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.
Differentiation
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.
Conclusion
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.
-----------------------------------
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.
Differentiation
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.
Conclusion
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.
