The amount of focus given to private labels versus branded goods is a key decision for both Mass Grocery Retailers (MGRs) and food producers. Nearly all retailers carry at least some private label goods, and some, such as upmarket retailer Marks & Spencer (M&S), carry exclusively private label products. Meanwhile, many of the UK’s largest food and drink producers manufacture both branded and private label goods. With the market share for private label goods growing, there is a strong argument for producers to focus production in this area.

However, producers that focus on branded products have the advantage of negotiating with retailers from a point of strength, particularly if consumer demand for their products is high, and can generally achieve greater margins. These issues have come to the fore in the second quarter of 2008. In May, Marks & Spencer revealed that it would start selling some of the country’s most popular branded products, such as Nestlé coffee and Heinz baked beans. Meanwhile several manufacturers, including the UK’s largest retailer, Premier Foods, began downsizing their private activities to focus on higher-margin branded products.

Marks & Spencer’s decision to sell branded products has been prompted by the growing popularity of upmarket private label ranges at other UK retailers. All of the major UK MGRs now have their own premium private label ranges, reducing the competitive advantage that Marks & Spencer once enjoyed. All of these retailers have enjoyed considerable success with their private label ranges and J Sainsbury (Sainsbury’s) recently reported that its upmarket ‘Taste the difference’ along with its economy ‘Basics’ range were among the most important drivers of growth throughout 2007. Despite the rise in importance of private label products for retailers many food manufacturers are less enamoured with the sector.

As production of private label products can be shifted between manufacturers, retailers generally have a strong position when negotiating supply terms. As an example of this, in May 2008, Northern Foods announced that it is to close a factory in Lincolnshire that supplies ready meals to M&S after it could not agree acceptable supply terms. Northern Foods claims that the factory is only just breaking even and that the new terms demanded by M&S make the factory unviable.

This highlights the wafer thin margins that many firms producing private label products are forced to operate on. Another firm reducing its reliance on private label products is Premier Foods. The firm is planning to sell its RF Brookes subsidiary, which supplies chilled food to major retailers and the food service industry, and its Avana Bakeries unit, which is one of the main suppliers of cakes and confectionery to Marks & Spencer. Both Premier Foods and Northern Foods have a portfolio of very strong consumer brands, such as Hovis bread and Goodfella’s pizza respectively. Although both firms are unlikely to leave the private label sector entirely anytime soon, this downsizing may be a signal that the major UK food producers may not be willing to go on supplying private label products if the returns cannot match the returns that can be achieved by focusing on brands.