Australia’s $46.8 billion retail industry is on the cusp of major change. Its success rides on acceptance and uptake of packaging and supply chain innovations, writes Packaging editor Matthew Levinson.
High input costs, low domestic growth, a fragmenting marketplace, a strong dollar, declining brand loyalty, increasing fuel prices and regulation, globalisation and the level of investment in technology have affected the high volume, low margin environment.
The intensely price competitive sector, which IBISWorld estimated to have generated $AU46.8 billion in the 10 months to April 2006, is facing serious threats from Europe – German retailer Aldi has made a very successful move into the Australian market – and there are likely to be more, if incumbent retailers fail to take the initiative.
In response, operators are stocking an increasing number of products previously found only in specialist stores (i.e. Asian ingredients, organic foods), much of which is imported; for example, Coles imports around 70% of its merchandise, according to BRW - Aldi is an important exception, with more than 80% of its products Australian-made and sourced from local manufacturers.
This is the backdrop for a debate on retail innovation; but in such a tough marketplace retailers have to make savings – by pruning staff (Coles looks set to slash 1000 staff), key alliances and expansion into complementary markets (Shell , Caltex , Liquorland ), and by aggressively moving into private labels and shelf ready packaging (SRP).
Mandate for change
Improving the supply chain could be one of the best ways to maintain a competitive advantage.
It promises better management of inventory levels and improved stock flow-through, accurate product safety and recall, reduced labour costs, increased efficiency, e-commerce applications and better prediction of trends.
For good reason, many grocery retailers believe tracking products as they move through the supply chain, using traceability solutions such as radio frequency identification (RFID) tagging, will be a significant tool in the future.
Retail World has predicted RFID will reach a significant turning point by the end of 2006.
The benefits seem enormous, but the question of a mandate hangs over it all.
In fact, it has only been taken on board whole-heartedly by the meat industry, which has seen huge export rewards as a result of the quality assurance offered by thorough tracking.
However, traceability could become a point of differentiation for many products, especially in light of health concerns and contamination scares; it could also be used to stem the massive losses from shrinkage due to shoplifting and employee theft (Retail World estimated Australian retailers lose between $2.5 billion and $3.5 billion annually).
The last 50 metres
Shelf ready packaging is the other big supply chain initiative to grip the industry.
In the past year, there has been a dramatic increase in shelf ready products hitting the stores.
Disposable rip-away cartons or returnable trays are being used with perishable and non-perishable goods in most supermarkets – Coles recently switched its fruit and vegetable aisles to collapsible returnable trays – although simple geometry means SRP does not work as well with beverages, due to cost and environmental concerns.
Many operations import their ideas wholesale from UK or US operations, particularly British retailer Tesco, however, Australia has a very retail different environment.
For example, trucks need to travel much further here than in Britain, so the added weakness of perforated SRP boxes has an incrementally larger effect.
“Supply chain initiatives should be translated not simply transferred,” Australian Food and Grocery Council assistant director Samantha Blake told the Australian Institute of Packaging national conference.
However, the major retailers demand change from suppliers.
Woolworths project manager (shelf ready packaging) Brett Griffiths said their objective is to get nine billion items on shelf 10, 20 or 100 units at a time.
Efforts by retailers to cut costs in this way are putting pressure on trading partner relationships, because, although there are clear benefits in terms of reduced labour costs at the supermarket, the benefits are not necessarily passed upstream to the manufacturer.
It gets more complicated – design considerations are usually thrashed out between the manufacturer’s marketer and the retailer’s salesperson, neither of whom are trained in packaging design.
This process is directing manufacturers away from the much-needed industry standards, and in doing so, driving more costs, most of which go to the supplier.
Few decent cost benefit analyses exist and there is little evidence to prove the reduction in in-store labour, in fact, on paper, supply chain costs increase.
It is yet to see what the impact will be large scale on the supply chain, especially with the implications for National Packaging Covenant mach 2 and 3.
However, as the AFGC’s Samantha Blake noted: “Retail ready is becoming a cost of entry.”
On the shelf
Once considered cheap and generic, home brands, or private labels as they are now known, have experienced a renaissance in recent years, which ACNielsen attributes to Aldi.
They currently account for 15% of sales within Australia’s supermarket sector, and according to BRW, this figure is set to increase with Coles stating it wants to achieve 30% private label sales by 2007, while Woolworths is believed to be aiming for 20%.
KPMG executive director (corporate finance) Adrian Arundell said retailers have taken a two pronged approach.
“First, they went after the large volume items that require little processing such as sugar (private label now accounts for 50.4% of the market), eggs (56%) and milk (55%),” he said.
“Second, they infiltrated smaller niche categories such as dried fruits (24.8%) and small goods (20%).
“Coffee, laundry detergents and nappies are all large markets with a very low penetration of private label products, they are the obvious next targets for retailers attempting to boost profits through high margin private label brands,” said Arundell.
Taking it to the top
Market researcher Heartbeat Trends said more Australians would buy premium private label products if they were promoted better because better packaged goods have ‘the look of quality.’
British retailer Sainsbury’s has introduced several extremely successful lines making use of ‘premium’ packaging – colour, photos, shape, finish and so on – to lead customers to attribute value to the product.
“They understand that consumers thinking of making the shift [to private label] want to be reassured of the quality,” said Australian Centre for Retail Studies executive director Amanda Young.
According to a KPMG report, the next stage of private labelling will target coffee, laundry products and nappies, while ranges including ‘Woolworths Select’ and ‘You’ll Love Coles’ focus on quality products, and in the future Coles plans to roll out the ultra-premium George J Coles line, according to Retail World.
Retailers are in a great position to be responsive to consumer needs, for example, by developing products that feed out of current dietary trends such as ‘Carb Control’ or ‘Free From’.
Fundamentally, customers will buy something they can afford, so it makes good economic sense to charge what the consumer can pay rather than simply the end of an equation that takes input costs plus labour, plus transport, and so on.
For retailers the pricing strategy means finding out what consumers want, at what price, then going out to find the product.
But where once upon a time consumers were prepared to deal with low quality in return for a low cost, they now demand quality whatever the price.
The ‘commoditisation of quality’ means that in many cases the same product is packaged differently and sold at different price points.
It’s counter-intuitive, but the theory says by cannibalising the market you actually open up a wider consumer base.
For example, a machinery manufacturer described watching the sugar mills dispensing sugar at Bundaberg , when they replaced the branded paper bags to private label bags while the sweet crystals kept flowing - Bundaberg recently announced it may stop production of its branded product altogether.
Retailers, keen to increase margins, have taken this a step further by squeezing out the middle ground of the brand spectrum and selling more of their own private label products.
“If you have a branded product that is not a market leader then you are under threat,” said Young.
It is a tough decision for suppliers as going into a private label manufacturing agreement with a retailer could undermine their own brand sales.
On the other hand, suppliers could be left behind if they are not involved.