Shoppers aren’t yet trading down to own-brand products – Aegon Asset Management

by | Sep 10, 2022

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Consumers are yet to shun big brand products in favour of own-brand items, despite significant price hikes and mounting cost pressures on households, according to analysis by Aegon Asset Management.

Amid the cost-of-living crisis and soaring food prices, the expectation is that behavioural changes among consumers will lead to a bigger uptake of own brand products – otherwise known as private label.

But Chris Kiriakou, senior analyst at Aegon AM, says this is not appearing in the consumer data, despite the widespread belief that shoppers turn to cheaper brands when cost pressures rise.

“Since at least February, with the start of Russia-Ukraine War, many investors and sell-side analysts have sounded the alarm that private label was positioned to gain meaningful market share at the expense of branded food,” he says.

“There was certainly a logic to this position. Food companies had already begun raising prices in 2021 to offset increased costs related to raw materials, labour, and freight, among other areas. The war worsened the cost problem for many food companies, and to protect margins and earnings they continued to raise prices aggressively.

“To some extent, the expectation that private label would take meaningful market share has remained a popular view. However, over the last several months, private label volumes have not risen as fast as anticipated.”

Kiriakou also notes that private label prices are rising in price faster than brand names.

“While private label volumes are trending modestly higher and total food volumes are trending modestly lower, a wholesale change in consumer behaviour is hardly occurring. We believe there may be two key reasons.

“First, private label prices are rising at above-market rates, and thus the possible savings for the consumer are lower. Private label is not immune to inflation or commodity costs; just like branded food, private label has needed to increase prices to remain profitable. Thus, while private label remains cheaper overall than branded, the price gap between the two has not widened dramatically.

“Second, while consumers are buying less branded food in retail settings, private label is not the only possible reason for lower volumes. Compared to last year, consumers have more access to food away from home given fewer Covid-19 restrictions. This is obviously a negative for branded food, and it affects private label as well.”

While there is no clear evidence that a shift in behaviour is underway, Kiriakou says we could see a change as the cost-of-living crisis worsens.

“There is still time for consumer behaviour to shift more forcefully. Food at home prices in aggregate in 2022 have risen faster than inflation, and if this trend continues it could eventually lead to more consumers giving up their favourite branded food products.

“But if food prices peak in 2022, there is a fair chance that a private label revolution does not fully arrive. There is some very early evidence that this may come true: after spiking in March due to the Russia-Ukraine War, wheat prices have returned to February levels, though other commodity prices remain high.

“Moreover, management teams at food companies are acknowledging the risk that consumers will feel fatigued with even more price increases which could lead to those companies refocusing on cost management.”

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