Understanding the impact of the fast growth of private labels on branded products

Abstract

In today’s economy, as consumers look for ways to save money and squeeze greater value, the relevance of store brands for retail industry players especially retailers and consumers gains prominence. This gains larger prominence in a developing country like India as the international precedent indicates the relative success of private labels in low income countries. On the flip side, this has greater implications for the branded manufacturers who were hitherto grown unchallenged in India for the larger part. In India, the organized retail forms just 3% of the entire retail industry, although it has the highest retail density, by some counts 11 shops per 1000 people, in the world. The organized retail is mainly concentrated in cities and in larger operational formats. Watches as a segment has seen the largest penetration of organized retail while food & grocery has the least presence of the organized retail over the years. On the other hand, food & grocery is the fastest growing segment while watches have grown the least. Of late, most of the existing retail players closed down their loss making stores and/or consolidated their formats to reduce overhead costs, in a bid to augment their profits. Some of the top players include Pantaloon Retail India Ltd, Reliance Retail Ltd, and Spencer’s Retail Ltd and so on. With the evolution of organized retail and increased competition, retailers place their bets on private labels to differentiate themselves and increase their profitability. This impetus on private labels necessitates an understanding of the evolution of private labels across the world and its implication on retail industry players to help draw parallels on its presence & growth in the Indian retail industry. The evolution of private labels across world can be categorized into the following five phases: a) Import, b) Value alternatives, c) Segmentation by price, d) Segmentation by categories and e) Segmentation by brand attributes. Across regions, private label penetration is the highest in Europe followed by North America while in terms of private label growth Emerging markets lead as North American market comes second. The retail industry elsewhere in the world has seen both losses and profitability with the evolution of private labels. The analysis of private labels in the Indian retail industry indicates that the categories that have seen the most of the private labels are food & grocery and apparels and as many as 50% of the retailers have their store brands in the grocery segment. The share of the private label is as high as 90% depending on the range of product segments as well as the retail format for a retailer. Players like Reliance and Pantaloon have private labels in multiple segments. Some of the few Indian private labels are John Miller and STOP in the Apparel segment and Feasters and Fresh & Pure in the Food & grocery segment. In general, private labels increase the industry profitability with new product categories and if positioned to fill customer value-gaps appropriately. For consumers, it provides for good value for money while for retailers helps increase store profits and store equity. But the flip side is that if private labels are positioned as value alternatives, it will reduce the industry profitability. In India, although the private labels have pervaded most of the product categories and segments, the penetration is mainly concentrated on few categories. Even the customers are selective about product categories for purchasing private label products. There has not been much impact of the private labels on branded manufacturers so far, with the judicious choice of product categories and target segments for private labels by retailers. Most of the retailers have stayed away from product categories, so far, that require huge investments in R&D and product innovation. Hence thus far, the story of private labels has been good for the industry growth and profitability. The consumer’s attitude towards private labels is summed up below based on the results of the survey conducted on “atta” in the food & grocery segment. A snake diagram is drawn based on the consumer responses on the various product attributes considered for making a purchase decision. The various attributes considered are a) Quality, b) Freshness, c) Well ground, d) Low content, e) Price, f) Trust, g) Popularity, h) Packaging, i) Variety, and j) Value for money. The brands that are considered for comparison with private labels are a) Annapoorna, b) Aashirwad, c) Pillsbury, and d) Nature Fresh. Of all the parameters, private labels are perceived better mostly in terms of price and value for money alone and fared worst on parameters like packaging and quality. Performing factor analysis showed three broad parameters that influence purchase decision of “atta” as a) Quality, b) Price reasonability and c) Look on the shelf Going forward, as the industry precedent elsewhere dictates, with the increase in revenues and profitability of the retailers, and better understanding of the customers there could be no stopping of the penetration of private labels into other categories. To achieve this, the private label strategies of the retailers shall be as follows: • Fill value gap with better quality private labels contributing to store equity and footfalls • Create new category with informed and intuitive information on consumers • Create new premium brands and enable strategic brand management • And finally negotiate better terms of trade with branded manufacturers on better reach and penetration. The branded manufacturers on the other hand shall • Choose product categories with high perceived-category risk • Creating advantage for their brands. • Focus on an assortment of retail chains or other stores with the best locations to build sales Much is left to be seen, if these players both branded manufacturers and retailers exhibit judicious selection of their target segment and/or product categories. And, of course, at this juncture it is worth mentioning the recent regulation on back-end supply chain management players like Bharti Walmart Pvt Ltd, to supply 50% of their products to mom & pop stores, the impact of this on the sales of FMCG manufacturers is yet to materialize. To conclude, the consumer now plays king calling the cards depending on his preferences: quality, price, and value and so on. But for the time being, there is some respite for the branded manufacturers as the consumers favor quality first, followed by price reasonability as the survey results indicate.