Private Label in an Inflationary World, or Europe To Be More Precise

Consumers are confronted with soaring food prices around the globe. Prices in European supermarkets have risen by 7% to 9% so far, and the end is not yet in sight. One of the ways consumers and food retailers are dealing with the impact of this unprecedented food price inflation is by opting for private label products. Given the impact of the current inflation on consumers’ wallets, private label looks to be gaining market share. Brand players have to carefully consider their promotion strategies in order to retain volumes.

Back in November 2021, we wondered who would foot the bill for the unprecedented food cost inflation at the time. More than half a year later, it is fair to say that this is still the question, albeit at a much higher cost level than anticipated at the end of last year. The impact of the war in Ukraine on a broad range of agri commodities and on energy prices has pushed up the already historically high cost levels for many food producers even higher.

The war has also been a turning point in the stance of notably food retailers toward accepting higher prices. While earlier in the year they tried to push back and postpone price increases, food retailers are now more responsive. Likely driven by (perceived) scarcity and the subsequent fear of missing out. Consequently, consumer prices are on the rise as well. Based on the first reported figures, the average food price inflation for the EU will be around 7% to 9% in May. We have seen similar figures in the United Kingdom.

Consumers Will Actively Manage Down Their Food Costs

Food inflation has been steadily accumulating since January at about 1 to 1.5 percentage point a month. And the end is not yet in sight. Given the rising prices for grains, oilseeds, energy, transport, and packaging since the end of February, supply contracts that will need to be renewed, the latest producer price indices (PPI) in some European countries, and the large divergence of consumer price inflation rates between different categories, consumers will need to brace for further food price increases in the coming months.

For consumers, it is not only the higher food prices that hit them in their wallets. With overall inflation rates in Europe at about the same level as current food price inflation and salary increases not keeping pace, consumers are seeing an erosion of their spending power. Food prices may be rising, but that does not mean that consumers’ food budgets will automatically increase as well. They will try to circumvent inflation by trading down to cheaper products or cheaper channels: by buying ground beef instead of steak, buying more products on promotion, shopping at hard discount instead of full-service supermarkets, or having dinner in a QSR outlet rather than a fast-casual restaurant.

This Time Around, Private Label Is Set To Benefit

Private label will gain traction. It will, this time around. But for supermarket’s own brands to benefit from economic headwinds is less straightforward than generally assumed. Looking specifically at mature private label markets such as the United Kingdom, Germany and Switzerland, private label market shares actually came under pressure during the economic recessions of 2008/09 and 2011/12. Looking at the disposable incomes of the British, Germans and Swiss, the impact of the aforementioned recessions on consumers’ spending power in these countries was limited at the time. If they indeed became more price conscious, these consumers likely went for the lower ‘perceived’ price of increased promotional efforts. Counterintuitively, private label actually lost market share during these recessions, as promotions are typically brand oriented (see Figure 1).

Very much unlike countries where these economic recessions did take a toll on consumers’ disposable income, like Spain, Greece, and Ireland. In these countries, the recessions took a bite out of consumers’ disposable income. As the Spanish, Greeks and Irish were looking for lower ‘absolute’ prices, private label market share and hard discount penetration (also beneficial for private label adoption) benefitted (see Figure 2).

Whilst officially Europe is not in a recession at the moment, the current inflation does have a material impact on disposable incomes throughout the continent. That entails that a ‘Spain type of scenario’, with consumers focusing on absolute prices, is more likely. In combination with the first (anecdotal) evidence of hard discounters winning ground, food retailers placing more emphasis on their private label assortment, and consumers buying more supermarket brands, the top-line outlook for private label companies looks promising. Whether that holds for their bottom line as well depends on their negotiation power. As private label producers’ cost base generally is more vulnerable to cost inflation than that of their branded competitors.

Talking about brands: the expected focus on absolute rather than perceived low prices in the more mature private label markets will be different than in earlier recessions. For brand producers, the absolute difference between list prices and promotional prices is likely to gain more attention, as will offering value propositions.