Private Labels: Variety is the Spice of Life - Views on News from Equitymaster

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Private Labels: Variety is the Spice of Life

Mar 7, 2011

Over the past few years, a "private labeling" trend has caught up with the Indian organized retail. Retailers on account of being in direct contact with end consumers are in a better position to understand their needs and desires. They also receive feedback and suggestions from the customers. Instead of passing on such information to the manufacturers, some retailers decided to use it to their own benefit. Thus, the private labels came into being. Private labels refer to the merchandise produced and sold by the retailing companies under their own store names. These may be sold as generic brands with little or no branding or as umbrella brands with multiple categories of products. These private labels are sometimes referred to as own labels, retailer brands or store brands. These provide shoppers more options to choose from and reduce the retailers' dependence on their suppliers.

The story that initially began with only apparels now extends to a large number of product categories. These include accessories, footwear, food and beverages (esp. ready to eat items), detergents, air fresheners among many others. These brands came to the rescue of retailing companies in times of the recent economic uncertainty when buyers were less willing to spend on expensive labels (well known brands).

Apparels

Have you ever come across a person wearing the same shirt as you are wearing? For the female section of the society, nothing could be as depressing as that. Right? This was more common in the past because of the same bouquet of brands being sold at almost all retail outlets. Since the number of branded makes was limited, more and more pieces of the same garments got picked up by consumers. Private labels make up for this by providing more options to choose from and that too at relatively cheaper prices. Trent's Westside is a predominantly private label fashion apparel format.

FMCG

Private labels eliminate a large number of intermediaries in between vendors and consumers. They procure directly from vendors and sell to the ultimate consumers. As a result, the retailers stand to earn a better margin for goods sold. Pantaloon's FMCG private brands contribute 8%-35% to sales in their respective segments. The company has launched "Ektaa" that offers community specific foods across India. More of the Aditya Birla Group has private brands like "Feasters (food category"; Jaan (tea); Kitchen's Promise (pickles).

General merchandise

Pantaloon has a range of offerings in electronics under its private brands "Koryo" and "Sensei". Around 20% of the segment comes from these brands which are retailed through "eZones". Other retailers like Reliance and Aditya Birla Group are also planning products in this space.

Benefits

For Retailers

The main reason for private brands being successful is the ability of retailers to identify the gap between what they sell and what the consumer wants and fill it up by their own merchandise. This helps them in differentiating their product offering from the other competitors and helps in building brand loyalty. It also helps them in negotiating terms with suppliers especially the large FMCG companies and the apparel brands. The retailers get better margin. In times of high inflation and economic uncertainty the retailers selling more of private labels tend to benefit.

For Consumers

For the consumers private labels provide more options than what might have been available earlier. It provides value for money. This is because the retailers who make their own products earn better margin on these, the benefit of which is passed on to the consumers. On an average, private labels offer discounts in the range of 15% to 30% versus the other well known brands.

Challenges

While the benefits of private labels are plenty, there are certain challenges too. Retailers tend to have conflict of interest with brands as they want more shelf space for their products. Marketing of private labels has to be done by retailers to make the target customers aware of their existence. This may prove to be a challenge in terms of cost incurred and innovating strategies. Retailers have to constantly maintain the quality of the products manufactured under private labels. Also, they have to invest more in working capital and the supply chain has to be strengthened.

Global private labels

Worldwide private labels have been doing well and contribute to a major share of total organized sales. In European countries, these make up almost 40% of the sales with volume as high as 53% in Switzerland and 47% in the United Kingdom. Global retailers like Wal-Mart, Tesco and Sainsbury have 40% of their sales from private labels. Wal-Mart's private label "George" is one of the best selling apparel brands in the US. In 2009, Wal-Mart introduced its private labels in India too at Easy Day stores of Bharti Retail Ltd.

The Indian scene

The private label market in India is currently estimated at Rs 13 bn which accounts for 10-12% of organized retail in India. Retailers like Pantaloon, Trent, Shoppers Stop and Spencer's have increased focus on private label retailing. Private labels constitute 90% of Trent's, 80% of Reliance's and 75% of Pantaloon's overall sales. Aditya Birla Retail plans to increase the share of own brands in sales from the present 3% to 10% in the next 2-3 years.

Conclusion

At the end of the day, what drives a consumer to a retail outlet is advertising and promotion done by the big brands. If retailers are not able to resolve their conflicts with the brands, they may be asking for trouble. The share of private labels is likely to increase in India with growing organized retailing. This may lead to further conflicts between both the parties concerned as they both vie for a bigger share of this increasing pie. Having a balanced mix of private labels along with the better known brands is the need of the hour. Be it brands or private labels, what a customer wants is "variety" and "value for money".

Source: Retailers Association of India, India Brand Equity Foundation, Company Annual reports.


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