Thursday, September 27, 2007

The power of private labels

When Pepsico’s Frito-Lay decided to boycott Pantaloon’s Food Bazaar due to differences in terms of trade, it was the latter’s private label which got a boost in shares. Today Tasty Treat, the ready-to-eat private label of Food Bazaar, is leading with a 16 per cent share among the rest of the snack brands.

Sadashiv Nayak, CEO, Food Bazaar, Pantaloon Retail, claims, “In the past few months our private brand in the snacks category has been dominant with a 16 per cent share. In fact, the second largest selling snack brand, ITC’s Bingo, is way behind it.”

Today Pantaloon Retail has 80 products comprising 350 SKUs with five private labels. Since Pepsico’s rejection, it has promptly approached local manufacturers such as Prakash Snacks in Indore and Pogo Chips in Kolkata to manufacture its snacks brands. Arvind Chaudhary, CEO (Foods Business), Pantaloon Retail, adds, “The purpose of our private labels is to grow the category and fill the gaps between demand and supply. Today we have upgraded our suppliers with better quality systems and processes for the snacks category, where there was a gap.”

The power of private labels is being explored by most retailers today as they do not want to be at the mercy of the big manufacturers. At the same time they also realise that it’s not going to be easy as it takes time and money to build private labels. Observes K. Radhakrishnan, Chief Executive- Hypermarkets, Reliance Industries, “While it’s our strategic intent is to build private labels, it is more difficult and takes longer to build these brands. However, in categories such as commodities, it is easier to build private labels. At present, nearly 15 per cent of our hypermarket brands comprise private labels.” On the advantages of owing private labels, Hemant Kalbag, Principal, Consumer Industries & Retail Practice, AT Kearney says, “Private labels are generally introduced to get higher gross margins from branded products. Besides, they place the retailer at a competitive advantage over the branded FMCG players who have historically been arrogant with the retailers. It gives the retailers a platform to negotiate with such branded players.” At the same time, in India, there are not enough branded products to fill the retail shelves. Tapping into the lacunae in each category gives retailers a chance to launch their private labels in that space. Take the case of the Spinach brand from Wadhawan Foods Retail which is now exploring private-label ground spices. Claims Dippankar S. Halder, CEO, Wadhawan Food Retail, “Private labels help in bringing in a range by fillings in the gaps in the category. Besides, they also give retailers a chance to bring in unique products that have not been branded before.” Spinach’s private labels in foods comprise 10-12 per cent of the food brands it stocks. “Today we have kirana stores which come in as customers and buy our private labels to sell them at their stores. Branded foods have an assurance of quality, something which is not necessarily available at a kirana store,” says Halder. Pitching its private labels on quality assurance, especially in commodities which have been unbranded, is an opportunity being explored by retailers. TruMart, the supermarket chain of Piramyd Retail Ltd, recently announced the launch of its private label in the grocery segment under the brand name Uttam. Uttam will be available in pulses, cereals, flour, sugar, whole spices, masala powder and dry fruits. Upamanyu Bhattacharya, Chief Executive Officer, TruMart, said, “The launch of Uttam will be an extension of our quality offerings to our loyal customers.”

In fact, branding in commodities is an easier proposition compared to other categories where there may be relatively more brands to stock the shop shelves. Drawing attention to the Indian scenario, Kearney’s Kalbag says, “In India, about 20-30 per cent products are branded. This makes it difficult for retailers to fill up the shop space. Private labels can accomplish that but at the same time they must have a strategic positioning more than merely developing a product.” There are others like Trent from the Tatas who have developed a business model purely on private labels, especially in apparel. “The Tatas through Trent are trying to build a store brand under the Westside label. It all depends on the kind of price the customer is willing to pay. The question is whether a customer is willing to pay the same amount for a private label compared to a well-known brand in the same category. It all depends on the kind of sales and the kind of margins that the retailer can drive in this business,” observes Kalbag.

While store brands have the onus of trying to build their equity, they also have cost advantages (which can help in driving down prices) compared to the rest of the branded players in the respective categories. Pointing out the objective of having a private label, Sophie Joseph, Executive Director, AC Nielsen, says, “One of the reasons is higher margins, but the other objective is to maintain and increase footfalls through the lower-priced offerings at the same, if not higher, quality levels as that of the established brands. The ‘store equity’ in the mind of the consumer decides the fate of the private label. It denotes the trust that a consumer has in the store.”

In the apparel category, sourcing would play a key role in differentiating the products from the rest of the retailers. As Sriram Srinivasan, President & Chief Executive (Apparel), Reliance Industries, says, “It is our sourcing skills which will hold us in good stead in the apparel category. Today we have 50 per cent of private labels in our present stores.” There are others like HyperCity Retail, which has dominated its apparel category with its private labels. According to Andrew Levermore, Chief Executive Officer, HyperCity Retail, “In the case of private labels there are no restrictions on MRP and this makes it profitable for the retailers who in turn can offer better value to its customers. Private labels help retailers in controlling their destiny.” In fact, in the apparel category it is possible for a retailer to have its business entirely driven by its private label. Recently, a multibrand retail chain such as the $1.5-billion Rajan Raheja-promoted Globus Stores Pvt Ltd decided to become a single store label brand under its own name. Discontinuing its previous formats, Globus will now launch smaller stores under its private label. “At present, 90 per cent of the merchandise that we have is under the Globus brand but with time we plan to convert the balance into our private label brand. Globus will be our mother brand,” states Vinay Nadkarni, CEO, Globus Stores. Globus plans to build its brand by roping in a new brand ambassador – Kareena Kapoor. On the new business model, Akshay Raheja, Vice-Chairman, Globus Stores, says, “There are higher margins in private labels but at the same time it is a harder model for retailers. It is going to take additional effort to build the private label business but that is the new business strategy we have decided for our stores.” On the other hand, there are others like Shoppers’ Stop which believe in capping the percentage of private labels in apparel in spite of being one of the pioneers in this concept. Claims B. S. Nagesh, Managing Director, Shoppers’ Stop, “Today almost 20 per cent of the apparel section is driven by our private labels. We may take it up to 25 per cent. While having private labels might be a better business model, our consumers want a choice of at least 4-5 exclusive brand options and that is not going to be possible under private labels.” In the consumer durables category, it is still the known brands in the category which continue to drive the business for retailers. The Tatas-promoted Infiniti Retail, with its Croma stores, is on the threshold of bringing in private labels with caution. Ajit Joshi, CEO & Managing Director, Infiniti Retail admits, “There are plans on the drawing board to bring in our private labels but we are still waiting for infrastructure to improve in this business and this is mainly in the area of after-sales service.” Building equity for a consumer durables brand is based on after-sales services and Croma well realises the importance of this service before it decides to launch its own label in this category. However, Indian retail still has a long way to go before private labels become a successful model. Claims Mehul Maroo of KSA, “In the US, private label in food/FMCG is about 20 per cent by volume and about 15 per cent by value. But in the UK, it’s even higher.” According to him, how strong private labels become in India will depend on several factors. These would be:

The private label product proposition: Quality and price, primarily, relative to branded alternatives

How strong supplier brands are in the minds of Indian consumers: Many supplier brands are relatively new in India, so potentially have less awareness, and therefore, easier for private label products to supplant supplier brand products

How effectively suppliers innovate: Supplier innovation is often what allows them to stay ahead of retailer private label. Innovative suppliers can come out with new products that retailers haven’t necessarily thought of.

How consolidated Indian retail eventually becomes: The more market share a retailer has, the greater the opportunity to create a strong private label offering, and the greater the leverage a retailer can put on a supplier. This may be one reason why the UK has greater PL penetration than the US – UK retail is more consolidated than US retail. Right now, India retail is highly fragmented, so there’s a long way to go, as KSA’s Maroo observes.

No comments: