Monday, February 15, 2010

Private Labels : From Cheap Substitues to Serious Competition

Here's the full version of an article of mine that got published in the February Issue of Markathon - Marketing Magazine of IIM Shillong.
For quite long, executives have dismissed private labels as inferior products and focused exclusively on the competing manufacturer brands. Most of the manufacturers, for a fact, benchmarked only against other manufacturer brands, and not against private labels. It seems that it didn’t occur to them that they compete with private labels too!
The following article talks about the growth of private labels in developed retail markets, their impact on the Indian organized retail segment over last few years and the resulting implications for the Indian retail marketers.

Private labels are brands owned, merchandised and sold by retailers themselves. These can be categorized into store brands, store sub-brands &Umbrella brands. They are also called in-store or own brands. Private labels are unique to a particular retailer and they can be divided into a number of categories where the retailer’s name is evident on packaging. From apparel, healthcare products and furnishings to consumer items, they are making their presence felt in a variety of retail items in the country.
Globally, private labels contribute 17% of retail sales with a growth of 5% per annum. International retailers like Wal-Mart of USA and Tesco of UK have 40% and 55% own label brands representation in their stores, respectively. Private label penetration in the United Kingdom is close to 37 per cent currently, and is forecast to exceed 40 per cent by 2011. In Germany private label has shot up from 12 per cent of sales to 34 per cent over the last decade. And apart from the multi-brand retail stores, a category of retailers like Ikea, Toys ‘R’ Us, Zara has also been created who sell only private label brands.

Growth in India
And now, the role of private labels is gaining significance in the developing markets too. In India there is a growing trend towards acceptance of private label brands and thus their penetration is on the rise especially in the apparel, consumer durables, home care and FMCG segments. India is still an under-branded country and in each category there is still a lot of scope for growth, this is where the private label comes in and the story is looking good so far. For instance, Future Group has already tasted the success with its Tasty Treat brand which is just behind Frito Lay in the potato chips segment. Its Care Mate in the baby diaper segment has left behind Huggies in the in-store sales. At Spencers, diapers and agarbattis sell more than market leaders across the store chain.
Experts comment that when it comes to local tastes and preferences, private label brands have an advantage over national brands and this reflects in the increasing percentage share of these goods in Indian retail chains. As the figure 1 shows, among the major Indian players, the degree of private label penetration is the highest in Trent with 90 per cent, followed by Reliance Retail (80 per cent) & Pantaloon (75 per cent).

Commercial Objectives behind launching Private Labels
There are certain objectives that a retailer has in mind before getting into private label goods. Figure 2 lists the benefits that a retailer expects from the in-store brands.

Higher Margins
Private label goods are cheaper to produce than branded goods. Besides, due to the lack of advertising and marketing expenses they provide double advantage to the retailer when it comes to the profit margins. While majority of branded goods provide margins in the range of 6-12%, private label goods can offer margins up to 40% . Not only they give a higher margin to the retailers, private labels have also changed the balance of power between brand manufacturers and retailers, giving the latter a decided advantage when negotiating terms with the brand manufacturers.

Stronger Customer Loyalty
As the private label offerings increase and the quality is assured, a high sense of loyalty is cultivated among its customer base. This customer loyalty is the result of an affinity with the retailer brand which implies that the development of private label brands can tangibly enhance the retailer’s brand itself. So in the long run, the private labels become an important tool for the retailer to establish its positioning and strategically attract the target customers to its outlet. Numerous studies have also shown that private label buyers are more store-loyal and not as easily influenced as brand buyers.

Through private labels, retailers get a chance to bring in unique products in their supply chains that have not been branded before. So if a retailer can cater to the local tastes and preferences of the consumers well by top quality private labels then they can differentiate themselves from other stores and become destination stores. In effect, it’s a win-win situation even for the producers who get a chance to display their produce.

Freedom with Pricing Strategy
A retailer promoting a private label has the added benefit of greater freedom to play with pricing strategies, as a result of which these are overall cheaper than brand leaders. For instance, in USA, some private labels are 25 percent cheaper than leading brands . In addition, since it is an own private label, the retailer has the freedom to create its own marketing strategy and have more control over its stock inventory. This command of all the stages that a product goes through, gives the retailer high flexibility in pricing.

Positioning during economic downturns
The growth of private labels is likely to continue in the current financial environment as cash-strapped consumers' perception of the products as a cheaper option changes. The price advantage of private labels leads to the belief that these score in times of economic meltdown, and further that this newly-acquired market share is maintained even as the recession swings out. Even after the economy bounces back, consumers will naturally gravitate towards products marked at lower prices yet offering the same quality, especially where the retail name is a trusted national or regional player.

Private Label Maturity Curve
The share of private labels is related to the level of retailer sophistication and concentration in the country. In economies where retail is more consolidated, private label shares are both higher and expected to grow faster. However, the Indian retail industry is highly fragmented at the moment and organized retail is in its nascent phase presently with contribution of about 5% to the whole market . In this stage, the private labels that are launched play mostly the price game to compete with the branded products. At this stage, most private labels which have acceptance are at the bottom of the pyramid of retail products. However, as the retailers mature and gain experience they want to move up the pyramid where realizations are higher. As figure 3 depicts, over a period of time as the market matures, the retailers shift their focus from price to product quality which leads them to a stage where they can launch their own brands in the premium category expecting to capture the brand equity and the customer loyalty built over years of good service. The consumers too, at this point, have enough trust and confidence to accept premium products from the retailer.

Implications for Indian Retail Marketers

Identify the needs of your customer base
The private label should provide the required functional as well as emotional attributes and benefits. Keeping in mind that it already has a price advantage, this ensures that it takes into account needs that are important to consumers and hence, offers a reliable point of difference from other category players. By offering a differentiated value proposition, a private label utilizes the approach that national brands use to arrive at a holistic benefit proposition rather than the specific positioning they use. This furthers its promise that has been already informed by the competition, confirming its category membership, but is clearly not a me-too expression. It is also successful as it demonstrates a commitment to offer consumers multiple choices and varieties with distinct attributes, benefits and price points.

Leverage the Consumer Connection
A successful private label has the ability to own the consumer connection and has the capacity to strike a chord with consumers in multiple categories of products. Unlike national brands, private labels are offered exclusively through a specific retailer and can easily surpass specific categories because they have a consumer focus rather than a product focus as their brand foundation. These brands instigate trustworthiness and allegiance from their loyal consumers that the parent store becomes their conscious and obvious retail source for certain categories. Moreover, these categories may be the reason that consumers are initially drawn into the store, but once they get there, the store also has the prospect of encouraging them to spend more on impulse purchases. Therefore, the private labels not only reinforce enduring loyalty and positive feelings for the retail brand, they also enable the retailer to capture a more significant share of the consumers’ heart, wallet, mind space and lifestyle than a national brand.

Communicate at the Point Of Sale
Retailers need to be more cognizant of the significance of the communication with the consumer at the point of sale. They own the canvas consumers shop on and thus, through store environments, in-store messaging (like signage), merchandising systems, and packaging as well as external messaging like circulars, catalogs and advertising in a congruent manner, the retailer is able to create a lasting impression in-store, at shelf, at the time of purchase and during usage. Retailers need to make sure that they send out the right message at these interaction points. Moreover, many of these messages do not require revolutionary change for extended periods of time, so they perpetuate a persuasive branded voice and don’t require constant investment from the retailer.

Collaborative category management
Category management is instrumental for a retailer to realize its own-brand goals and aspirations. To maximize the efficiencies of product flow throughout the distribution system, a retailer must be aligned with the supplier. The relationship between the retailer and trade should become increasingly about cooperation and lesser about the retailer negotiating with the manufacturer or supplier on price. By joining hands, they can strengthen their trade relationships and ensure that the category as a whole remains profitable and emotionally appealing to the customer resulting in both private label and branded goods as winners. They can collaborate in understanding and deciding how to optimize the product lines and Stock Keeping Units (SKUs) that will progress the category definition as a whole and determine planograms and shelf allocations to rally the greatest degree of category interest and excitement from consumers.

Manage Brand Architecture the right way
Brand architecture is a critical consideration for private label marketing. Once the brand proposition solidifies, the brand architecture strategy enables decision makers to promote this promise at the store level in order to stimulate a sense of familiarity, recognition and trust. Also, private labels have broader set of aisles than national brands. Because of this, it becomes more and more important to differentiate its attributes and benefits on an aisle, category and product basis. So the implication for the retailer is to strike the right balance of similarities and differences with brand messaging and portfolio offerings.


The growth of private labels in the Indian retail industry is inevitable but retailers do need to keep a few things in mind. Promotion of own label and allocation of large shelf space at the expense of well-marketed national brands can depress the overall size and value of the category while on the other hand, joining hands with them and following principles of category management can create a win-win situations for both. Retailers need to realize the importance of consistent brand message and should ensure that the product quality backs it well. Moreover, when used as an umbrella brand, the brand portfolio should be managed properly as to avoid any negative impact on the store brand. To conclude it is quite evident that as the Indian retail industry consolidates over next decade, retailers will look to differentiate among themselves and private labels will form a highly significant part of their strategies.

Friday, October 23, 2009

Change Management

Read my post on Change Management on XLRI's blog

I did not put the post in this blog as it is all about Marketing Perspectives only :)...

Tuesday, October 6, 2009

Same Book, Different Authors!

“Ask a finance person what NPV is and how to calculate it and you'll likely get the same answer just about anywhere you go in the world, but if you ask a marketer to define a segment, however, you'll get a thousand different answers!”

As I read this comment in an article, I was reminded of a piece of advice someone gave me a few years back-‘ Marketing is subjective and if you have the conviction don’t bother about what others think because there are hundred ways of doing things, just that you should know what you’re doing!’

The article mentioned something which all of us would have felt at some point in time during a conversation with other marketers- you get the sense that even though you are talking about marketing, sometimes you aren't on the same page about how marketing should work, be implemented or the direction it's headed?

During my internship, I had a chat with lot of members from the marketing team, for whom marketing was still a shot in the dark. Some had worked before in firms that never made a marketing plan. But, then I checked with other people from P&G etc and found that the bigger firms were more conscious of things like ROIs and depended a lot on facts and figures. And I think that such practices come from experience. The same holds true even for marketing professionals. I believe that when most of us will start out, we won’t have much of an idea about how things work. But, over a period we’ll develop ideas, patterns, opinions of our own that will shape our definition of the marketing profession. We tend to believe everything of what we hear or read from our first influencers, the professors, and the subsequent ones like books, blogs et al but we would surely find a disconnect during our first job as the requirements and the variables change!

Another aspect of this discussion would be to see it from the eyes of people who see marketing as an art vs the ones for whom it’s a science. And I think that is where the marketing is an ‘art’ contingent wins as if it were to be an exact science, we would see the same things over and over again! The ‘artist’ within a marketer is, I think, the reason why developing a common ground for marketing is tough.

What do you guys think of this? And also what all can be done to address the issue of marketers not being on the same page!

Tuesday, September 8, 2009

Bundle offers: New Mantra of success

Just visit any retail shop and try to observe a change in the offerings of the FMCG players. I am talking about bundle offers. Invariably every FMCG company is giving these kinds of offers. Let’s look at some of the bundle offers.

· Emami’s schemes include Emami Pure Skin worth Rs 22 free with Boroplus

Advanced Moisturizing Lotion worth Rs 98

· Five pieces of Sardija Cough drops worth Rs 5 free with 100 ml of

Sardija Cough Syrup worth Rs 50

· ITC is offering Vivel Di Wills shampoo (200 ml) free with its 75 gm

bathing soap for Rs 89

· Fiama Di Wills and Lux are offering free lufa with their body washes

· Sunfeast is giving 4 packs of variety of its biscuits for Rs 25

· Kurkure (Frito-Lay) is offering 3 different flavors for reduced price

· Meswak is giving toothpaste and tooth brushes together

in a nice cylindrical box

· Dettol has a bundle offer of its soap and liquid

These offers operate on logic of “Buy more to save more”. In these hard times this tactical measure can provide companies with more revenues (though profit may decrease), better cash flows. At the same time these offers help the companies to increase the trial of the new and upcoming variants/flavors which are often bundled with their best sellers. These offers also give them more shelf space and eyeballs in the retail chain. Consumers may not buy them immediately but atleast will pick up the bundle, look at the price point (I also did the same) and may decide to buy one in future.

Let’s look at how these offers work from the company’s perspective.

Because of the lower price point the total value perceived by the customer goes up and customer is tempted to buy the bundle product. He would not have bought the unbundled standalone product. Also these bundle offers create one more price point for the customer. Some customers buy the product at the new price point.

This strategy sometimes proves perilous for the company In the long run as the customer may get used to lower price point and may not be willing to shell extra money once the offer is withdrawn. This sometimes happens with Soaps which can often bundled in a pack of three and are price substantially lower.

From the customer’s perspective these offers are often tempting. Great packaging adds fuel to this temptation. In case new flavors/variants are bundled with existing flavors/variants bundling provides him the incentive to try. It also provides him with the incentive to buy more and pay less which he always strives for.

I am sure that someone amongst us will surely be tempted by one such offer…Soon…


Next Post --> “Positioning of great Indians companies”

Sunday, September 6, 2009

Loss Leaders @ Big Bazaar

The concept of ‘Loss Leaders’ might sound crazy at first but for a fact it has been in use in many industries for many years to pull in more customers, create brand awareness and in some cases to clear stocks as well. Let’s first see what exactly a loss leader is. As Wikipedia defines it ‘A loss leader is a product sold at a low price (at cost or below cost) to stimulate other, profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. The price can even be so low that the product is sold at a loss. ‘

Well, the practice of pricing popular items like milk, sugar and eggs attractively and situating them at the other end of the store, so that shoppers go through other items too and end up buying one, has been in use for long. But what stores like Big Bazaar have done is use the concept of loss leaders quite astutely to create a price perception in the mind of the shopper. So for example if most shoppers buy potatoes & cereals from the store and base their perception of the store on prices of these items, the store will offer them at low price and simultaneously hike the prices of the items bought along with these items like tomatoes and rice thus, making profit overall. So while earlier you knew that you are getting a deal or discount on the popular items, now you are made to think that the store on the whole is the cheapest and the best! The fact is that only 4-5% of the items are cheapest as compared to other stores around you but since these are the popular or frequently bought ones, you tend to think that you are getting a good deal on other products as well.

The retailer’s strategy can go wrong if shoppers start piling up such items leading to losses for the retailer. But this glitch can be handled by a) choosing perishable goods as loss leaders and b) keeping less SKUs of such items. This becomes essential since, if customers pile up the stocks then they won’t come back to purchase the items again and thus, the idea that the sales of other items are pushed every time a loss leader is purchased, won’t work.

Just read through the following excerpt from a piece in Mint,
Balasubramanian usually does her grocery shopping at Big Bazaar on the first Sunday of the month, after her banker husband draws his pay. On this particular weekend, she bought items ranging from toothpaste to tea and her total bill that day was for Rs3, 410.
Mint tried to compare rates for the items Balasubramanian purchased at Big Bazaar from a small grocery store located a few hundred metres from the hypermarket. For a start, only 30 items were available at Grover Store at Atta Market in Noida against the 48 items on the Big Bazaar bill that Balasubramanian showed Mint.
Mint then attempted to find out the total bill of only the comparable items at both the mom-and-pop store and the hypermarket. The total bill for the 30 like-to-like items, including staples from sugar to sunflower oil, at Big Bazaar was Rs1,812 compared with Grover Store’s Rs1,723—a saving of Rs89 at the neighbourhood grocery store.

Of course the kirana store stands nowhere in front of air-conditioned aisles at the supermarket and secondly, the big bazaars win by far when it comes to the number of SKUs. Thus, if we keep on increasing the basket size, the super and hyper markets will always come out trumps.

And as I was about to publish this post, I saw an ad by Reliance Fresh @ Amritsar offering cheapest rates on 70% items. Possibly, the fundaa of loss leaders is evolving too and retailers are using it to differentiate among themselves. But it's too early to say that. So for the timebeing, let's keep our eyes open and also try not to get fooled by the false perceptions created by these stores.

Tuesday, August 25, 2009

What's next for modern retail?

I have come across the modern retail industry a lot in the last half a year and I thought it’ll be best to start my contribution to this blog by sharing a few perceptions on it. I’ll talk about the two issues that I think, plague the industry and will come to the forefront in a short time.

We all have witnessed the growth of modern retail over the last half decade. The shift has been enormous from a time when our parents visited the weekly Mandi to this day when the neighborhood store from ABG/Reliance or Mr. Biyani has become the obvious choice. Leaving apart the hypermarkets, let’s see what the supermarkets have tried to do. These stores try to capture the market in the radius of 5km, from the kirana/general stores by offering same/cheaper prices in a better environment and also giving the shopper an opportunity to assess the products on the shelf unlike a kirana store. The only two areas where a kirana store had an upper hand were a) the provision of credit & b) the benefits coming from the fact that you dealt with the same guy every time (bargaining/he knows what you buy etc).

While the credit issue was well handled through tie-ups with banks and offering credit cards that earned you reward points, the second factor was and is still troubling the stores. This, in my opinion is the first issue that will impede the ascent of the industry (let’s forget about the real estate and funding issues for a moment). The management sitting in a board room planned as to how they will tackle the issue and voila, came the solutions like well-trained staff & attractive uniforms. But, such initiatives have to be implemented effectively at the grounds rather than being discussed in the boardrooms. If you haven’t noticed it yet, next time you visit one of the stores please do try to see how helpful and aware the employees are and you might figure out what I mean. For a fact, I have seen the staff of Reliance Retail beating up a group of 3-4 customers over a petty issue and I’ll leave it at just that.

The second area that needs attention is the use of business intelligence in this industry. It’s not very difficult to understand that this is a very data oriented industry with every transaction of every consumer being recorded. The SKU type & the category type data have to be put in and then there are daily/weekly/monthly price discounts or bundled offers. We have done well in recording all this information but where Indian retail players need to gear up is using analytics efficiently by embedding them into their day to day decision making. I worked on one such project this term for my course – ‘Business Analytics & Intelligence’ where we created a market basket for a retail store based on the transactions over a period of two and a half months. We started out with the goal to find out ‘associations’ across all the transactions. What this meant was looking for a combination of products in a particular bill that was bought repeatedly. This task introduced my project group to two tools (both are add-ins for MS-Excel) namely, XLMiner and Microsoft’s Shopper Basket Analysis Tool. Both require different kind of input but the first add-in has a limitation. The free demo version can handle only 600 rows of the excel file. Considering that you have lakhs of transactions, that’s a limitation that cannot be dealt with. On the other hand, MS’s tool is a blessing for any category manager or a retail store manager. Its output gives you the percentage of lift that a product gets because of another product(s) and that is how you know that bundling product X with product Y or placing the category A adjacent to category B would result in higher value for the store.

Use of analytics in online retailing by players in the developed markets is a case in point that the stores can achieve a much better level of efficiency through employing tools that help in unlocking the door to understanding the consumer behavior. Many analytics firms like Manthan Systems have realised the potential of this opportunity and are catering to the BI needs of retailers across the geographies.

Let me conclude this post by saying that to succeed, the modern retailers need to excel at both the qualitative and the quantitative aspects of the business and the two concerns that I've mentioned are exactly at the extremes of these.

Just read through the comments at the following link that I picked and you’ll know what magic analytics can do. Happy Reading!


P.S. - Next up: "Loss Leaders @ Big Bazaar" & "Growth of Private Labels"

Tuesday, August 18, 2009

Attacking the leader

Almost every company strives to be number 1 company in its area. Everybody wants the bigger share of the pie. GE had a company policy to be number 1 or number 2 in every business area they operate in or exit that business. In this article we will discuss the approach company should adopt to attack the market leader and garner market share. There are broadly three strategies to attack market leader and companies can adopt anyone or combination of these.


1. Open War: In open war strength of the market leader is attacked. There are ample examples of this kind of warfare. Some companies were able to succeed and some failed by adopting this strategy.

Virgin cola: Virgin openly attacked Cola giants by entering in their segment. Visuals shown make the strategy of Virgin loud and clear. This open war proved to be futile as Virgin cola was only able to reap 1% of the market share in fizzy drink segments even after 5 years of its launch.

Nirma: HUL left some gaps in the product line of washing powder by not having any product at the entry level. This innocuous folly was exploited by Nirma to the maximum which took the giant head on by launching detergent on national scale.

Ujalla: Ujalla was able to dislodge Robin blue from its market leader position in whitener segment by launching a better liquid version of the product. Robin blue reacted by launching liquid version but by then the damaged had been done.

Microsoft Xbox: Microsoft launched its Xbox against market leader play station Sony. It was priced lower than the Sony and Nintendo. This strategy to garner more market share by lowering price proved hazardous for all players in the market. Neither was Microsoft able to garner high market share and nor it was able to profit from this venture. At the same time Sony and Nintendo margins were also badly hit.

IE Explorer: Microsoft virtually cannibalized Netscape after launching its own browser, apparently by resorting to unfair practices. This is a classic case of a bog giant taking lesser mortal head on and finishing it.

Bingo: ITC launched its potato chip in a segment dominated by Pepsi’s lays. Through some innovative advertisement bingo was able to gain 15% market share in less than 3 years of its launch. In this case two giants confronted each other and eventually settled by sharing the pie with each other. ITC is also challenging big FMCG by launching products that directly compete with products of these MNCs.

2. Focus on Niche Areas: Instead of taking the market leader head on the company may decided to go the territories that are still unexplored. Market leader’s focus on these territories is low and risk on being swallowed by market leader is relatively less.

Red Bull: Instead of taking the cola giants head on Red Bull decided to focus on energy drink segment. By the time coke realized the potential of this segment and launched Vault against Red bull, it was already a big brand and market leader worldwide in this category. According to estimates Red Bull has more than 50% share in the energy drink market.

One important difference was also the way Red Bull went about its promotions. Instead of TVC it relied more on unconventional routes of advertisement like Bars, events etc. This strategy made sure that it is not attracting attention of big cola giants.

Skype: Skype is also into telephony like Vodafone and MTN, but it works on completely different technology. Due to this it virtually faced no competition from these big giants and carved a niche area for itself. It was acquired by Cisco for whopping amount.

3. Indirect attack (Guerilla warfare): This ploy was adopted by Ujalla to hold on to its share in the cloth whitener market. Jyoti laboratories figured out that Mortein is the cash cow of Reckitt & Benckiser. They hit them by launching low cost mosquito repellant products and reduced their focus on whitener market.

Choice of Strategy

Choice of strategy is a big question with no clear answer as it depends a lot on the management of the company and risk they can afford to take. Based on the examples given in the previous section following are broad parameters which can be looked upon by companies before taking decision.

1. Direct attack

a. Companies with deep pockets and good cash flow from other product lines can take the leader head on. For e.g. Reliance due to its sheer resources was able to make inroads in the mobile service market in India. It is a number 3 operator by number of user now.

b. Better product/huge price differentiation: The companies having product which gives much more value to the customer than the existing products at equal or lesser price can make an attempt to attack the leader head on. But these companies must keep one thing in mind that their offering cannot be imitated by market leader easily. Because if market leader is able to copy the offering than it the beat the small competitor because of its distribution network and brand equity. Nirma was able to challenge HUL on the basis of huge price differentiation.

2. Niche areas

a. Middle and small size companies: These companies do not have the deep pocket to compete with market leader unless they have much better offering than the existing offerings. These companies should look for new territories instead of taking on the leaders head on. Economies of scale are not too important in these areas as small companies will seldom achieve them.

b. Patented technology: Small companies with unique product offering can take the market leader head on. The unique product must be perceived by customer as something which adds more value as compared to existing products. This happens in Pharma space where even small companies because of the patented technology are able to compete with biggies and even beat them in their own turf.

3. Guerilla warfare: It basically involves hitting the enemy at some unanticipated area. This strategy can be adopted by any company depending on the object it wants to achieve.

Caveat: It is very important to anticipate the reaction of the market leader while adopting any of these strategies.