Home brands and manufacturers

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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.

 

 

13 Responses to "Home brands and manufacturers"
  1. The reality of “kinked” supply and demand curves – where there is airspace –  has sometimes been misunderstood by many, including myself in the context of durable goods.

    To the extent that producers may sell fairly generic stuff (“home brand”) at supermarkets and maintain a profit and yet continue to make supra normal profits on brand names is maybe quite a clever strategy.

    I am not up to speed on the Heinz news, but I know that Uncle Tobys does a lot of generic stuff for volume.  This is food for thought.  Pun intended.  I also note that on the one occasion I have watched ACA, they did a “blind” taste test and people couid tell little difference between brand names and generic. 

    It may also be not so much only an issue of where the demand curve they sit or its elasticity, but shifting it to the right, increasing profits (assuming a fairly flat supply curve from competitive producers of, say, milk or sugar – although the latter is a bit tricky), by virtue of that well known strategy of placing milk at the rear end of the supermarket.

    I have no evidence or otherwise whether supermarkets are paying producers a fair return, but I must assume that they do so for the reasons Dr King suggests, as it would be disingenious (better known as stupid) of them to do otherwise unless there are special circumstances.

    What their pricing practices demonstrate is that they just want you to get into the shop.  This comes as no news to anyone over the age of about, hmmm, a two year old passing the chocolate secton.  Why supermarkets discount chocolate is beyond me – parents (and many otherwise normal people) cannot say no. 

    Off topic, but there may be an intellectual property issue, which clearly has been resolved in private agreements, as supermarkets such as Woolies and Coles become a brand for many things in their own right.

    Apologies for a Sunday night rant.

  2. I recently conducted a study into the Private Label products in supermarkets, which included an analysis of the impact throughout industry structure as it related to selected products. In general, the Private Label products are most definitely produced by the same producers that market traditional brand name products. Staple products with low-differentiation are best suited for successful Private Label products.
    All I can say is congratulations Stephen, at last an opinion that is not written for a media cycle. The “Milk Price War” is the largest example of inaccurate journalism driven by media cycles or sentiment so far (not to sound too cliche). The impact position for dairy farmers is negligible: in Australia a small percentage of milk products is used for milk production (the rest for other dairy product manufacture), a large portion is exported, the producers also produce the Private Label product. Farm gate prices are unquestionably driven my export prices. Interestingly just 2 milk producers dominate 92% of Australian domestic milk supply. The producers actually control the market, not the supermarkets.

  3. Tinos, yes generic band-aids are awful.  So don’t buy them  -all the supermarkets will continue to stock Band-Aids (TM) for precisely the reason Stephen points out.  OTOH no-name baked beans and milk are the best things since home-brand sliced bread, especially for low income people.

    It never ceases to amaze me how easily vested interests can use the media to sway the aveage joe into opinions that are against his own interest.  Some of my friends and family really believe that the supermarkets are their enemies, not their friends, on this particular issue.  I reckon I picked the wrong career – I should have gone into marketing  because it must be such an easy and lucrative job.

  4. Darren – “Interestingly just 2 milk producers dominate 92% of Australian domestic milk supply. The producers actually control the market, not the supermarkets.”

    This is interesting indeed.  I am guessing your definition of producers is outfits like Pura.  I would rather call them “manufacturers”, or “refiners” or something like that.  In any event, they are outfits with substantial market power who purchase the raw product from price takers – farmers.  Especially with products such as milk where if not disposed of quickly obviously becomes worthless.

    There are equations for this which can be found in literature or lecture notes.

    On generic quality – yeah, some is really crap, like washing machine powder which is full of filler.  As a bloke, though, I ask myself whether all the extras in brand names like fragrances are maybe a bit silly.  But a baked bean is a baked bean.  Pasta, unless you are a perfectionist and am a contestant on Masterchef, is pasta.

    KS – thankyou for that link. I look forward to reading Mr Carr’s words, maybe tomorrow, but from the title his stance maybe correct – clearly generic brands are not lucrative for established brands, but they keep they are a wake up call to brand name producers of fairly generic products which spend inordinate amounts on advertising fairly insignificant differences.

  5. Hi Lloyd,
    While 2 producers control 92% of domestic milk supply this represents only ~20% of diary product use – the rest is for non-milk and/or export based products. There are 5 major producers, the largest does not actually produce domestic milk products. 
    Price determinants for milk are largely driven by export pricing, the producers (..refiners?..) actually have less say i this regard than many want to think.
    Interestingly, the two producers who supply brand label milk also supply the private label milk, as well as other diary products to the supermarkets, they most definitely have the bargaining power with the supermarkets. The super markets are taking the discounts on the chin.

    What I see every day is more and more people wanting to create stories to support the belief that big business operates solely at the expense of smaller businesses or individual people. Built largely on reporting platform that cuts quality to meet media cycles,.. and once the thread of an idea is started.. well don’t let the facts get in the way.

    Fuelling this are people whose reference frame has not been that tested i.e. it’s a pretty good life in Australia compared to any other developed country, broadly,people haven’t had the experiences to reset their appreciation for what they have. 

    Personally, in economic matters right now I’d be far more concerned about the level of government debt issued (~$230 billion) during the last 4-5 years than anything else. Debt issuance by government in Australia has out-accelerated the problem countries in the world by a staggering factor. The more it does so the more it relies on future growth to support it. As long as you;re the second to last one out you’re ok.
    Why is no one paying attention to this ?!
    Yikes. 

  6. I should point out that there is some degree of product differentiation in the bread market so people will kick up less of a fuss compared to milk. In my experience homebrand bread is of poor quality and is only eaten when you’re on low incomes

  7. In my experience the own-brand bread is identical to the “basic bread” branded product.  The brands have their price-discrimination higher margin products too, of course – and at a level above that again is the chain bakeries (Brumbies, Bakers Delight…).

  8. I skim-read the Honorable Minister Kim Carr’s piece. He does seem to want it both ways: protect the producers and protect the consumers simultaneously. And this is from a man who also looks after Innovation as part of his Industry Portfolio. You have to wonder if he (or his advisors) has read Schumpeter.
     

  9. Hi Darren – you are telling me many things that I didn’t know….and possibly to many other people on this forum.

    Yes, on the fiscal stupidity.  I actually think that a lot of people are paying attention to it, but not at Fairfax or the ABC.  On a greater level though, I wonder how on earth do these people think what is best for you in your everyday life?

    Whilst I studied Macro at a post grad level, I found it a bit voodoo.  A particular lecturer Prof McDonald (??) at Monash provided a really profound lecture on all the ins and outs of deficits and surpluses which I swore I would never forget, but have – cycles and so forth.  I must dig it up.  It was kinda neo-Keynes with a splash of Monetary and heaps of other stuff and lots of graphs and maths.

    He ended his lecture, which was his last to the small class I was in, to be modest about the things he shared with us on that day.  I am so modest I have forgotten them.  I think being prudent was his underlying tone – don’t panic, let the market correct itself kinda thing.

    However, being only a recent veiwer of the forum, I think it is primarily a place to discuss micro-economic things.

    Matthew and kme – you are correct on bread.  They are very different on many levels and stuff they pack into it, and the better ones are quite expensive.  I would suspect that the issue of bread is the source of a whole new thread, as there are many sources of bread from your local independent bakery to the franchises to the niche, and supermarkets clearly have a wide range. 

    Like milk, which tries to differentiate, bread has a fairly quick use by date.  I am not on a low income, but I make my own bread, as do many people if they can be bothered – no chemicals or preservatives etc.

    As you may have gathered, I am interested in issues of time.

    DP – I very much wonder whether many pollies have studied economics at all.  I *think* Mr Costello has an economics degree together with law. Mr Swan has an Arts degree.  Draw your own conclusions.

    Two questions – 1. Can I post links here?  2. My eyesight is not failing, but I find the first word required to post a comment to be made up by someone who is seriously into drugs.

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