Competition… at any cost?
So, Heinz has made a bit of a fuss about the growth of private-label or in-house brands in our major supermarkets. According to Fairfax publications, “William Johnson, executive chairman, CEO and president of the $US16.4 billion Pittsburgh-based Heinz, told investors the company has had to rework its strategy in Australia to cope with the growing domination of private label goods and the never-ending discounting on branded goods by the supermarket chains,” with Mr Johnson labelling Australia as the “worst market” to do business. Obviously, Johnson and other national brands should be doing everything they can to try and deal with this growth in supermarket private-label brands. It is in their interests to have as much of their product on the supermarket shelves as possible.
Similarly, the two major grocery chains, who command around 70 per cent of the market, also have every right to do what they like (within the current law) to get people to buy their private label products. By shifting from national brands to private label brands on their shelves, Australian supermarkets increase their (already substantial) control of the distribution chain, by entering into highly-controlled, vertical networks. In doing this, supermarkets are able to increase their profit margins, and force wholesalers and manufacturers into difficult, and often unprofitable agreements.
In terms of whether it is good or bad, like all things, it all depends on how you look at it. There are many perspectives, but as a researcher in consumer behaviour, with an interest in the broader societal impacts of marketing, I would argue that two particular perspectives are worth considering, which can be broadly termed the micro and the macro view.
A micro perspective – consumer behaviour
From a consumer behaviour perspective, one of the arguments arising out of this debate has been that the private labels are “mimicking” the packaging of the national brands, so that they can trick consumers into accidentally buying the private label version. So – the argument goes – I go into the supermarket planning on buying Uncle Toby’s muesli, but grab the Woolworths Select Version, because it looks a bit like the Uncle Toby’s version, and not realise the mistake until I get home. I've been tricked into buying the brand because it looked a bit like it.
While that particular perspective is useful and seems reasonable, the reality is a bit more subtle.
It’s not about consumers making a mistake when they make a choice, it's about consumers feeling okay to make the choice of the in-house or private label brand, because it looks a bit like the national brands. All consumer behaviour is a balancing of the finite processing resources available, and despite what the rationalists might be erroneously thinking (I’m looking at you IPA), people use a whole range of processing shortcuts (we call them heuristics) to help us make a decision.
So, if a package of Woolworths Select muesli looks similar to a pack of Uncle Toby’s or Kellog’s muesli, then it is easier for a consumer to choose it. It sounds silly, I know, but if you think that few of us are pharmacologists, or chefs, then we have to rely on factors other than, say the ingredients, or the materials used, to help us to make a decision. If the product looks (mostly) like the national brand, AND it is cheaper, then it is easier for us to choose it.
This is why we all fall for the French jam trick. If we are trying to make an assessment about which jam to choose, and we want something a little bit special, then many of us are drawn toward the jam that purports or looks like it is a little bit French. If you think about it in a rational way, just because it is made in France doesn’t necessarily make it better, but its “French-ness” imbues it with an aura of quality.
This is exactly what is going on with the growth in premium in-house brands at Coles and Woolworths. For a long time, their Home Brand or Embassy generic labels made good inroads for those who were happy to pay less for products that were perceived to be of lesser quality (although the concept of quality is incredibly subjective and is more about perception – which is pretty much how we make our choices, anyway).
Now I realise that this sounds a bit dismissive of human behaviour, and that many readers would simply say, “… well, that’s just lazy, and its your fault if you make a mistake, and I think about every decision I make, so there!”
But that is the reality of decision-making. We are a product of our finite processing capacity, and also our desire to be as efficient with our time, effort, money, etc., as possible. It requires a lot of work, and our default position is to 1. Operate automatically, 2. Rely on past experience, and 3. Undertake as little effort as possible in our decision-making. So, even if we are provided with good information, it is unlikely we will use it.
When we reach for that muesli, our objective is to exercise minimal effort. We are not conscious of this, and we are not alone. We all do it.
All that Coles and Woolworths are doing is exploiting a basic psychological predisposition.
The question is whether we are okay with that.
A macro perspective - competition
Purists on the competition side predictably say that the growth of private labels is all good.
As former ACCC chairman Bob Baxt said, “the use of private label is just another form of competition. As long as the labelling is not misleading. I don't see anything wrong with private labels, in fact it's another way [in] which companies can compete and thus deliver benefits to consumers.” Like most regulators, Baxt takes a primarily rational view of decision-making; that if consumers are provided with appropriate information, they will make the most appropriate choices.
Another long-term assumption is that if consumers are getting lower prices, they will move toward the lower priced goods, which will force the national brands to change their selling propositions (toward a lower price model). In the end, everyone benefits, because we all get lower prices, businesses become more efficient, and (eventually) consumers are provided with the products that they want.
The pure competition thesis is an appealing one, especially to classical economists, politicians, and lawyers, because, at face value, it says that people should be able to choose how they want to spend their money.
A parallel narrative that tends to go with this, is that in the long run, the market will force industries to become more competitive, through consumer choice. Those that aren’t competitive will simply not survive. And nor should they.
The end point is that the market decides whether an industry or supplier should exist, rather than an arbitrary decision made by a government regulator.
So, if consumers care about a particular industry, they will make a choice to buy particular goods to support that industry, even if those goods are more expensive than the alternative.
At a simplistic level, when cast through an economic "prism", lower prices seem like a great idea. But this approach makes an assumption that we live in a marketplace, rather than a community, and that we are simply consumers, rather than citizens.
Which is where a more philosophical and longer-term approach might be appropriate.
It may sound a little bit idealistic (and perhaps naïve), but I would hope that we are more utility seeking "transactors", and that we should strive to be part of something more than simply lower prices to buy stuff, and satisfying our individual needs and wants.
What makes sense or seems reasonable now – in this case the paradigm of the supremacy of the market, and a drive for competition at all costs – may not make sense as we force more and more industries to the wall through our desperate individual need for lower prices.
At a very practical level, as people lose jobs, and as industries disappear, we may well see a need for more support from government, which will inevitably increase tax burdens, meaning that we have less money to spend on cheaper products.
Another outcome of the desperate race toward cheaper products, is that the creation of cheaper products inevitably leads to poorer quality goods, and businesses taking more risks in production to find those savings. As goods are sourced from places with less stringent control over production, quality and safety is inevitably compromised.
Free marketeers will argue that all this means that those who can afford it should be allowed to spend their money on better quality (and safer) products, if they choose.
Similarly, our desire for lower prices so that we can buy more stuff, also mean that we overconsume, with the resulting impact on the environment, our health, and our global community.
So, there is something missing in this rather simplistic discourse around the market and competition.
As sociologist, Zygmunt Baumann says in his book, Does Ethics Have a Chance in a World of Consumers, “All or most currently held views of reason and good sense tend to be praxeomorphic. They take shape in response to the realities ‘out there’ as seen through the prism of human practice – what humans currently do, know how to do, are trained, groomed and inclined to do.”
Sometimes we have to challenge a particular ideology – in this case, that lower prices and competition is good for everyone – even if we don’t currently have the language or expertise (yet) to articulate exactly what is problematic about it.
The recent growth of the Occupy movement is indicative of unhappiness with the current frame, even if those involved can’t quite articulate what the answer is.
At the moment, we are a product of a discourse built around rationalism, economics, and the individual, and many answers may not fit the current frame. But this focus on the market as the only arbiter has not always been the case, and at some point, beliefs and behaviours (and laws) may shift the balance to an alternative ideological frame.
In the short-term, the discussion is probably going to leave us with more questions than answers.
But we should be okay with that. From my perspective, it is the next step in a more enlightened view of the experience of what it is to be human.