Who Is Winning Control of the Supermarket Shelf?

THE MOST FAMOUS NATIONAL BRANDS HAVE ALWAYS BEEN PLACED IN THE BEST SHELF POSITIONS, RIGHT WHERE YOU CAN SEE THEM. NO MORE: THE PRIVATE LABELS OF LARGESCALE RETAILERS ARE NOW DIRECT COMPETITORS OF LEADING BRANDS, COMPETING FOR SHELF SPACE AS WELL AS MARKET SHARE

by Enrico Valdani
Translated by Alex Foti

In retail management theory and business practice, the rule has traditionally been that shelf space is to be assigned to products and brands in supermarkets on the basis of their overall margin. This meant putting lower margin, low-cost brands in the lower shelves, while popular brands with average unit margins and great sales volumes were placed in central (eye-level) shelves, and high-value, high margin goods with low sales on top shelves.
 
Thus in supermarkets sellout was traditionally dominated by goods of industrial brands, especially by those with high rotation and significant market share. Today many things have changed. First of all, the relentless growth of retailers’ own brands: in many product categories private labels have attained market share in excess of 30-40%. If yesterday private labels where a cheap alternative to be confined to the bottom shelf, today distributors’ brands are supported by differentiation strategies that position them in the premium category, with higher quality and prices aligned with those of leading brands. This has engendered problems for industrial brands which have now to directly compete with private labels. The recession has worsened the situation, as the consumer has become more attentive to price-quality (value for money) tradeoff and is less keen on impulse purchases, thus displaying increasingly rational behavior. All this has affected pricing policies of established brands and retailers’ brands alike. The supply of branded products is now no longer priced at premium levels, but there has been a more aggressive stance, with prices converging toward those of retailers’ brands. We are probably witnessing a change of paradigm in the supermarket industry.
 
More fiercely competitive pricing reflects the underlying trends of an economy caught in deflation. Manufacturers’ strategies about supplying products at more competitive prices reflect differentiated objectives. In certain cases, it is a defensive strategy against the product label, which has turned into a direct competitor. Cutting prices is the move of last resort to defend market position. In other cases, it is an offensive move, in order to attack an ailing brand or increase market share at the expense of rivals.
 
Retailers’ pricing strategies are motivated by other factors. Private labels are offered at prices closer to manufacturers’ brands, because their quality has improved and because supermarket chains no longer want to position their own branded goods as third-rate products. Retailers aim to be included in the consumer’s panel of purchases, when he/she visits their stores. In other cases, pricing policy is about aggressive discounting in the hope demand is elastic enough to increase overall sales, and thus meet the growing demand for convenience caused by the crisis.
 
The competition between manufacturer and retailer brands is unfolding at all levels. Yesterday it was grocers who had to persuade consumers that their own brands were as valuable as the leading industrial brands. Today it is manufacturers who must persuade their customers that branded products are superior in terms of quality and innovation with respect to the retailers’ brands that imitate them.