The Australian media appears to have gone feral on home brands recently. Cheap home brand milk will apparently make consumers worse off in the long run. Cheap home brand bread will apparently stop plant bakers from baking every day. And Heinz had a good whinge during the week about how the increase in the use of home brands by Coles and Woolworths is making the Australian market harder for manufacturers.
Part of the confusion on home brands seems to relate to a simple fact. Our major supermarket chains do not manufacture home brand products. The home brand products sold by supermarkets are manufactured by the same producers, like Heinz, who are complaining about home brands. This confusion was illustrated in The Age on the weekend:
There’s an argument that savagely discounted products such as $1-a-litre milk are simply a boon for consumers, but you don’t need an overly suspicious mind to wonder what a company hopes to get out of selling a product for less than it costs it. If it’s not an aggressive bid to put rival dairy producers out of business, …
Sorry? What “rival dairy producers”? The supermarkets are not dairy producers. The supermarkets do not manufacture bread or baked beans. Rather, they buy these products, including home brands, from the manufacturers.
A bit of simple logic tells you that the last thing the major supermarkets want to do is put the manufacturers out of business. This would leave the supermarkets with fewer manufacturers to compete to produce home brand products and the other items that are stocked by those supermarkets. The supermarkets would face higher input costs and, while they will be able to pass some of these on to consumers, the higher costs will also mean lower profits for the supermarkets.
Supermarkets do not increase profits by wiping out competition among their suppliers.
The supermarkets depend on the manufacturers. However, they will also push for the lowest possible input prices in order to compete for customers. Those manufacturers who have strong brands have nothing to fear from home brand competition. Don’t believe me? Go and look at an Aldi store. Aldi specialises in home brand products. Almost all of their range is manufactured exclusively for Aldi. But they simply cannot ignore strong brands that are demanded by consumers. For example, you want Milo or Vegemite? They are brands stocked by Aldi.
The manufacturers who have most to fear from home brands are those whose products do not survive on quality but on marketing hype. Those manufacturers risk becoming contract suppliers of home brand products. Home brands will reduce the profits of those manufacturers–but consumers will benefit.
Finally – one point before comments. Even if the supermarkets fully pass on the input price rises, if demand slopes down then their profits will fall. So no ‘but if they pass it on then the supermarkets wont care’ claims unless you really believe that supermarkets face vertical long run demand for all their products.