Monday, February 15, 2010

Private Labels: From cheap substitutes to serious competition

Sumit Bedi, IIM B

Private labels are brands owned, merchandised and sold by retailers themselves. These can be categorized into store brands, store sub-brands & umbrella brands. They are also called in-store or own brands. Globally, private labels contribute 17% of retail sales with a growth of 5% per annum. International retailers like Wal-Mart of USA and Tesco of UK have 40% and 55% own label brands representation in their stores respectively. Private label penetration in the United Kingdom is close to 37 per cent currently, and is forecasted to exceed 40 per cent by 2011. In Germany private label has shot up from 12 per cent of sales to 34 per cent over the last decade.

Growth in India
The role of private labels is gaining significance in the developing markets too. In India there is a growing trend towards acceptance of private label brands and thus their penetration is on the rise especially in the apparel, consumer durables, home care and FMCG segments. For instance, Future Group has already tasted the success with its Tasty Treat brand which is just behind Frito Lay in the potato chips segment. Its Care Mate in the baby diaper segment has left behind Huggies in the in-store sales. Experts comment that when it comes to local tastes and preferences, private label brands have an advantage over national brands and this reflects in the increasing percentage share (as shown in the figure) of these goods in Indian retail chains.


Commercial Objectives behind Private Labels

Higher Margins
Private label goods are cheaper to produce than branded goods. Besides, due to the lack of advertising and marketing expenses they provide double advantage to the retailer when it comes to the profit margins. While majority of branded goods provide margins in the range of 6-12%, private label goods can offer margins up to 40%.
Stronger Customer Loyalty
As the private label offerings increase and the quality is assured, a high sense of loyalty is cultivated among its customer base. This customer loyalty is the result of an affinity with the retailer brand which implies that the development of private label brands can tangibly enhance the retailer’s brand itself. So in the long run, the private labels become an important tool for the retailer to establish its positioning and strategically attract the target customers to its outlet. Numerous studies have also shown that private label buyers are more store-loyal and not as easily influenced as brand buyers.

Differentiation
Through private labels, retailers get a chance to bring in unique products in their supply chains that have not been branded before. So if a retailer can cater to the local tastes and preferences of the consumers well by top quality private labels, they can differentiate themselves from other stores and become destination stores. In effect, it’s a win-win situation even for the producers who get a chance to display their produce.


Freedom with Pricing Strategy
A retailer promoting a private label has the added benefit of greater freedom to play with pricing strategies, as a result of which, these are cheaper than brand leaders. For instance, in USA, some private labels are 25 percent cheaper than leading brands. In addition, since it is an own private label, the retailer has the freedom to create a marketing strategy and have more control over stock inventory. This command in all the stages that a product goes through, gives the retailer high flexibility in pricing.

Implications for Indian Retail Marketers
Identify the Needs of Your Customer Base
The private label should provide the required functional as well as emotional attributes and benefits. Keeping in mind that it already has a price advantage, it should take into account the needs that are important to consumers and offer a reliable point of difference. This furthers its promise that has already been informed by the competition, confirming its category membership, but it is clearly not a me-too expression.

Leverage the Consumer Connection
A successful private label has the capacity to strike a chord with consumers in multiple categories of products. Unlike national brands, private labels are offered exclusively through a specific retailer and can easily surpass specific categories because they have a consumer focus rather than a product focus as their brand foundation. These brands instigate trustworthiness and allegiance from their loyal consumers so that the parent store becomes their conscious and obvious retail source for certain categories. Moreover, these categories may be the reason that consumers are initially drawn into the store, but once they get there, the store also has the prospect of encouraging them to spend more on impulse purchases. Therefore, the private labels not only reinforce enduring loyalty and positive feelings for the retail brand, they also enable the retailer to capture a more significant share of the consumers’ mind space and hence, wallet than a national brand.

Communicate at the Point Of Sale
Retailers need to be more cognizant of the significance of the communication with the consumer at the point of sale. They own the canvas that consumers shop on and thus, through store environments, in-store messaging, merchandising systems, and packaging as well as external messaging like circulars, catalogs and advertising in a congruent manner, the retailer is able to create a lasting impression in-store, at shelf and at the time of purchase. Retailers need to make sure that they send out the right message at these interaction points. Moreover, many of these messages do not require revolutionary change for extended periods of time, so they perpetuate a persuasive branded voice and don’t require constant investment from retailers.

Collaborative Category Management
To maximize the efficiencies of product flow throughout the distribution system, a retailer must be aligned with the supplier. The relationship between the retailer and trade should become increasingly about cooperation and lesser about negotiations on price. This will ensure that the category as a whole remains profitable and emotionally appealing to the customer resulting in both private label and branded goods as winners. They can collaborate in understanding and deciding how to optimize the product lines and Stock Keeping Units (SKUs) that will progress the category definition as a whole and determine Plano grams and shelf allocations to rally the greatest degree of category interest and excitement from consumers.

Manage Brand Architecture the Right Way
Brand architecture is a critical consideration for private label marketing. Once the brand proposition solidifies, the brand architecture strategy enables decision makers to promote this promise at the store level in order to stimulate a sense of familiarity, recognition and trust. Private labels have broader set of aisles than national brands making it all the more important to differentiate their attributes and benefits on an aisle; category and product basis. So the implication for the retailer is to strike the right balance of similarities and differences with brand messaging and offerings.

The growth of private labels in the Indian retail industry is inevitable but retailers do need to keep a few things in mind. Promotion of own label and allocation of large shelf space at the expense of well-marketed national brands can depress the overall size and value of the category. On the other hand, joining hands with them and following principles of category management can create a win-win situation for both.

Retailers need to realize the importance of consistent brand message and should ensure that the product quality backs it well. Moreover, when used as an umbrella brand, the brand portfolio should be managed properly as to avoid any negative impact on the store brand. To conclude it is quite evident that as the Indian retail industry consolidates over next decade, retailers will look to differentiate among themselves and private labels will form a highly significant part of their strategies.

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