Lack of retailer sophistication could hamper private label growth

There is lack of supply chain sophistication among Indian retailers. Most retailers still exchange information manually with suppliers. Indian retailers are yet to implement bar-coding techniques properly, let alone sophisticated technologies such as radio frequency identification (RFID). There is also a lack of integrated IT systems, coupled with low overall IT spending. As is evident, Indian retailers have a long way to go before they can be compared with international retailers such as Tesco and Wal-Mart, in terms of technology and supply chain sophistication. Therefore, unless retailers pay attention to these issues, they will be unable to develop successful private label portfolios.

Rural areas unlikely to be tapped by private labels in the near future

While it is widely acknowledged that the ‘real' potential in Indian retail lies in rural areas, the rural retail scenario continues to be unorganised and highly fragmented. While FMCG manufacturers – such as Hindustan Unilever and ITC – continue their efforts to solve the rural ‘retail jigsaw' through projects such as Shakthi and e-Choupal, major retailers have tended to stay away from the rural scene. In light of high access costs due to infrastructure bottlenecks, along with absence of a successful rural retailing model, the above trend is likely to continue in the coming years. Therefore, the Indian private label market is expected to be largely confined to urban areas (metro cities), with some growth also coming from semi-urban areas (tier II towns).

Psyche of the urban Indian consumer is both a hurdle and an opportunity

In an ACNielsen consumer survey in 2005, only 56 per cent Indians agreed that private labels are a good option in comparison with brands – as against four in five consumers in developed countries. Further, the same survey also concluded that a majority of Indian consumers associate private labels with low cost, and are, therefore, apprehensive about compromising on quality. The target segment for organised retail in India is still predominantly urban, and in the context of private labels, it is more inclined towards ‘upwardly mobile' urban consumers. This segment gives high priority to quality, and the ‘budget label' perception does not help at all.

Further, Indian retailers have not been able to develop a bond with consumers. Consumer loyalty has been seen to provide impetus to private label growth in developed countries such as the United Kingdom. The lack of this bonding and loyalty could hamper private label penetration in coming years.

At the same time, though, the Indian consumer's psyche also provides an opportunity for retailers. The Indian urban consumer is price-conscious, but also expects high quality. Private label products could actually fit the bill perfectly. If Indian retailers are able to achieve high quality, while controlling costs, their private labels can successfully meet the demands of the Indian consumer.

Intense competition in Indian retail could provide impetus to private labels

With the entrance of several corporate majors such as Reliance, there is intense store-level competition in the current Indian retail scenario. However, if Indian retailers were to follow the UK model, this could actually turn out to be a boon for private label growth. Major UK retailers such as Sainsbury and Tesco have successfully used private labels to differentiate themselves. This scenario could be replicated in India in the near future.

Private labels likely to exhibit maximum penetration in ‘food and groceries', ‘clothing' and ‘consumer durables' segments

All segments where percentage of organised retail is relatively high, and which are also exhibiting the highest overall growth rates, are most likely to show maximum private label penetration in the near future. The following figure illustrates the findings of a simple analytical model based on the above two assumptions.

All segments where percentage of organised retail is relatively high, and which are also exhibiting the highest overall growth rates, are most likely to show maximum private label penetration in the near future. The following figure illustrates the findings of a simple analytical model based on the above two assumptions.

Figure 3: Private label penetration by category
Of course, this model assumes that the Indian buyer doesn't have any bias towards private labels in any particular category. However, practically speaking, these biases do exist and are, therefore, bound to affect the penetration in certain categories. For example, an ACNielsen consumer survey in end-2005 showed that Indian consumers might not be too comfortable with private labels for products such as baby food, shampoo, etc.