Grocers who are seeing the next big business opportunity in own brands are launching a slew of private label products to take on national brands.
The last few years have seen Indian retailers resorting to various measures to maintain profitability – the most talked about being developing own brands. These retailers are also planning aggressive growth strategies in terms of innovation, investment and marketing of their private labels (PL) to take on national brands. Industry experts believe that private labels are the retailer’s answer to low fill rates, poor margins, few product offerings, and unfavourable vendor contracts. They also give a big boost to sales and revenues.
Induced into launching them, retailers now position their own brands at par with their national counterparts. In fact, PLs have become universally accepted by consumers seeking value for money product offerings from established retailers. So much so, PLs are now giving established brands tough competition due to their value in terms of choice and pricing – without compromising on quality.
“As companies line up to grab a bigger and better slice of the retail pie, another battle is slowly changing the face of the industry, the one between the manufacturer brands and the private label brands of retail chains, which are far from being just cheap generics,” says Harminder Sahni of Wazir Advisors.
Global retail biggies like Tesco, Carrefour, and Wal Mart have a plethora of private labels across value points, and as they scaled their operations worldwide, their PLs became the actual deal makers. In India, organised players such as Future Group, Spencer’s, Aditya Birla Retail, Bharti Retail, and Reliance Retail have an extensive range of PL offerings across categories in the food and grocery segment. However, the striking part is the emergence of regional retailers, especially the mom and pop stores across the country, who are increasingly adding private labels to their portfolio to woo their loyal customers. In many cases, these retailers are almost at par with organised players, though on a smaller scale in terms of investment and promotion of their private labels.
The growth factors
It all started with retailers wanting to convert buyers of loose products (as they are cheaper than packaged branded varieties) to buyers of packaged products by incurring no extra cost. This also gave the retailers a better bargaining power to negotiate favourable margins from the manufacturers.
Industry experts feel consumers trust an organised player when it comes to selling quality products and that works for them. It originated from the fact that people buy goods from a trusted chosen grocer, who sells them loose as well as packaged products with the assurance of right price and quality. Whatever success that PLs have achieved so far stems from this theory probably.
In most cases, price attractiveness is the real deal maker. Private labels tend to be 5 to 20 percent cheaper than established brands. By cutting out the middlemen, retailers are able to pass on the cost benefit to consumers, and the upside is that not only do they make more profits by selling PLs than the national brands (margins are 60 percent more than what they get from FMCG companies), these labels help differentiate them from their rivals. Today, organised retailers are increasingly leveraging their brand value by introducing top-quality private labels that set them apart from other retailers, and hence considered as a destination store.
According to Ernst & Young, private label share is the highest in the grocery segment. Kishore Biyani owned Future Group generates more than Rs 200 crore in revenues from its private labels. Almost 20 percent of the FMCG business of the Group’s flagship value format, Big Bazaar, comes from its in-house brands such as Cleanmate and Sach. In soups, about 25 percent of sales come from its brand, Tasty Treat. Other leading chains such as Mukesh Ambani’s Reliance Retail and RP Sanjeev Goenka Group’s Spencer’s have long been focusing on private labels.
“On an average, Spencer’s PLs garner double-digit shares in all FMCG sub-categories where they are present. Of course, PL shares are much higher in staples. Shares of PL brands (PLBs) in a sub-category depend on some variables like how many FMCG majors are operating in the sub-category, level of competitive intensity, price wars in the category, whether the profit pool in the sub category is deep enough to enable our PLB to play the role of discounter, economies of scale of manufacturing in the sub-category vis-à-vis the scale of the retailer,” says a Spencer’s spokesperson.
Over 200 stock keeping units (skus) of Walmart’s Great Value are available at its Easy Day stores in India. And one can see a significant presence of Tesco Value brands at the Tata Group’s Star Bazaar. Nearly 22 percent of the merchandise at K Raheja Group’s HyperCity comprises of its own brands.
A Multi-Pronged Strategy
Private labels don’t just work by keeping the products cheap. To maintain the low price index, retailers try to outsource a sizeable chunk of their private labels mainly from small and medium units, who also supply to well-known branded players. Again big brands need to spend a lot of money on brand promotions, advertising, dealer’s commissions, etc, whereas retailers promote their private labels only inside the store, at the point of purchase without incurring any extra cost. Instances like Big Bazaar roping in cricketing legend Sachin Tendulkar to promote its toothpaste brand Sach are very rare. What’s crucial is that private labels should be at par with established brands, but should be cheaper.
The prices of private labels can range from as low as 4-5 percent to as high as 25 percent than that of established brands. Pricing would depend on the sourcing (in most cases it is direct from local vendors) and other overheads such as packaging and branding, if at all. Retailers earn margins upwards of 15 percent from their own brands. Staples such as sugar and groceries can earn them 15 to 25 percent. Most PLs are launched in categories where the brand is not so important to consumers, or to lure customers who want to upgrade from loose products to packaged, or where there are not many branded players in a particular category. So we are seeing almost every organised retailer worth his salt rolling out in-house labels in categories such as staples and cereals.
The type of retail format also determines the percentage of PL sales. In a 2,000 to 3,000 sqft supermarket, PLs can bring in 50 to 90 percent of sales because the retailer has given more shelf space to them. The equation changes in hypermarkets, where retailers have to stock all available brands. “Here, private labels in the same category of flour or groceries can constitute just 20-25 percent of total sales since so many known brands are also there,” informs a supermarket manager.
Spencer’s has three tiered brand architecture for its private brands. The first level is called the generic private brand. This brand defines the opening price point category. It is the lowest price in the market with the right quality. “Trusted Value is the first level OPP Brand offering from Spencer’s. The second level is the national brand equivalent, which offers our shoppers an option to buy a product as good as or better than the national brand in the category, but at a lower price. We have category specific brands like ‘Spencer’s Smart Choice’ for foods, ‘Tasty Wonders’ for snacking, ‘Clean Home’ for household cleaning products, ‘Care & Esentialz’ for OTC and personal care products, and Maroon for general merchandise. We are planning to launch a gourmet food brand shortly which shall be our level 3 brand. It will offer shoppers an option to buy a gourmet product with quality much better than the national brand and as good as an imported gourmet product,” says the spokesperson.
For Star Bazaar, part of the Tata Group-owned Trent Hypermarket, food represents the next big business opportunity when it comes to private labels. The Group has already extended this category with its private label chocolates. Treating this as an extension of its bakery services, confectionary is the new offering under its in-house labels. With almost 32 categories under its PLs, staples and home care remain the largest for this retail chain.
The Spencer’s spokesperson adds, “Many PLBs in the country have managed to create a distinctive positioning for themselves, albeit as value providers. They have distinctive logos and among their shopper catchment they have significant brand equity – which includes high scores in top-of-mind awareness or spontaneous awareness, and associations of good quality that are equal to or better than the national brand, and at much better prices. Significantly, none of the private brands have achieved this through advertising – they are brands created by in-store visibility, trails, and word of mouth publicity.”
Supply and Execution
In fact, sourcing and execution is the most crucial part. According to Ernst & Young, retailers often rely on their suppliers for strategic recommendations and insights. The manufacturer, in turn, gains the advantage of a closer relationship with the retailer and access to the retailer’s shopper experience and insight. But can private label brands compete effectively against the big brands in the long term, given that their owners do not have the budgets for advertising or marketing them? Unlike them, established brands have the bandwidth to sustain brand recall through consistent ads and promotional campaigns. Private label owners claim that their labels speak for themselves – at the store level – where the real buyers are. However, they will have to ensure consistent and timely supply if they want to retain their customers.
Ashish Bhatolia, CEO – Mark Commodities, which contract manufactures staples like a range of flour, pulses, dry fruits, etc, for leading retailers such as Spencer’s, More, Big Bazaar and Bharti Walmart, feels that most of the retail companies use stringent quality norms while manufacturing their PLs. “We have been working with these players and we have found that product wise there is hardly any difference between a private label brand vis a vis a nationalised brand. The quality is same, the only advantage that retailers get is in terms of margins, which are then passed on to the customers,” he says, and adds that retailers are making significant investments in terms of developing their PLBs.
“Retailers are using superior packaging and ensuring quality of all the products they launch. Most of the time they ask us to manufacture products for them. Sometimes, we also offer suggestions on products that could do well in the market. I think it is a mutually benefiting relationship that we share with retailers, and on our part, we generally get good volumes from them,” Bhatolia adds.
Manish Murarka, owner of Mayurank Foods, has been manufacturing PLs for retailers for the past 12 years. “We work with retailers such as Spencer’s, Metro Cash & Carry, Reliance Retail, More, and many others in categories like staples, spices, dry fruits. All these retailers have strict quality control measures and we also have our own team to jointly monitor the standards laid down by them. They are very particular about the quality and almost never compromise on that,” he says.
Murarka informs that most of these retailers have their own pricing strategy, streamlined stock keeping units, and the packaging materials are supplied by them, but the products are packed at his manufacturing units. He feels that retailers are gradually opting for attractive, functional packaging, which stands out on store shelves. Having worked with many retailers, he feels that they have managed to come out of the initial roadblocks, and are more sure about the products they want to launch, the skus, fill rates, etc, and are now getting things right.
Retailers do resort to some sort of direct or indirect marketing of their PLs. While national brands go for 360 degree promotional campaigns, including media and the social network, retailers mostly depend on leaflets and inserts in local newspapers. The maximum communication takes place at the store level because they believe that purchase decisions are taken within the store, where they do their best to influence the customers. Multiple touch points are created within the store through extensive in-store advertising and product placement strategy. They also try to bring in the comparison factor by placing their PLs next to the most expensive competitor, and as it often happens, customers pick up the cheaper (PL) as the quality is guaranteed.
In-store interactions are also crucial. Based on an understanding that Indians like to touch and feel products before buying, Big Bazaar outlets keep open containers of rice, wheat and lentils, and encourage customers to run their hands through the grains and check their quality. The sales personnel at retail stores also interacts with consumers and point out the price difference and quality advantage of PLBs over other brands. Doling out freebies and monitory discounts also help in creating brand recall, and customers keep coming back to a private label owner if there is an ongoing promotional activity at his store.
More Power to Regional Retailers
Even regional players are not lagging behind when it comes to having a distinct private label strategy of their own. According to Luxmi Chand Gada, proprietor of Mumbai-based Society store, it’s a natural progression for all the big mom and pop stores to get organised. “Having our own PL is the natural progression for retailers like us. I feel that unlike large organised players, we have a better understanding of consumer minds regarding what kind of products they prefer, the pack sizes, product variants, etc. We have been servicing our loyal customers for many years and we know their preferences and dislikes more than anybody else. Based on this consumer understanding we have our own private labels in the staples and grocery categories and they are doing very well,” he says.
Gada informs that his store gets 12 to 15 percent of sales from his private labels, and that’s no mean feat considering he has only one store in suburban Mumbai. He feels that having private labels means giving more choice to the consumers. “It’s not only about offering products at a lower price. Consumers today are very quality conscious. So we cannot compromise on quality. What we try to offer is choice in terms of products and skus, and this has paid off. Customers who like our products buy them repeatedly. We also monitor the fill rate and stock accordingly. At the end, it’s a win-win situation for both the parties.”
For his PLs, Gada did not have to invest much. “We have invested in packing machines and some other machines required for producing these products in-house. We started in a small way and as demand is growing, we are prepared to invest more.” He also calls himself a consultant who advises 270-odd similar mom and pop stores who are trying to modernise. “These stores have already done with their in-store modernisation. I have advised them to start their own labels as well because, going forward, PLs will bring significant growth in their top line. They all have the knowledge of their catchment and they should utilise it for developing own brands which will be welcomed by their customers,” he adds. Gada is also planning a common procurement strategy for all his fellow grocers from Andheri to Churchgate.
Tanvi Supermarket, based in Mumbai stocks a large number of PLs in different categories such as cereals, pulses, sweets, snacks, plastic crockery, etc, like any big box retailer. Says Vasant Khemji Patel, Partner at the store, “We have been in this business for several years now. With time we have modernised and we try to give our loyal customers all the facilities that they get at a large-format organised retail store. PLs have become a very crucial part of our product portfolio as through them we are able to give our customers more choices at a better price.”
PL categories are currently giving them roughly 20 percent of their sales, so Khemji has plans for expanding the range. “We are very serious about the PL segment. We have our own facilities and every month we spend more than Rs 30,000 only on labelling. We have already made an investment of Rs 20 lakh to develop our private labels,” he adds.
Manoj Satia, owner of Mumbai-based Direct 2 U, echoes the same sentiment. His PLs in categories such as staples, household cleaning, snacks and savoury earn him 30 to 40 percent of his top line. “We get very good margins and in some categories our own brands are doing much better than other national brands because we have priced them attractively without any compromise on quality,” he says. For instance, his private label tea brand is priced at Rs 250 per kg compared to a national brand priced at Rs 350 to 400 per kg. “The quality is the same and since there is no other cost apart from sourcing and packing, I can pass the benefit to my customers. If they are happy, they make repeat purchases and my margins improve,” he explains.
Satia has elaborate plans to promote his own brands. “Since, we need to give a specific amount of shelf space to national brands, we don’t have the luxury or adequate space to promote our brands. Instead, we run promotional schemes to woo consumers. We also take the help of a visual merchandiser who advises us on eye-catching displays.” For all this, he has invested Rs 5 to 10 lakh on a packaging and manual label machine. “We are running our store for the past 20 years. We believe that we have more knowledge than many organised players about the buying behaviour of consumers, and it’s natural that we use the knowledge in creating our own labels,” he adds.
Satia also highlights the transformation that the mom and pop stores in India are going through. On a micro level, in the past two to three years, more than 2,000 grocers in Mumbai alone have transformed from general to modern trade and their numbers are increasing. “So in future if all of them have their PLs, you can imagine the kind of choices the consumers will have. This will mean more innovation and more competition, which will benefit the industry at large,” says an optimistic Satia.
Expanding Base of PLBs
According to retail consultancy firm Technopak Advisors, modern retail is expected to increase at an average of 35 to 40 percent a year to reach $70 bn by 2015. A booming economy, presence of a large number of young population, increase in per capita income, and rapid infrastructural growth are some of the factors behind this growth forecast. Not to forget the huge aspiring population beyond metros and their increasing consumption which will drive growth to a great extent.
Though PLs constitute a minuscule number in the organised retail sector, the last few years have seen an emergence of a sizeable number of PL suppliers as PL categories continue to enlarge and grow. Almost all private label offerings are positioned in the value segment. In fact, the end-consumers of private labels are retail chains as well as FMCG players. The main objective of a PL supplier is to support both the sectors, so that retailers as well as FMCG companies can focus on their core competencies of marketing and branding. That’s why the emergence of a large number of PL manufacturers is considered to be a boon for the growing PL segment.
Private label suppliers thus focus on managing the operations and supply including inventory and cost management. Globally, this industry is matured and does not hesitate to work on thin margins, but in India it is still nascent, and has small production capacities. Retailers on their part use PLs as a bargaining tool to achieve better commission from FMCG multinationals, who cannot ignore organised retail stores as a major source of revenue. By promoting and aggressively pushing PLs, retailers often make FMCG brands give in to their terms.
In situations of a gap in the demand and supply, private labels tend to fill the gap by giving more options to the consumers. “India is highly under-branded. Private brands can drive 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,” Devendra Chawla, President (Food & FMCG), Future Group said in a media report.
He adds, “Private brands create a differentiator for retailers, as these are exclusively available at a particular retail outlet. The objective of PLs 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.”
According to a recent KPMG report, globally, private label brands contribute 17 percent of the retail sales with a growth of 5 percent per annum. International retailers like Walmart of USA and Tesco of UK have 40 and 55 percent, respectively, of their PL brands represented in their stores. However, both Walmart and Tesco first built scale in their retail business before launching a single PL product. For example, Walmart started in 1961 but introduced its first PL only in 1991. By then they already had immense scale, which allowed them to use economies of scale to add significant value to their PLBs. As Indian retailers build scale, their private label share will also soar. In India, there is an increasing acceptance of private label brands and thus, their penetration is set rise, especially in the apparel, consumer durables, home care and FMCG segments.
According to Ernst & Young, the private brand industry across the world is on a high growth trajectory. In order to capitalise on the trend, retailers in India need to focus on delivering their private label brands profitably, even in the face of rising commodity prices. To remain competitive, they need to build their sourcing capabilities and engage their chosen suppliers more closely by seeking insights and suggestions on consumer preferences and mindset.
So the growing status of private labels is the result of consumers’ acceptance and retailers’ relentless efforts to bring value to their product offerings. In the past few years, retailers have been adding new products and improving quality, and as reward, gaining loyal customers who are making repeat purchases at their stores.
As consumers continue to see value in private labels, manufacturers of established brands will have to increase their advertising spends to support their brands, and resort to strategies other than the usual advertising such as increasing consumer engagement with their brand, gaining in-depth insights on what consumers want, and how they perceive their products, etc. This knowlwdge will equip them better to meet consumers’ need for greater value and affordability.
At present, and in the foreseeable future, low prices of private labels brands is the biggest (and, maybe only) advantage. But retailers will have to deal with the pressure of giving consistent quality too if they want their PLBs to be accepted for the long term.
But will the market for private labels evolve over time or will it phase out? National brand loyalists opine that the trend will phase out as retailers begin to concentrate on their core business of retailing. They feel that retailers should do what they know best (that is, selling), and leave the manufacturing to the FMCG companies.
Though private labels may be attractive in terms of bringing in higher business margins, they cannot compete with national and multinational companies in areas such as R&D, investments, advertising and marketing spends due to lack of funds. In mature markets, retailers have leveraged their brand to launch private labels successfully. In mature markets such as the US and Europe, nearly a quarter of retailers’ sales come from private labels, and the success of their PLs greatly depends on the strength of their retail brand.
In the meanwhile, the customer is being inundated by a slew of national and private label brands in the same product categories, spoiling him for choice like never before.
In India, success will be determined by how Indian retailers build a business model that caters to the needs and budgets of the Indian consumers, and their own capacity to fill in the demand supply gaps by offering a consistent and timely supply of their privale label brands.
Retailers and suppliers are still learning how to operate private labels efficiently. The rising development of private labels indicates that retailers are willing to invest for products with better quality control, lower production costs, and for equal competence with the established brands.