frankly, the prospect of any one of the big names taking it over is better than continuing uncertainty about the future of Safeway. Morrisons has also said that its own label penetration is behind that of rivals and there is clearly an opportunity for us to grow our volumes with it.”
One of Handley’s biggest bugbears is the online auction - a “crude, overrated, tool”, he says. “The guy who offers the lowest price is usually the one most desperate to get the business. The danger is he will be supplying at marginal cost - and that’s not sustainable. What happens next time the contract comes up for auction?”
There have also been cases in which the pressure to keep costs down has resulted in products going to market that don’t even meet basic legal requirements, claims Handley.
“We lost one contract in an auction to a supplier that made a product where the chemical potency was less than the legal minimum.”
The retailer “redressed the situation when we pointed it out”, he adds.
“Auctions have forced many of us to re-examine our costs. But the question retailers should be asking is: Does this supplier have the equipment to make the next new product in the market? Is it capable of responding quickly if a brander brings something out tomorrow?”
Thankfully, he says, retailers are finally “beginning to reflect” on the usefulness of auctions as procurement tools.
Few things keep Handley awake at night, with the exception of factors beyond his control - notably rising raw materials costs in the chemicals industry and restrictive chemicals legislation from Brussels. One thing he can control, however, is costs within his business.
A recent focus has been on driving operational efficiency through SAP systems, which give greater visibility across the business and have cut inventory and improved customer service.
Although being able to benchmark performance helps when retailers ask difficult questions about why prices vary between markets, Handley is confident he can justify any discrepancies.
“Market costs and conditions always vary - from building costs to wage rates, distribution costs and so on. I think retailers understand this.”
As for big brands taken to task for charging wildly different prices to different retailers in different markets for the same product, he has very little sympathy.
“It’s the retailer’s job to raise these questions. If you look at the returns blue chip branders make on every pound, they have gone from the low teens to the high teens over the past five years. So who has really won the power struggle with the retailers?”