House Brand: Why purchasing them equates to feeding the monster

Essay by meteors August 2008

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Over the last few months of rising prices occurring worldwide and more importantly for the readers; in Singapore, the men in white have been churning out 'explanations' as to how they are attempting to keep the prices for the average consumer at tolerable levels or rather, levels at which they perceive to be tolerable. They have rejected the notion of subsidies as 'unsustainable' and would 'put people on welfare mentality' which would result in higher taxes from the masses to sustain such a programme despite having the country's huge reserves pointed out to them. Likewise, they have rejected calls to raise salaries to similarly enable the average consumer to afford his previous standard of living. The reason given which has the stench of absurdity was that it would lead to an upward wage-price spiral.

Nonetheless, I digress. Leave the discussion of their reasoning to another thread. Instead, I would like to bring to the attention of readers the suggestions or rather advice which they dole out to the masses to survive the price hikes.

The main methods suggested would be to 'go cheap'. Buy Frozen meat instead of chilled meat; buy cheap brands which of course usually means house brands. Might I stress that I doubt that such inane comments are worth their salaries.

I shall focus on the issue of house brands which for the uninformed are those items seen sitting on supermarket shelves with the supermarket's logo slapped onto its packaging. These products are often touted as being cheaper than other so called 'branded' goods which come with its manufacturer's label on it. These products (house brands) were in the past associated with lower quality and being inferior in comparison 'branded' goods and were less widely adopted; at least by the middle class. However with the constant upward spiral in regard to prices witnessed in recent months, I have been getting an impression of which more of such house brands are being consumed by average consumers and the demand for such cheaper items have been fulfilled by supermarkets filling their shelves with them. It is striking to glance over the chilled shelves filled with chilled poultry in NTUC Fairprice and to find them filled with Pasar labeled plastic bags.

I wish to highlight the negative trend of such consumption patterns and hope that consumers will keep them in mind during trips to the supermarket.

Firstly, a brief background on the nature of house brands which the reader might not be aware of - House brands are usually and in the case of Singapore's supermarkets almost exclusively not manufactured by the supermarket at all. The supermarket acts as a retailer and not a manufacturer. It sources for manufacturers of more commonly consumed products such as pepper powder, rice grains, bread, Milk ...etc. Do note the simplicity of the manufacturing of such items and the lack of relatively more complex consumables which arrive in a package with the supermarket's label on it. Such searches result in any interested manufacturer quoting their prices to the supermarket chain and a comparison being performed to determine the wining quote. The supermarket chain assuredly has a large number of offers due to its wide reach and ability to sell products on a massive scale unlike 'mom and pop' shops. The supermarket will more often then not choose the cheapest offer to be their house brand and the contract with the manufacturer usually has the manufacturer doing all the work including the packaging before shipping it to the supermarket's warehouse and subsequently landing on their shelves.

The question, 'Why is it possible for the manufacturer sell their goods at a lower price to a supermarket chain?' could be asked. The reasons are simple. Bulk and lower quality.

This brings us to a hypothetical problem – that of house brands competing against 'branded' items. The problem lies in the way these house brands are sold. This is accomplished by placing the house brand items on the shelves beside those of 'branded' items. In a possible situation, consumer comparing a house brand bottle of pepper and a 'branded' bottle of pepper may perceive that the contents are identical. After all, both bottles may state its contents to be '50% pepper'. However, the factor of quality is not so readily apparent. The pepper seeds could have come from a different source, have been processed differently and have a different brand reputation (or lack thereof) to live up to. Terms on the items such 50% pepper are difficult to verify as the other 50% is ground rice; Thai fragrant rice covers a huge quality spectrum.

Such consumer behaviour will cause a concern especially to smaller manufacturers of such relatively simple goods which could happen to be local SMEs with small scale factory units. They might attempt to compete with house brands on the factor of price but it would be quite impossible to do so. The supermarket sells both their house brand and 'branded' ones and any attempt to undercut the house brand can simply be countered by putting pressure on their contract manufacturer who is desperate to maintain his relatively lucrative contract or perhaps desires to have it renewed for another period of time. To cut his own costs, he could sacrifice some of his margins or he could cut his quality or manpower costs to satiate the supermarket chain's desire for a lower priced product. In all likeliness, the contract manufacturer would prefer to preserve his current margins and would choose to cut his quality and manpower utilised in the manufacturing of his product. Note that this is not an improvement of efficiency or a better manufacturing process being developed. The manufacturer may in the case of pepper products, source for inferior quality pepper, attempt to process the raw materials in a shorter amount of time, cut down staff strength and in the case of '50% pepper', add more rice powder than stated as such behaviour would be quite unverifiable. After all, if the contract manufacturer is unable to meet the price point desired by the supermarket chain, it can simply ask for offers from other manufacturers and switch to them; retaining the packaging and approximately similar looking contents. The consumer would not able to discern if what he purchased before is an indication of how the brand's quality is expected to be.

Thus, a house brand can always out compete a branded item so long as there are multiple manufacturers for approximately the same product. This might seem as a win for consumers as the house brand drives the prices of an item down – at least that is what it seems on the surface. Scratch a little deeper and you'll find that they drive the quality of items down; both of the house brand and that of competing 'branded' products. It is after all a vicious downward spiral to the bottom.

Would you as a consumer want a day when there are no more competing brands and a walk in the supermarket would mean navigating shelves containing something labelled 'rice', 'bread', 'milk' – generic products whose quality is suspect as the supermarket does not have to bother about increasing the quality of their products and even worse, might try to fatten their margins due to a lack of competition? Smaller manufacturers will close down and larger brands would have a tough time competing as their retailers compete directly against them. Product variety will suffer. The supermarkets care little. After all, they have better margins on house brands then on 'branded' items which they carry. [1] The money will be concentrated in the hands of fewer people.

In the short term it might seem as if consumers will gain from the rising number of house brand items. But in the long run, they lose.

Do not feed the monster. If it gets too big, it'll eat you too.

[1] Paragraph 3, Wikipedia 2008, to copy and reproduce.

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