The expensive mistake of the cheap own brands

Food manufacturers and retailers are currently engaged in a bitter price war. And these disputes escalate more and more often. This is now becoming increasingly visible to customers in supermarkets and discounters. Because the shelves of retail chains are currently missing more branded products than ever before.

At Rewe, for example, there are no longer any cereals and cornflakes from Kelloggs, no coffee from Jacobs and no brands from the US consumer goods giant Mars, including, in addition to the chocolate bars of the same name, popular products such as Mirácoli, Bens Original, Balisto, Airwaves or animal feed from Whiskas, Frolic and pedigree.

Edeka customers, on the other hand, also have to do without the Mars brands and in addition to Coca-Cola, Fanta, Sprite and Fuze Tea. At Aldi, on the other hand, there are currently no Pepsi products and at Kaufland there is no chocolate from Ritter Sport.

Sometimes the manufacturer refuses to deliver, sometimes the dealers don't accept the goods. The reason for this power struggle, which was fought out publicly and sometimes even in court, is the same in both cases: It's about money. Because the costs for raw materials, energy, logistics and wages are rising sharply, the industry reports to the retail chains almost every week and demands price increases.

And much of it is also passed on. This is shown by the inflation figures from the Federal Statistical Office. For several months now, the authority has been identifying food and other so-called fast-moving consumer goods such as personal care products or cleaning agents as the second major inflation driver behind energy.

In October, for example, groceries cost 20.3 percent more than in the same month last year, in September it was 18.7 percent and in August 16.6 percent. "Since the beginning of the year, food price increases have gradually increased," the statisticians note. The rate of price increases for food is thus increasingly decoupled from overall inflation.

And the end is far from reached. "A large part of the increased costs in the supply chains has not yet arrived in the consumer price increases," say industry experts. This is also indicated by figures from the Munich ifo Institute, which asks companies about price expectations every month. The result: In the food sector, all retailers are planning further surcharges in the coming months.

Further disputes and gaps in the shelves are programmed. Especially since the trade praises itself as an advocate for the consumer and a fighter for the customer. "Today, trade functions as a limiter for rising prices," says Josef Sanktjohanser, the outgoing president of the German Retail Association (HDE), at the trade congress in Berlin.

Rewe boss Lionel Souque then used his appearance there to attack the brand manufacturers again. He had the Pepsi and Kellogg logos projected large onto the screen behind him. "Some - especially American - companies are freeloaders of the necessary price increases," he railed in front of almost 1,000 industry representatives.

Such corporations are trying to take advantage of inflation to boost their profit margins, the Frenchman warned. This was shown by comparisons with other countries and other manufacturers. For example, Kellogg demanded a 30 percent price increase from Rewe, but only five percent from French retailers, Souque claimed. Pepsico, on the other hand, is charging 20 percent more for its energy drink "Rockstar", while the competition is keeping prices stable.

Rewe and Co. are now filling the vacant shelf space primarily with their own private labels. And the advertising of supermarkets and discounters is increasingly geared towards cheaper alternatives. With success: According to a recent study by the price consultancy Simon-Kucher

Almost half of the 1,000 respondents stated that they mainly or almost exclusively buy private labels in the food sector. In the case of low-income households, the proportion is as high as 66 percent.

According to the study, the focus is particularly on dry products and canned fruit and vegetables, but also detergents and cleaning agents and cosmetics. "In view of the high inflation and rising cost of living, more consumers are looking at the price and less at criteria such as (brand) quality and sustainability," says Martin Mattes, partner in the consumer goods sector at Simon-Kucher

Whereby the price of private labels is also in flux – meanwhile it is rising even faster than for branded articles, as reported by consumer researchers at GfK. According to the current GfK Inflation Tracker, the prices of retail products rose by 19 percent in the third quarter of 2022.

And that's unusual. "The last time private label price increases were higher than manufacturer brands was during the 2008 financial crisis," reports Robert Kecskes, GfK's consumer trends expert. As a result of the higher prices coupled with higher demand, private label sales grew by double digits between July and September. In contrast, it was only 4.4 percent for leading brands and 0.6 percent for premium brands.

Meanwhile, Rewe's chief lobbyist Sven Spork rejects the impression that is now emerging of excessive price increases for private labels. The decisive factor is not the percentage price surcharge, but the plus in the absolute cent amount, the expert explains to WELT. Since own brands are usually cheaper than brands, the starting price is simply lower - and therefore the percentage increase seems particularly high.

In addition, the private label manufacturers could usually show in detail how their raw material costs have increased - in contrast to many brand manufacturers. Rewe mainly deduces from this that a similar amount of cents would be justified as a price increase for brands as for comparable private labels, according to Spork.

At the beginning of the wave of inflation, corporations such as Beiersdorf and Coca-Cola pointed out in their analyst presentations that they had advantages over private label producers. The price calculations of brand manufacturers include significantly more marketing costs than cheap offers from retailers.

Often these expenses for advertising and distribution account for almost half of the costs. However, due to the triumph of digital advertising, the prices for advertising are tending to fall. Therefore, despite higher raw material prices, the total costs of brand manufacturers increase less than those of pure contract manufacturers who get by without advertising.

GfK researcher Kecskes anticipates a sustained trend towards private label anyway. “Many consumers expect to have to spend more money on energy in the next twelve months. If true, private label will continue to gain market share despite price increases.”

The experts at Simon-Kucher are also counting on this

Based on the experiences of the past few months, this does not apply to every area. "With luxury goods such as snacks and sweets, the private label share is stable despite inflation," reports Simon-Kucher

That should increase the pressure on a negotiated solution between Rewe and Edeka on the one hand and Mars on the other. After all, it's about products like Mars, Twix, Snickers, Bounty and MilkyWay or M

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