Exploring retailer relationships

Power vacuum

The market for private label products continues to grow throughout Europe but at the same time we have seen the concentration of retail into retail chains with market domination. Mainly in human food, but also in the pet industry. The consequence is that a few powerful buyers interact with many suppliers. 

Overcapacity in manufacturing in many product categories, one of them being pet food, has created an environment with a downward pressure on pricing and margins for private label suppliers. The process of retailer consolidation has had a major impact on the manufacturing industry. 

For a private label manufacturer, a contract to supply a retailer may represent a large proportion of their business, whilst one contract for a retailer will represent only a small fraction of their overall business, potentially creating a very one-sided relationship.

Research

The International Private Label Consult (IPLC) felt that the conditions that prevail in the market required better understanding from the manufacturer’s point of view, specifically on the relationships that they have with their main retail customers across the key areas of:

• bottlenecks in collaboration;
• turnover of contacts;
• decision making;
• communication;
• collaboration and trust;
• quality and price;
• supply chain management;
• tender process.

This moved IPLC to conduct a research study into how private label suppliers in Europe experience the relationship with their retail clients. IPCL consultants interviewed 113 senior managers from its network of private label manufacturers in 16 different European countries. The companies were from a range of product sectors. 

It is the first time that the views of private label manufacturers have been presented in such a way and on such a scale.

Main findings

Currently, the business relationship is very one-sided in the favour of retailers, although there does seem to be more balance with the discount channel. 

Another key theme that arose from the research was that most retailers’ strategies seem very short term, which does not support long-term collaboration. 

Where good practices were found, they were underpinned by an open trading relationship that focused on building categories in a collaborative way. This in turn resulted in a willingness by suppliers to invest for the long term, moving away from tendering and spreadsheet buying.

Some respondents expressed concern that if the quality of private label was eroded over time due to cost pressures and if this remained undetected by the retailer, then consumers would lose confidence in a retailer’s brand. 

Inefficiencies

The private label market is one in which tough negotiations prevail, that is the way of business and it will not change. However, if the system fails to get the best product to the end consumer at the best cost, then there is something wrong with the process. 

• The research shows several inefficiencies in the current process, for instance:
• Too much power on the buying side of the equation.
• Constant change of contacts which in turn leads to a lack of product and category knowledge.
• A narrow focus on only price as a deciding factor, which has eroded the market position of private label over time.
• Inadequate and inconsistent quality control of the product.
• One other striking aspect was that respondents felt the discount channel to be viewed more positively for many elements of the trading relationship.  

About IPLC

IPLC is a boutique consulting firm specialised in strategic consultancy services and project management support to suppliers and retailers, with a critical understanding of the European private label industry. Founded in 2003, IPLC has been involved in many international assignments of manufacturers, retailers and the supply industry.

The complete report can be downloaded via:

iplc-europe.com/iplc-research-report-driving-private-label-growth-collaboration