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Netherlands: Research on who will fill the larger price gap between A-brands and private labels?

All groceries have become more expensive in the past three and a half years. The shelf prices of A-brand products rose slightly more than those of private labels. As a result, the price gap between A-brands and private labels in Dutch supermarkets has grown to almost 40%. Supermarkets see this larger price gap as an opportunity to put a new price point on the market, above the regular private label but below the A-brand. A great opportunity for private label producers and B-brand suppliers.


Private labels have been on the rise in Dutch supermarkets over the past two decades. Over the past three and a half years, this advance has accelerated substantially. According to market researcher NIQ, private labels have taken no less than 2.3 percentage points of market share from brand manufacturers since the beginning of 2022.

This is of course a consequence of the unprecedented high food price inflation in this period. Since the beginning of 2022, groceries have become about 33% more expensive on average.


Consumers have responded to these high prices by, among other things, opting for cheaper variants of the products they used to buy, such as private labels. In addition, service supermarkets have also paid more attention to their private labels with different shelf layouts and offers to keep the price-sensitive consumer on board.


Prices of branded products rose faster than private label prices

What has undoubtedly also played a role in the recent market share gain of private labels is the larger price difference between brands and private labels. All groceries have become more expensive, but the price increases of branded products were generally slightly higher than the price increase of private labels.


In Dutch service supermarkets, branded products have become on average 31% more expensive since January 1, 2022. In the same period, the shelf price of private labels has risen by an average of 'only' 20%.


This difference in price dynamics is not only due to the bargaining power of brand manufacturers. In some cases, brand manufacturers have increased shelf prices in order to be able to offer more discounts afterwards. In addition, food retailers determine the final consumer price on the shelf and in many cases it is the supermarket that has raised the prices more than was necessary on the basis of the purchase price increase. They did this to repair their own profit margins, subsidize other product categories and to make their private label assortment more attractive to consumers.


Brands now on average almost 40% more expensive than private labels

The price difference between brands and private labels can differ per product category. In some categories such as canned fish or olive oil, the average price difference is limited to less than 20%, while private labels in beer or energy drinks, for example, are on average 70% cheaper. The amount of the difference depends on many factors, such as the strength of the brand and the competitive relationships between suppliers.


If we lump together the most relevant product categories, the categories where brand and private label are both available, private labels in the Netherlands were on average roughly 34% cheaper than their branded alternatives at the beginning of 2022.


Because the prices of branded products have risen faster in recent years, the price gap has now grown to an average of more than 39% (see Figure 1).

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Figure 1: Price gap between brands and private labels has grown to almost 40% in 31/2 years


However, percentages do not mean much to consumers. They look at absolute numbers. Because branded products are often more expensive, the price increase in euro cents hits brands harder than for private labels anyway. Due to these absolute price increases, branded products may also shoot through psychological price barriers, causing consumers to drop out more quickly.


A-brands are left with a bigger price gap in their stomachs

Very cautiously, Dutch consumers are starting to regain some confidence and we are seeing a cautious recovery in volume demand for food. Grist to the mill of the A-brands, you would say, because they may be able to win over the customers they have lost in recent years, the aforementioned 2.3% market share shift to private labels.


The larger price gap does bother them. And because manufacturers have no direct control over the consumer price, it will be very difficult to lower the prices of their A-brands again.

With a more active promotion policy, more bulk packaging, shrinkflation to maintain psychologically important price points and/or innovation, A-brands try to positively influence consumer perception. But in the end, they are mainly at the mercy of the food retailers. They have the final say on the price on the shelf.


Supermarkets see opportunities to fill price gap

However, those Dutch food retailers have their own concerns. Service supermarkets in particular have seen their profit margins come under pressure in recent years due to higher purchasing costs, and perhaps even more so due to higher personnel costs (including an increase in the minimum wage), rents and energy and transport costs.


To repair these profit margins, they are currently cutting costs, for example, and putting more pressure on price negotiations with suppliers, for example by working more internationally in purchasing.


But the wider price gap between brands and private labels gives them an additional opportunity to boost profit margins. With the introduction of products at a new price point, below the A-brand but above the regular private label, food retailers want to take advantage of the booming consumer sentiment. The new price point should entice consumers to spend more in-store (greater operating leverage) and is expected to generate higher gross margins than retailers earn on brands and/or their regular private label range.


Easier said than done

Whether the rollout of such a new price point will be successful is literally the million-dollar question. Opinions in the market are divided on this. However, there are a number of common denominators that help determine the chance of success:

  1. The price difference must be large enough to entice consumers to opt for this new price point;

  2. The potential volume must be large enough.The potential benefits must outweigh the costs of a new product introduction. This consideration can differ per supermarket chain;

  3. There must be room to make a distinction. A variation in raw materials, production processes and/or product functionalities must be able to provide added value for the consumer;

  4. It is possible that a brand player can no longer maintain a good price point due to the price increases and there is the possibility to claim this price point with a new product launch.

Based purely on the above factors, the number of product categories in which the price gap can be filled with a new price point is relatively limited. But the need to improve margins and continue to put pressure on price negotiations with brand suppliers is so great that it cannot be ruled out that food retailers will opportunistically view the larger price gap.


Good news for private label manufacturers and B-brand suppliers

The most logical candidates to supply these products at the new price point seem to be the private label manufacturers. The relationships are often already there and for these manufacturers, such a range with more premium products generally offers higher margins and the opportunity to work with the food-retail customer in a more strategic way.

In many product categories, the volume potential is not large enough to justify the investment in a completely new product. If a food retailer still wants to choose to claim the new price point in such a category, temporarily or otherwise, then B-brand manufacturers can offer an alternative.


By opting for existing products, food retailers may be cheaper. For B-brand manufacturers or perhaps even foreign A-brand players, the price gap offers the opportunity to increase market share or gain access to a different geographic market.



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