More Choices in Store: India’s Retailers Are Stocking Up on Private Label Brands

If you are in Chennai and in the mood for some authentic kasundi with your fish, you may be out of luck. The pungent mustard paste is part of the culinary tradition of West Bengal and is not commonly available outside the state. None of the big, pan-India food companies sells it. Supermarket chain Food Bazaar, which is part of India’s largest listed retailer, Pantaloon Retail, introduced Tasty Treat kasundi some years ago as a private label — or store brand — offering. But you won’t find it on shelves across all 119 Food Bazaar stores, only in markets with significant Bengali populations. Similarly, you are not likely to come across Tasty Treat khakra and thepla, traditional savory snacks from the western state of Gujarat, in Food Bazaar outlets in north India. “The product mix varies significantly depending on local tastes and preferences,” says Santosh Desai, CEO of Future Brands, which is responsible for private label development for the Future Group, including its flagship Pantaloon Retail. “Unlike national brands where such differences are muted, with private labels, customizing your offering is critical.”

Private labels weren’t always taken so seriously; in the past, they were considered cheap, no-name substitutes for “real” brands — cheap in terms of price as well as quality. They were found mainly in generic products such as detergent and toilet paper, and staples such as rice and sugar. While many consumers bought stores’ own brands, which usually sold at a substantial discount to national brands, they didn’t often acknowledge it. For the retailer, the private label was one more way to earn a little extra. As quality improved, though, customers became more accepting, and retailers began to change their attitudes.

Not only are private brands now found across a spectrum of products — from groceries and staples to apparel, consumer electronics and mobile handsets — they are considered brands in their own right. The fundamental reason for the success of private labels is their price advantage, made possible by their nonexistent or very limited spending on product development and brand promotion. The bulk of the products are reverse-engineered copies of category leaders and they are promoted within the store, not advertised outside. Their value still resonates with customers, but it is no longer the only reason private labels are finding their way into more homes.

In India, the growth of store brands is a function of increasing retail sophistication. Large-format, modern retail stores (known as the “organized” retail sector) — as opposed to smaller, traditional “mom and pop” stand-alone stores — are presently only a small portion of total retail in the country. A report by investment bank Northbridge Capital, titled “Indian Retail Research 2009,” estimates the total Indian retail market at US$450 billion, growing more than 30% a year and expected to cross US$720 billion in 2011. Of this, organized retail accounts for just 14%, or US$63 billion — although this sector is expected to grow 40% faster than the overall market to reach US$90 billion in 2010.

Harish Bijoor, CEO of Harish Bijoor Consults and a visiting faculty member at the Indian School of Business, Hyderabad, wonders whether the definition of “private label” should include single-store labels as well. “If it does, then private label’s share [of the retail market] becomes quite large. Many small businesses in the unorganized sector do stick their stores’ name on the products they sell.”

Why Private Labels Matter

Private labels matter for several reasons, the most important of which is their higher margins. For retailers, gross margins on private labels are, on average, 25% to 30% higher than on those of manufacturer brands. In consumer products especially, retailers’ margins on national brands are in the 12% to 17% range, which is not enough to offset the cost of modern trade overhead. With a house brand, the margin can be upward of 40%, points out Pankaj Gupta, head of the consumer and retail practice at management consultancy Tata Strategic Management Group. “From the retailers’ point of view, the urgency is obviously because of margin play.”

The introduction of a store label also gives the retailer greater leverage with manufacturer margins and an increased ability to ride out business cycles, because the retailer has more leeway in pricing, marketing strategies and long-term planning.

Retailers view manufacturer brands as little more than commodities that can be easily procured from any outlet. Store brands, then, help retailers differentiate themselves. “As these products are unique to our stores, we benefit [from] the increase in [consumer visits] and overall sales,” says Gunender Kapur, president and chief executive of Reliance Retail. If a store brand becomes popular enough to become a destination brand, it has implications for customer loyalty and profitability. “If a customer remains loyal to the store but switches brands, that works for the retailer,” says Avinash Mulky, professor of marketing at the Indian Institute of Management, Bangalore.

To some extent, the market for private labels will grow on its own. “The more consolidation there is in retail trade, the greater the growth of private labels,” notes Nirmalya Kumar, director of the Center for Marketing and co-director of the Aditya Birla India Center at the London Business School. According to a September 2009 report by PricewaterhouseCoopers on the outlook for the retail and consumer products sector, retailers across Asia — and particularly in India — report a strong increase in the sale of private label goods. “India may be Asia’s most receptive market for private label goods. Today, private labels account for 10% to 12% of the retail market there, and leading brands are far less dominant than in other countries.”

Even the economic downturn has not damped that enthusiasm. In fact, private label sales typically increase during a recession as cost-conscious consumers trade down from branded products. While brands tend to return to favor when the economy recovers, the correction isn’t to the same degree, Kumar says. “There is a permanent positive effect.”

Others echo that thought. “As consumers learn about the improved quality of private labels in recessions, a significant proportion of them are likely to remain loyal to private labels, even after the necessity to economize on purchases is no longer required,” says a March 2009 KPMG report titled, “Indian Retail: Time to Change Lanes.”

Adding Value

Retailers in India are spurring consumers’ decision-making by expanding the scope of private labels. In the book Private Label Strategy: How to Meet the Store Brand Challenge, which he co-authored with Jan-Benedict E.M. Steenkamp, Kumar writes: “To be successful with private labels, retailers must remember when private labels add value. They should ‘fill a void in the category’ either in price or in value.” That happens in three cases, according to Kumar and Steenkamp: where a copycat product offers consumers a choice even if prices are similar; where the market can be expanded by offering similar-quality products at significantly lower costs; and where innovative products that are not available through national brands are launched.

All three scenarios have been part of the Indian experience. For instance, most store brands in mass categories such as processed foods, personal care and home care are “me-too” products. (Interestingly, brands in grocery items are a more recent phenomenon for both retailers and national manufacturers: Traditionally, staples in India are purchased either in bulk from a wholesaler or loose from the neighborhood store.) The Tasty Treat label took off after a disagreement over margins a year ago between the Future Group and Frito-Lay. The snack company temporarily broke ties with the retailer, and Food Bazaar promptly stocked its shelves with Tasty Treat potato chips and a rival brand, ITC’s Bingo. The result: The homegrown chip brand raced ahead. “The Tasty Treat brand outsells better-known brands in many products, and we don’t advertise,” says Future Brands’ Desai.

Kapur of Reliance Retail notes that his company’s multiple-format stores stock private labels in categories including processed foods, staples, personal and home care, and even dairy and beverages. “The prices are 10% to 40% lower vis-à-vis similar branded products, while the quality is consistently very good. The share of private labels continues to grow as more and more customers are discovering the value and great quality.” The introduction of own-label mobile handsets by telecom retailers such as The Mobile Store, HotSpot and Univercell similarly falls in the second category of value creation by private labels. “There may be customers down the value chain who currently buy traded-in phones who would be happy to upgrade to a new, branded, reasonably priced instrument that is feature-rich and comes with a warranty for after-sales service,” says TSMG’s Gupta.

The third category — offering a product not available from name brands — is perhaps the most sophisticated way private labels can create value. This was probably the first step taken by organized retailers seeking to launch private labels in India. Store brands in apparel were introduced along with the first Western-style department stores and hypermarkets. When Shoppers Stop launched the STOP brand of Indian wear in the early 1990s, it was the first branded ethnic women’s wear range. “Branded merchandise was not available, so retailers had to start their own labels,” Kumar notes. Similarly, consumer electronics products have been available for some years through most retailers as big international brands or smaller national/regional brands. But Ajit Joshi, CEO and managing director at Infiniti Retail, the Tata group company that runs the Croma chain of electronics stores, says that “innovative products encourage early trials and are therefore interesting for private labels to explore and be present in.” More than the usual laptops and toasters, the “Handpicked by Croma” brand is drawing attention because of its introduction of products including wine coolers, jewelry cleaners and binoculars.

Store brands in high-involvement categories such as consumer electronics seem contrary to conventional wisdom. “Indian consumers can be aggressively brand-conscious, especially when it comes to durables,” Bijoor says. “The brand is seen as a guarantee of quality and also has flaunt appeal.” Joshi notes that in electronics, private labels have “higher acceptance in products and categories that have low brand preference and high functional appeal. In categories that are predominantly driven by leading brands, it is a challenge to get visibility and conversions. Penetration in brand-neutral categories like peripherals and accessories is easier. We have a fair presence in the small appliance and IT category, both of which allow us the flexibility to offer technologically superior products at high perceived value.”

‘Just Another Brand’

By that logic, do private brands lend themselves to any particular category of product? “For most consumers, a private label is just another brand. Hence, the categories where consumers have less loyalty to better-known or promoted brands are the categories where retailers should try to push private labels,” says Harminder Sahni, managing director of retail consultancy Wazir. Commoditized items with low levels of product innovation and emotional involvement from the consumer, then, are ideal candidates to become store brands. But given the regional variations in India, there is tremendous scope for customization even here. Kasundi and thepla are cases in point, but Desai also cites a to-be-launched staples brand that is a “highly localized effort,” with even the variety of wheat differing from region to region.

How do private labels get potential customers’ attention? For starters, they advertise — but not for all brands, not at the same scale as national brands, and, often, not in the same media. Unlike national brands, which may opt for 360-degree campaigns using television, radio, print and online media, retailer brands typically rely on local advertising avenues such as radio, leaflets and newspaper inserts.

The bulk of the communication, though, happens at the store level. That’s because most retailers accept that 80% of purchase decisions are made at the store shelf, and the store is where they have maximum control. Thus, most retailers work on creating multiple touch points within the store, through extensive in-store advertising and placement strategy. “Private labels benefit most by comparisons, so retailers will try to drive sales, for instance, by strategic positioning of the product next to the most expensive competitor,” says Bijoor.

In-store interactions also have an important role. The traditional Indian shopper prefers to touch and smell food grains before buying. Working on that insight, Food Bazaar outlets display open containers of rice, wheat and lentils to encourage customers to run their hands through the grains and check the quality. Similarly, grinding mills installed inside many outlets reassure customers that the flour they are buying is fresh — and fresher than the national brands.

Retail stores’ sales personnel also play a role, especially when communicating the store brand’s advantages. The price angle is rarely the focus of the sales pitch. Instead, the emphasis is on how the house brand is superior or similar in quality to the leading brand. Most retailers in India source their private label products from “contract” manufacturers. The KPMG report points out that “[in] India, very few players are into manufacturing of private labels and are very dependent on third parties. For example, Vishal Retail is increasingly shifting from manufacturing to third-party sourcing primarily because of increase in categories for private labeling and volumes.” Importantly, big brands often source from similar third-party suppliers, a move that has implications for the retailer. Not only do margins increase, the quality of the private label product is likely to be closely matched with the national brand. For consumers who are sitting on the fence, that argument is often the clincher, retailers say.

Who Loses Market Share

Despite the activity surrounding private brands, Indian retailers recognize that it is highly unlikely that a private label will unseat the number-one player in any category. In fact, the conventional wisdom is that when a private label enters a category, it is more likely to take away market share from the brands in second and third place. “Private label products typically offer a wider choice to the consumer and should not replace leading category brands that help set consumer expectations,” Joshi says.

Most retailers are aiming for about 50% revenue from their own labels, though there are exceptions. Pantaloon, the Future Group’s apparel store, has an own-brand ratio of more than 80%, while the ratio is even higher for Trent’s Westside stores. Consultants advise against tilting too much in favor of private brands. If manufacturer brands decide to walk out and the in-store variety is compromised as a result, customers may follow.

Manufacturer brands react to the influx of private labels with understandable wariness, especially during the launch phase of a store brand, when its nuisance value is still to be evaluated. If the retail label looks to be successful, the retailer’s bargaining power increases. An addition to the product portfolio means greater competition for the retailer’s limited shelf space. The result? Better margins for the retailer and more promotional offers for the customer. At the extreme, if too many players occupy a category, the retailer may opt for brand rationalization and do away with the nonperformers.

Retailers aren’t tough only with manufacturer brands. They are equally uncompromising when it comes to evaluating the performance of their own brands. Barely a month after launch, Mela — a home furnishings brand — was overhauled after Future Group chief Kishore Biyani decided it wasn’t working in the existing format. Another in-house brand, Fashion Station, has been phased out on similar grounds. “If you are in the business of retail, your religion is making money for every square foot,” Desai notes. “Building brands comes only after store-level efficiencies are achieved.”

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