Global food giant Heinz has made a bit of a fuss about the growth of private-label or in-house brands in our major supermarkets.
William Johnson, executive chairman, CEO and president of the $US16.4 billion company, complained to shareholders in the US last week that the firm would have to rework its strategy in Australia to “cope with the growing domination of private label goods and the never-ending discounting on branded goods by the supermarket chains.” Johnson labelled Australia as the “worst market” to do business.
Obviously, Heinz and other national brands should be doing everything they can to try and deal with this growth in supermarket private-label brands. It is in their interests to have as much of their product on the supermarket shelves as possible.
Similarly, the two major grocery chains, who command between 70 - 80% of the market, also have every right to do what they like, within the law, to get people to buy their private label products.
By shifting from national brands, such as Heinz, Kellog’s and others, to private label brands on their shelves, Australian supermarkets increase their already substantial control of the distribution chain by entering into highly controlled, vertical networks. In doing this, supermarkets are able to increase their profit margins, and force wholesalers and manufacturers into difficult, and often unprofitable, agreements.
Whether this is good or bad depends on how you look at it. I would argue that two particular perspectives are worth considering, which can be broadly termed the micro and the macro views.
A micro perspective – consumer behaviour
One of the arguments arising out of this debate has been that the private labels are “mimicking” the packaging of the national brands so that they can trick consumers into accidentally buying the private label version.
So, the argument goes, I walk into the supermarket planning to buy Uncle Toby’s muesli, but grab the Woolworths Select version, because it looks a bit like the Uncle Toby’s version, and not realise the mistake until I get home. I have been tricked into buying the brand because it looked a bit like it.
Yet, the reality of the “mimicking” approach is a bit more subtle than this.
It’s not about consumers making a mistake when they make a choice. Its about consumers feeling okay to make the choice of the in-house or private label brand, because it looks a bit like the national brands.
All consumer behaviour is a balancing of the finite processing resources available to us. Despite what rationalists might erroneously think, people use a whole range of processing shortcuts (we call them heuristics) to make decisions, rather than considering all information equally and reflectively.
If a pack of Woolworths Select muesli looks similar to a pack of Uncle Toby’s or Kellog’s muesli, then it is easier for a consumer to choose it. It sounds silly, I know, but if you think that few of us are pharmacologists, or chefs, then we have to rely on factors other than, say the ingredients, or the materials used, to help us to make a decision. If the product looks (mostly) like the national brand, and it is cheaper, then it is easier for us to choose it.
This is why we all fall for the French jam trick. If we are trying to make an assessment about which jam to choose, and we want something a little bit special, then many of us are drawn toward the jam that purports or looks like it is a little bit French. If you think about it in a rational way, just because it is made in France doesn’t necessarily make it better, but its “French-ness” imbues it with an aura of quality.
For a long time, Coles’ and Woolworths’ Home Brand and Embassy generic labels made good inroads for those who were happy to pay less for products that were perceived to be of lesser quality. Even that form of branding reflected a particular perspective and shortcut for many consumers; “if I buy this brand, I’m not buying into the ‘marketing’ tricks that others fall for”.
This may sound a bit dismissive of human behaviour, but that is the reality of decision-making. We are a product of our finite processing capacity, and also our desire to be as efficient with our time, effort and money as possible. Processing information requires a lot of work, and our default position is to: operate automatically, rely on past experience, and undertake as little effort as possible in our decision-making. Even if we are provided with good information, it is unlikely we will use it.
When we reach for that muesli, our objective is to exercise minimal effort. We are not conscious of this, and we are not alone. We all do it.
All that Coles and Woolworths are doing is exploiting a basic psychological predisposition.
The question is whether we are okay with that.
A macro perspective - competition
Purists on the competition side predictably say that the growth of private labels is all good.
As former ACCC chairman Bob Baxt said, “the use of private label is just another form of competition. As long as the labelling is not misleading. I don’t see anything wrong with private labels, in fact it’s another way [in] which companies can compete and thus deliver benefits to consumers.” Like most regulators, Baxt takes a primarily rational view of decision-making – that if consumers are provided with appropriate information, they will make the most appropriate choices.
Another long-term assumption is that if consumers are getting lower prices, they will move toward the lower priced goods, which will force the national brands to change their selling propositions (toward a lower-price model). In the end, everyone benefits, because we all get lower prices, businesses become more efficient, and (eventually) consumers are provided with the products that they want.
The pure competition thesis is an appealing one, especially to classical economists, politicians, and lawyers, because, at face value, it says that people should be able to choose how they want to spend their money.
A parallel narrative that tends to go with this is that in the long run, the market will force industries to become more competitive, through consumer choice. Those that aren’t competitive will simply not survive.
The end point is that the market decides whether an industry or supplier should exist, rather than an arbitrary decision made by a government regulator.
So, if consumers care about a particular industry, they will make a choice to buy particular goods to support that industry, even if those goods are more expensive than the alternative.
At a simplistic level, when cast through an economic “prism”, lower prices seem like a great idea. But this approach makes an assumption that we live in a marketplace, rather than a community, and that we are simply consumers, rather than citizens.
This is where a more philosophical and longer-term approach might be appropriate. It may sound a little idealistic (and perhaps naïve), but I would hope that we are more utility seeking “transactors”, looking for something more than lower prices to buy stuff, and satisfying our individual needs and wants.
What makes sense or seems reasonable now – in this case the paradigm of the supremacy of the market, and a drive for competition at all costs – may not make sense as we force more and more industries to the wall through our desperate individual need for lower prices.
At a very practical level, as people lose jobs, and as industries disappear, we may well see a need for more support from government, which will inevitably increase tax burdens, meaning that we have less money to spend on cheaper products.
Another outcome of the desperate race toward cheaper products is that it leads to poorer quality goods, and businesses taking more risks in production to find savings. As goods are sourced from places with less stringent control over production, quality and safety is inevitably compromised.
Free marketeers will argue that all this means that those who can afford it should be allowed to spend their money on better quality (and safer) products, if they choose.
Similarly, our desire for lower prices so that we can buy more stuff, also means that we overconsume, with the resulting impact on the environment, our health, and our global community.
There is something missing in this rather simplistic discourse around the market and competition.
As sociologist Zygmunt Baumann says in his book, Does Ethics Have a Chance in a World of Consumers: “All or most currently held views of reason and good sense tend to be praxeomorphic [in other words, they include practice and perception]. They take shape in response to the realities "out there” as seen through the prism of human practice – what humans currently do, know how to do, are trained, groomed and inclined to do.“
Sometimes we have to challenge a particular ideology – in this case, that lower prices and competition is good for everyone – even if we don’t yet have the language or expertise to say exactly what is problematic about it.
The recent growth of the Occupy movement is indicative of unhappiness with the current frame, even if those involved can’t quite articulate what the answer is.
We are a product of a discourse built around rationalism, economics, and the individual, and many answers may not fit the current frame. But this focus on the market as the only arbiter has not always been the case, and at some point, beliefs and behaviours (and laws) may shift the balance to an alternative ideological frame.
In the short-term, the discussion is probably going to leave us with more questions than answers.
But we should be okay with that? From my perspective, it is the next step in a more enlightened view of the experience of what it is to be human.