Writing new rules in retailing

Writing new rules in retailing

While scouting through the racks of a departmental store to buy a bottle of pickle, Geeta, a housewife, was in for a big surprise. She came across a vast variety of pickles, with brands ranging from the known MTR, Priya, Ruchi and Mother’s Recipe to what she noticed to be new ones which she had encountered for the first time. The brands bore the name and insignia of the store in which she was shopping and the pickles cost a few notches lower than the known brands. A price conscious consumer that she was, Geeta readily picked up one of the newer pickle cans and realised that this is a familiar case, which is emerging as a major trend in the retail space: “private labels”.

A customer scouts for groceries at one of the More Hypermarket stores in Bangalore. The retail chain has launched its own private label under the ‘More’ name. DH PHOTO/S K DineshPrivate labels are nothing but branded products created by a retail chain and sold only at the outlets of that chain along with other branded products. It is a phenomenon which has taken the retail arena by storm. Though private labels have emerged in the Indian retail space only in the recent years, they are gaining acceptance and are making fast progress due to certain inherent benefits .  

Many reasons

Retail chains across the segment are resorting to launching their own array of private labels in various product categories, such as pre-packed staples, pickles, jams, sauces, breakfast cereal, cheese, packaged rice, toilet-cleaners, liquid soaps, air-fresheners and hair conditioners, to name a few. Many see this advent in the right direction, claiming that it offers value for money.

To attract consumers with lower prices, almost all private labels’ production is outsourced from small and medium units, many of whom, also supply to well-known branded players. Unlike large brands who spend a lot of money on brand promotions, advertising and dealers’ commissions, private labels are promoted only inside the store at the point of purchase, virtually at no extra cost. The Big Bazaar group, however, has got cricketing icon Sachin Tendulkar to promote its private toothpaste brand ‘Sach’, but this is an exception, not a rule. 

In the background of the present economic scenario, where food prices have been rising, SPAR-Hypermarket Senior Vice-President (Food & Supply Chain) Ponnu Subramanian explains, “Private labels offer superior value i.e. these products come at a lower price, but promise quality which is as good as branded ones. For a retailer, it means improved margins and ensures availability of products when branded ones are in short supply.”
This means that when a customer does go shopping to a departmental store to buy a specific product, he is welcomed by an array of labels in that product category, involving big brands and also, those from the retailer itself. Such a scenario allows the customer to make better choices, depending on his need and budget.

Aditya Birla Retail Limited CEO Thomas Varghese says, “Private label business is born from two needs: one for the retailers’ need to offer more value-for-money products to the shoppers and second, the need to make higher margins to cover the costs of the retailer. These two signify the prime reasons for existence of the private label business. In addition, there could be a third objective that is to differentiate from the competition.” Indeed private labels are making sense for the retail chains by garnering a significant amount of revenue and sales. Birla group’s ‘More’ outlets, for instance, earn 19 per cent sales from own brands, while Spar earns 15 per cent. 
 
Retail chains also use different private labels for different product categories. Big Bazaar, India’s largest retail chain with 191 stores across 90 cities, serving millions of customers, sells own staples under ‘Tasty Treat’ and ‘Fresh n Pure’ brands and electronic products under ‘Sensei’ and ‘Koryo’ names. But Spar and More sell all their in-house products with the same name.

Size of the industry

The size of the organised retail play in India accounts for roughly 5 per cent to 6 per cent of the Indian retail market pegged at more than $400 billion which translates approximately to around $20 billion or Rs 1,04,000 crore. Currently, the private labels play a very small role in the organised sector. However, several small manufacturers are emerging as sizeable private label suppliers in a country where modern retail still is taking roots, but is expected to increase at an average of 35-40 per cent a year to reach $70 billion (Rs 3.1 trillion today) in 2015, according to retail consultancy Technopak Advisors Pvt Ltd. The fourth quarter, 2011 BMI India Retail Report forecasts that total retail sales will grow from Rs 19.74 trillion ($411.28 billion) in 2011 to Rs 30.96 trillion ($804.06 billion) by 2015. Organised retail constitutes around 7 per cent of the total retail market size at present. Strong underlying economic growth, population expansion, the increasing wealth of individuals and the rapid construction of organised retail infrastructure are key factors behind the forecast growth.

    As well as an expanding middle and upper class consumer base, there will also be opportunities in India’s tier-II and tier-III cities. The greater availability of personal credit and a growing vehicle ownership providing improved mobility also contribute to a trend of 11.9 per cent annual retail sales growth. Tourism is also a major contributor to the Indian retail sector. Tourist arrivals rose by 8 per cent in 2010 to 5.40 million, from 4.99 million in 2009.

SPAR’s Subramanian adds that nearly all private label offerings from Indian retailers are positioned in the value segment and priced lower compared to branded products.
SPAR started with pre-packed staples i.e. rice, dal and spices, eventually having a fair range of private labels in FMCG food & non-food products, organic vegetables, pre-packed fresh fruits, bakery products and general merchandise.

Today, private labels can be found in almost every retail store and almost every organised retail player is betting big on the ubiquity of private labels. And the fact is that private labels do tend to have their share of customer base.

According to PricewaterhouseCoopers India Executive Director Anand Dixit, “The end customers of private labels are retail giants as well as MNC players. The objective of the private labels is to support the retail industry and the MNC players by managing the bulk of manufacturing operations and helping the retailers and MNCs to concentrate on their core competencies which are primarily on marketing and branding.”

Private labels, hence, focus on managing the operations and supply chain including inventories and cost management. In the West, this industry is matured and often works on thin margins where as in India, they still remain at a nascent stage and are highly fragmented with smaller capacities.

Retailers also use private labels as bargaining chips to earn better commission from large FMCG brands, for whom departmental stores are a major source of revenue. By pushing and promoting own private labels, retailers often try to make large FMCG brands accept favourable business terms.

In a situation wherein the demand for specific products is high, but there is a visible dearth of supply, private labels tend to chip in to cover that gap. “India is highly under-branded. Private brands can drive up consumption by adding more options for the consumer. With our private brands, we plan to address a need gap considering the low penetration of most of the categories in India,” says Future Group President (Food & FMCG) Devendra Chawla.

He adds further, “Private brands create a differentiator for retailers, as these are exclusively available at a particular retail outlet. The objective of private brands is to create different opportunities for the brands and excite consumers leading to increased footfalls in our stores and also increase our margins in categories where we are present.”

Future of private labels

According to KPMG India Partner (Management Consulting) Ramesh Srinivas, “Globally, own label brands contribute to 17 per cent of retail sales with a growth of 5 per cent per annum. International Retailers like Wal-Mart of USA and Tesco of the UK have 40 per cent and 55 per cent of their own label brands represented in their stores, respectively. In India, there is an increasing 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.”

Surely private labels are here to stay as consumers in India are flocking more and more to large format stores. But one thing is certain that private labels will never be able to replace or take away the majority market share of large corporate brands as they spend less on Research & Development and product innovation to create unique and innovative products like their branded peers do.

DH News Service

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