Sunday, November 13, 2011

Private Labels

S. Sandhya | Yashwanth | Jitesh Patel| IIMS

Private Labels

"The David vs Goliath story is a true reflection of the often unsurprising power of the underdog when battling a giant. The Private Labels are becoming more and more of a powerful David making a dent into the markets of existing gigantic brands (the Goliath). Reckitt Benckiser recently cut retailer margins and the retail chains including Aditya Birla Retail and Future group stopped stocking R&B products. The retailers are countering Reckitt Benckiser by using Private Labels and are very confident in their plans too. What are Private Labels? What makes Private Labels a force to reckon with? What keeps them ticking? Why are brands getting wary of the Private Labels? We explore the answer to these questions and much more in this cover story...."

Private Labels are brands owned by the retailers themselves. They are often restricted to individual stores or to a particular chain of stores operating under a single company. They are often referred to as store brands or own labels. These Private Labels are growing at an ever increasing pace thanks to rapid expansion of retail chains in India; most of these retail chains have their own Private Label products which are cheaper alternatives to branded products. Some studies estimate that store brands already might be accounting for up to 40% of the shopping basket in some of the developing countries and the growth is outstripping the growth of manufactured brands. They are now the biggest worry on every brand manager’s mind and in India it is only now gathering momentum.
Private labels were introduced as a clever marketing scheme to extend the visibility of the store – when the customer carries home groceries named after the store, every time they use the product, they remember the store too. As the margins set by the store are significantly lower than those set by popular national brands, the perception of the consumer towards the store brand is one of value for money. Soon, the labels grow into solid brands without large scale advertising or marketing activities.
This trend is catching on very fast and most corporates (including the Tatas, RPG Enterprises and the Future Group among others) who wish to tap into the organised retail market have private labels as one of their key strategies. Private labels increase brand loyalty and tap on the extensive in-store marketing that retailers can provide and instead of the 10-12% margin provided by national brands, the retailers gain anywhere between 20-40% on their own labels.
The watch-word among these private brands is value addition. The advantage they have over leading brands is that they have more contact with the customer and consequentially have better knowledge of local tastes and can penetrate niche markets with ease. Food Bazaar’s (part of Future Group) initiative to sell Mustard Kasundi sauce which is native to east India is one such effort which became highly popular. Most stores also have an employee grinding wheat, driving home the point that their flour is “chakki-atta”, freshly packaged to retain the aroma.
The secret of the success of private labels lies in the trust the customers place on the parent chain – Spencer’s Retail was already a household name when they introduced their store label. Most players in this business tend to start off in the un-branded space and then branch out to products which are high-involvement or high-technology oriented because price-conscious consumers are more willing to go for private labels in the case of daily-use commodities than high-involvement products such as in the personal care segment. Simply put, one might take a risk with a dish-wash than with their brand of body-wash. However, once the chain establishes their label as trust-worthy, it is possible to break into the tougher segments too as indicated by Univercell and Croma.
However, this movement isn’t one without challenges – there is the flip side that the profusion of the store brands causes lesser choice among branded items. The problems in the retail market including effective and efficient supply chain management, integrating management with technology and high cost of set-up percolate into the private labels business too. Added to this is the growing awareness that private labels aren’t as cheap as they are often made out to be.
Currently, private labels occupy only 10-12% share in the organized retail sector, which by itself make up only 7-8% in the total $400 Billion retail industry. This under-penetration offers great scope for those who manage to provide a balance of price with quality, convenience, consistency, innovation and enhanced in-store experience. The market penetration of Reliance is 80%, Pantaloons 75% and Shoppers Stop and Spencer’s have a penetration of 20% and 10% respectively.
At the start of the private label revolution, many manufacturers considered it as an avenue to increase revenue. They used excess production capacity to supply to the labels but this only caused a reduction in their brand’s sales, which further increased their excess capacity. By the time manufacturers caught up, the labels were very well established. From 13% of food products in 2005, they grew to 25% in 2008 in the US and are now here to stay. But this intense competition has resulted in one clear winner – the customer. He is now spoilt for choice, spends lesser and enjoys higher quality and benefits from the constant innovation in the retail space.
The reason major brands are wary of private labels is their rapid growth – nearly 40% of Walmart sales and 50% of Tesco’s are through labels. In India, Stop (of Shopper’s Stop) and Fresh and Pure (of Food Bazaar) have become brands of their own right. This has given the retailers greater bargaining power over the manufacturers. Private-label only retailers such as Ikea and Zara make the market more complex and competitive. Manufacturers hit back with their own retail stores such as that of Raymond and online services such as Sangam of Unilever. The downturn contributed to further complications such as preference for private labels due to price sensitivity and then efforts towards price discovery as brands brought down their margins while stores increased theirs.
Major brands such as Britannia, Hindustan Unilever and P&G originally utilized third party manufacturers to outsource part of their production but this strategy back fired as these small companies now had the know-how of production and are now competing against the major players by tying up with new entrants or major retailers. Such was the case with Frito Lays which has trouble due to ITC’s Bingo and Future Group’s Tasty Treat or Britannia against Sunfeast of ITC.
Nearly 36 consumer products including breakfast cereals, detergent, fragrance and packaged tea, household products like cleaners have high penetration of private label brands, according to the Nielsen study which puts their share at 6% of the total retail sales in those stores in late 2010.
The private labels scene in India is still in the nascent stage and as the focus shifts from low price to product differentiation and quality, it could shift to the mature stage as seen in US , UK and the rest of the EU in the next 5 years. Feature differentiation, free samples and increase in Advertising budgets have helped these labels better their perception in the eyes of customers. However major inhibitors are the lack of sophistication in business processes such as management of supply chain and successful implementation of IT as demonstrated by Walmart as well as reluctance to penetrate into the rural segment. Lack of a rural retailing model and infrastructure are often cited as reasons for the same but is a cause of concern as this limits the market to urban areas which are already over-crowded with brands.
Market predictions indicate that there is high potential for private labels in food and groceries, medium potential in clothing and consumer durables and quite low potential in segments such as jewellery, watches and footwear. But retailers are wary about volumes as spiralling inflation brings price hikes with it, which adversely affects private labels. For instance, the increase in cotton prices by nearly 50% might lead to 10-15% hike in prices at Shopper’s Stop and Pantaloon Retail.
The food and apparels segments are of particular interests when looking at private labels – after all the profit margins are generally a lot higher in these sectors with foods at 20% and apparels at 40%.
It is evident that private brands come with their own share of issues, especially in retail scenario like India’s where the market is highly fragmented. The high costs for initial investment, product establishment, promotion, and heavy competition from established brands all paint a bleak picture. Yes, David was small and young. However, he had a sling. And Private labels have higher margins and increasing customer loyalty. The giant was huge, the national brands have higher market shares, are established and rich. The giant was also complacent about David.

Big Bazaar

The private labels of the retailing giant Big Bazaar include Fresh n Pure, DreamLine, Jyro, Pure, Premium Harvest, Tasty Treat, Clean Mate and Care Mate and account for 30% of their total sales in FMCG and 25% in personal care products. From the time Big Bazaar had the run in with Frito Lay and was denied stock of their snack brand, what happened is an indication of the growing power of Private Labels - the only tangible effect was the increase in consumption of the private label Tasty Treat making it the largest selling snack brand with 16% market share. It is disputable whether they might have reached such sales figures if they still stocked Lays... Yes, the power is shifting slowly from the manufacturer and is increasingly aided by private labels.
Big Bazaar aims at a diversified product portfolio with specific lines of niche goods that cater to the local taste, identified through the better contact they have with end users than manufacturers. Thus, apart from cornflakes, cheese, ghee, butter, toothpaste and even diapers, they have entered the niche markets through their community foods brand Ektaa.
Their marketing mix offers an interesting insight into the way they have become this successful - the product is what the customer wants (red rice in Kerala, Basmati in Punjab, Sona Masoori in Hyderabad under Ektaa, poha, community specific pickles and snacks such as khakra are some examples), Promotion is mainly in store, Prices are kept low by lower costs and the distribution includes nearly 300 Stock keeping units and planned supply chain initiatives.
According to Big Bazaar executives, private labels mean a 15% savings in retailer margin, 7% in distributor margin and 5% in marketing costs – this translates to 27% net savings which is transferred to the customer thus ensuring higher sales even in categories without extremely high demand. Marketing efforts involve strategic placement of products next to the main competitor so that visibility is increased and there is an effort to gauge the merits of the private label against the major brand. There is high emphasis on the price aspect, in fact, the labels are distinctly categorised as opening price point labels, promotional labels, trade-up labels and deep-discount labels. Further, there are ads placed at eye-level to the customer and products are sold as a bundle, for instance noodles and sauce in a combined offer – this way it is also easier to get relevant feedback regarding the suitability of the products.
Big Bazaar is aiming for a 60% increase from last year’s 1000 Crore revenue and it can be expected that 25% of their bottom line is met by private labels!

Pantaloon Retail and Shoppers stop

The different approaches in managing private labels can be brought out best by the contrasting styles of Pantaloons (the apparels division) and Shopper’s Stop.
Pantaloons takes an aggressive approach and nearly 80% of their revenues are through private labels – in essence, they are looking at creating a chain like Zara, whose value comes from the unique merchandise, variety and trendiness. They sell 20 different labels and associate certain labels with popular designers to accentuate the perception of uniqueness. They adopt a vertically integrated structure and source from the manufacturer for additional margins.
Expansion plans include upgrading the labels John Miller, Bare, DJ&C, Rig and Ajile into stand-alone brands with their own stores and even retailing them outside the company-owned stores. This is possible with labels that have become hugely popular with the public, have significant volumes and have a distinct identity. It has become a case of private label established through the retailer and eventually maturing into a brand of its own. This gives Pantaloons’ segments such as the Star and Sitara line of beauty products, to be moulded into beauty salons.
Shopper’s stop takes a different route with only 20-25% of their revenues being generated through private labels. In this case, the emphasis is on leveraging the private labels for the higher margins that they provide. Their labels include Kashish, STOP, Life, Mario Zegnoti, Acropolis, Push and Shove, Vettorio Fratini and Elliza Donatein.

1 comment:

forprolificjoy said...

As always, an insightful article by Team Markathon!

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