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Private Label: The trump card in the retailer’s profitability toolkit

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Private labels are increasingly becoming the weapon of choice among retailers in their battle for customer loyalty and control of distribution channels. Retailers are enhancing their portfolio to increase margins and provide greater differentiation to their customers.

Private Label: The trump card in the retailer's profitability toolkit
Private labels are increasingly becoming the weapon of choice among retailers in their battle for customer loyalty and control of distribution channels

Lincoln and Thomassen (2008) define private label as ‘brands owned and sold by the retailer and distributed by the retailer.’ Hyman and colleagues (2010) suggest that over 50 per cent of the manufacturers of national brands also make private-label brands to use their excess manufacturing capacity efficiently, while Goldsmith and colleagues (2010) say that 70 percent of national-brand manufacturers compete with copies of their brands in the market. Each private-label brand is sold at only one particular retailer and often under the retail chain name or under a different brand name created by the retailer, making it impossible to directly connect to the original manufacturer. According to Vroegrijk, Gijsbrechts, and Campo (2016), private labels are specifically aimed at protecting the bottom of the market against hard discounters.

In the United States, private labels reported sales of around $125 billion with a share of approximately 18 per cent. Research also indicates that more than 65 per cent of US households consider private labels a good substitute to national brands. Of Walmart’s total sales, 20–25 per cent is from its private labels, with 40 per cent coming from private labels in the food and beverage category. Walmart has increased its private label team to drive sales, innovation, price, and quality as it considers private labels to be among the five key areas for future growth. In a similar vein, private labels for Aldi and Lidl, the German retailers, accounted for around 70 per cent of the company’s sales, which again is proof of the growing acceptance of private labels.

Leading online retailer, Amazon, too, has a significant portfolio of private labels. The company’s Echo speakers account for more than 40 per cent of online speaker sales among top 10 brands in the United States. In India, Amazon’s private labels such as AmazonBasics, Solimo, Myx and Symbol constitute around 5,000 stock-keeping units (SKUs) to its portfolio of 100-million-plus products. The company is preparing to unveil a range of private label products that will take its total tally to 100,000 SKUs. Anticipating great benefits from private labels, Amazon plans to invest around $500 million in the food-retailing segment in India. Online grocery retailers such as Bigbasket and Grofers have also received similar FDI proposals. The Indian online food-and-grocery market is estimated to be around $600 million. It is growing at a compound annual growth rate of more than 70 per cent and is expected to reach $5 billion by 2020.

Growth Drivers for Private Labels

Indian customers have started accepting private labels because of improvements in quality, implementation of high food-safety standards, international look and feel, customized packaging created after customer feedback and the credibility of the retailer. Even as FMCG companies banked on modern retail to drive future growth, private labels owned by retailers such as Bharti Retail, Future Group and Aditya Birla Retail outsold several national brands in the home-care and packaged-food categories as customers picked the best bargain in testing economic conditions. The primary reasons for the growth of private labels in the food and grocery sector are as follows:
– Private labels offer customers convenience.
– Consumers now accept private labels.
– The quality perception of private labels has improved because of minimal differences with national brands across many categories.
– The cost price of private labels is competitive vis-à-vis national brands.
– Trust and loyalty to private labels have increased, driven by everyday value.
– Private labels have low marketing costs and offer higher profit margins for retailers.
– The availability of private labels is better as retailers control the entire supply chain.
– Retailers support their private labels with large in-house marketing activities. Also, retailers give prime locations to their private labels and use banners and pop-ups in online retail.
– Use of predictive analytics helps retailers understand changes in consumer behaviour, which helps them develop and launch new categories of private labels.
– Indian retailers launch private labels customised to regional tastes and offer variants that national brands are unlikely to or cannot create.

Prospects of Private Labels in India

Higher disposable incomes have led to shoppers experimenting with taste and requirements. Perceptions around grocery shopping have changed, and consumers no longer view it as a chore but consider it a pleasurable experience. In the food and apparel segment, private labels are gaining acceptance with customers and growing rapidly. Customers who purchase private labels regularly become loyal to the brand as well as the retailer.

The private-label business in India is still in its nascent stage and accounts for less than 10 per cent of organized retailing. That the number of private label brands offered by major retailers such as the Aditya Birla Group, Bharti Retail, Future Group, Reliance, Spencer’s, etc., across various categories (e.g., food and grocery, health and beauty, electronics, apparel, footwear) and online single-brand retailoring in furniture, grocery, apparels and fashion accessories have increased is proof of acceptance among Indian consumers. Anticipating massive growth and aiming for its private labels to account for 70 per cent of products sold in its retail chains such as Big Bazaar, the Future Group’s consumer packaged goods unit has planned the fortnightly introduction of a new private label. Some researchers believe private labels sales will touch around 20 per cent of total organized retail in India by 2025. The growth of private labels in India and China seems promising, according to a Rabobank report, which estimates the share to be around 28 per cent by 2030.

However, over-reliance on private labels may lead to consumer boredom because of a perceived lack of choices in retail stores. Many retailers, such as the UK-based retail chain Sainsbury, have suffered because of it. When the retail chain tried to sell too many private labels, customers did not find regular brands at its stores, and as a result, sales dropped. Product categories like food and grocery, which may be bought on a daily basis and are of good quality, can draw a premium price from the consumers at the higher end who are not very sensitive to price as compared to the quality. As in international markets, private labels can take up as much as 50 per cent of the shelf space in Indian retail stores, the point at which saturation may occur. If retailers were to increase space for private labels, customers are likely to feel the retailer doesn’t stock enough brands or have many choices on offer.

A look at the analysis of product preferences reveals that most customers opt for national brands when buying electronics, luxury, sanitary and cosmetics goods, but go with private labels when it comes to food and miscellaneous items. Customers who choose private labels do so only after suggestions from those close to them or because the offer is better versus a national brand, whereas those who do not prefer private labels are those not happy with the quality. Customers opt for a particular product primarily based on price and then on quality and availability.

Conclusion

Retailers need to manage and market their private labels carefully to improve their competitive edge. The traditional definition of a private label is evolving, and retailers are increasingly strengthening their private label portfolios. Private labels have managed to enter the mind space of customers, especially in the food and apparel segments, where growth has been rapid and phenomenal. Although, for most private labels, consumers’ buying decision is influenced by the brand, perception, purchase intent, marketing and demographics, when it comes to private-label food products, price is the overriding factor followed by attitude and past purchasing experience. This suggests retailers should persist with their pricing strategy and keep the price of their private label brands lower than national brands. As perceived quality is also an important influencer, retailers should increase the quality of private label brands. Word of mouth and brand-related activities are also big influencers, so retailers should use marketing communication and marketing activities to illustrate and promote private label brands. To penetrate the market, retailers should emphasize on the price-quality aspect and drive the point to consumers that their good quality private-label products come at cheaper prices. To draw in consumers, they should give and distribute free samples of private label brands or promote them through buy-one-get-one offers. Retailers should ensure that the packaging of their private label brands is different from that of national brands.