No Name logos on shopping carts at a Loblaws store in Ottawa on Aug. 21.Sean Kilpatrick/The Canadian Press
Vass Bednar is a contributing columnist for The Globe and Mail and host of the new podcast, Lately. She is the executive director of McMaster University’s master of public policy program and co-author of the forthcoming book The Big Fix: How Companies Capture Markets and Harm Canadians.
Last week, Loblaw Cos. Ltd. L-T unveiled ultra-discount grocery stores that will focus on its No Name and President’s Choice house brands. Just under 60 per cent of the items at these stores will be Loblaw’s own private-label products.
A private-label product is one that a retail chain, such as Sobeys or Walmart, produces through a third party but sells under its own brand name. This type of item is usually offered exclusively by the company that owns it. And the products are moneymakers! For example, Costco’s infamous Kirkland Signature generates about a quarter of the chain’s sales. Sales of its store brand are bigger than those of Nike and Coca-Cola.
Many people like these discount brands, and for good reason: They’re often a steal. But they might also come at the cost of better competition. And in the long run, this negative impact on competition will hurt consumers. Unchecked, the rise of house brands will result in higher prices and worse products over time.
House brands give retailers an unfair advantage. Most grocery chains charge independent suppliers slotting fees and other additional costs. These chains can therefore earn more from their own brands (and feature them more prominently in stores and online) while still offering a cheaper price as they make it more expensive for competitors to access shelf space.
Sometimes, major retailers – now in competition with their suppliers – can weaponize the information they glean against competitor brands. Eight years ago, a leaked memo revealed that Loblaw kicked French’s ketchup off its shelves because customers preferred it to Loblaw’s in-house President’s Choice brand. Instead of being motivated to compete more effectively with French’s on price or quality, the company decided to just ban its rival from store shelves.
Loblaw later claimed that “customer preference” caused the product to be removed – interestingly, this preference was also the reason cited for bringing French’s ketchup back. The company used detailed information it had collected to make a disciplinary business decision in its own favour.
In the United States, reporters found that Target Corp. TGT-N had copycatted entire brands based on its detailed knowledge of what is successful and popular, and then ceased to distribute the brands that inspired the copies. While knockoffs and replicas have long been a feature of the economy, the ability to mimic designs quickly through data is newer.
Now, firms can copy how Amazon.com Inc. AMZN-Q leverages data to help it develop similar private-label products. The Wall Street Journal detailed how Amazon has spied on sellers and used data about their sales, costs and suppliers to help it develop imitations under AmazonBasics or one of its other private labels. Any company that owns and operates a marketplace can similarly entrench itself, exploiting a built-in advantage.
How does this structure affect the average person?
Over time, concentration has led to large, dominant retailers. When retail markets stabilize, companies don’t work as hard to steal market share from each other. Instead, they have started to steal market share from independent suppliers through the creep of private-label brands.
These private labels primarily harm independent suppliers that can’t compete fairly because retailers self-preference their own products, copy successful ones and sometimes use prices to discipline legitimate competitors. Many consumers don’t even realize that all the private-label brands are owned by the same parent company.
The impact of this will play out in a diminishing selection of products, as independent companies find it harder to compete with store brands. Recall Kleenex leaving Canada after facing years of competition from supermarkets’ house-brand tissues.
A smaller selection of items translates to worse products over time; the lack of competition means there is less of an impetus for businesses to innovate. Why come up with new flavours of ice cream or better running shoes if you don’t need to compete for market share?
And in an environment of limited competition, retailers can jack up prices of their house brands without fear of losing business. There is reason to believe this is already happening. Research has shown that the price gap between independent brands and private labels is getting smaller.
Low prices are typically a feature of discount private-label products, and they can be attractive. But if a cheaply-priced item is introduced to copy and eventually eliminate competitors, we’d do well to acknowledge the downside of the growth of these brands – that is, if we can detect them in the first place.