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An introduction into how Australian supermarkets range private label SKUs

Background

This quick blog will help explain how Australian supermarket buyers range private label (P/L) SKUs. This blog will be most useful for people that have limited experience in dealing with supermarket buyers in Australia.

Nielsen research (The rise and rise again of private label , 2018) highlights the growth of P/L in many regions throughout the world. For example, 31.4% of retail $ sales in EU were from P/L in 2016. In comparison 4.2% of retail $ sales in APAC (Asia Pacific) were from P/L in 2016. This research highlights the potential sales growth for P/L in markets such as Australia. IRI research (Private Label : The Rise and Evolution of Private Label in Australia , 2017) suggests that 18.1% of retail FMCG $ sales in Australia were from P/L.

Independent research, including Nielsen (The rise and rise again of private label , 2018) explains P/L growth is being driven by some key factors.

  1. The quality of P/L SKUs has improved to match category leaders
  2. Shoppers now believe P/L SKUs are of similar quality to branded SKUs
  3. Shoppers growing demand for ‘value’. This is partially due to economic factors, such as the GFC and COVID-19.
  4. Growth of hard discounters, e.g. Aldi, that focus on P/L ranges

Private Label Tender Process

For hard discounters, such as Aldi, normally the buyer will buy all the SKUs in a range. For full service supermarkets, such as Woolworths, it is normal to have a separate buyer for P/L. The category buyer will normally work with the P/L buyer to ensure the range meets shopper demands. The P/L buyer will focus on sourcing the right SKUs from the right suppliers. In larger retailers, such as Woolworths, there may also be a P/L team. The team could include product development specialists, product technologists as well as a buyer. Depending on the retailers’ structure a number of different people, with different skillsets and responsibilities, may review a suppliers’ tender submission.

Different retailers will have different processes for private label reviews. The general approach for major Australian supermarkets (Aldi, Coles and Woolworths) includes the following steps.

Buyers will initially review their current P/L range to determine whether it is meeting consumer / shopper demands. The review is normally based on scan data and market intelligence. Standard reports, such as ranking reports, are used to evaluate the performance of individual SKUs and brands. It is normal for P/L SKUs performance to be benchmarked against branded SKUs. This indicates the success of the P/L SKUs in the market.

The buyers’ objective is to create a P/L range that meets consumers / shoppers demand to maximise the financial and strategic performance of the category. Financial measures are normally sales, margin and share. Strategic objectives may include a corporate objective to increase sales of P/L.

Tender Submission

For suppliers the first step is to be asked to be added to the ‘potential suppliers’ list for P/L tenders.

After determining the P/L range buyers will normally put supply of these SKUs out to tender. The buyer normally emails the tender submission document to potential suppliers. This document will detail important information such as the product description, review process including timelines etc. For imported SKUs the timeline is normally longer due to the longer lead times for production.

Retailers do have different approaches, but it is normal that potential suppliers have to complete the necessary tender submission paperwork, including pricing, plus deliver a physical sample of the product. For some products independent product testing may also be required. For example, that P/L laundry liquid performs as well as the market leader in stain removal. All the required information / testing etc is outlined in the tender submission paperwork.

The buyer will then review the submissions to determine the best supplier for the P/L SKU. During this process the buyer may reach out to potential suppliers to ask for more information, different pricing etc. Depending on the retailers’ guidelines and the buyer it is normally OK for suppliers to ask for an update on how their submission is progressing. If the buyer feedback highlights an issue, e.g. price too high, sometimes suppliers can re-submit an updated proposal. Some retailers do not allow re-submissions as they expect suppliers to put the best offer first. Also, re-submissions can increase the time taken to complete the review.

Supply Contract

The buyer will then notify the supplier that they have been successful in the tender process. Retailers do vary, but it is normal for a retailer to grant a P/L supply contract for the SKU. The supply contract is normally for a set period such as 1 or 2 years. This contract will contain a lot of information detailing the responsibilities of the supplier. The next step in the process (NPD) now starts.  

Depending on the supply contract the retailer and / or the supplier shall organise the product packaging. It is normal for retailers, as brand owners, to have style guides for packaging. These guides outline what the product packaging should look like, pantone colours etc. Sometimes retailers will outsource this work to third parties, such as Equator Design. It is usual that suppliers have to pay for the product packaging.

Another important part of the NPD process is product specifications. Any product claims that are going to be made need to be supported. For some products, e.g. food, there are government requirements, such as listing ingredients in a NIP (nutritional information panel). For other product claims, e.g. P/L laundry liquid matches market leader for stain removal, additional independent product testing may be required. From the retailers’ perspective, as brand owner, they want to make sure the physical product meets all the claims that are made. Depending on the supply contract it is normal for suppliers to fund the independent testing.

From personal experience finalising product specifications can be a difficult task. Suppliers may not wish to share their IP (intellectual property) such as production techniques / recipes for food products etc. They are concerned that retailers may then share this IP during the next tender. From the retailers’ perspective they want to know as much as they can about the physical product and how it is made.

Depending on the product it is common for the NPD process to take months to complete. The process takes this long as there are many details to verify and items to be agreed upon / signed off.     

Product supply

After the tender process and NPD then suppliers can start to supply the retailers. As per branded SKUs there are performance requirements such as DIFOT (delivered in full on time) etc. In addition to these requirements many retailers will have P/L specific requirements. This may include holding a minimum 3 months of packaging stock, allowing retailer staff to access your factory at any stage and independent product testing. These P/L requirements will be detailed in the P/L supply contract. The goal of these P/L requirements is to ensure the supplier meets the P/L shopper demands.

The retailer, as brand owner, normally has an understanding with suppliers that they will support their brand. For example, the retailer normally pays for marketing support for their brand. If the supply contract includes a forecast normally the retailer will attempt to reach that sales figure. The forecast is normally based on historical sales and suppliers should use it as a ‘guide’ for ordering packaging etc. Obviously, a number of factors, including activity from branded SKUs, may affect the actual sales of P/L SKUs. If suppliers have an issue, e.g. excessive packaging due to low sales vs forecast, they should reach out to their buyer. Most retailers will support suppliers resolve any issues with P/L supply.  

Summation

This simple blog has outlined how Australian supermarket buyers range private label (P/L) SKUs. Each retailer will have their own unique process / structure but many steps are similar. The retailers goal is to have ‘the best product at the best price’ for their P/L range.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.

Thank you,

Tim Bowen