The private label industry is one of the few bright spots in this down economy and the next big thing in retail, says Anshu Kumar, Manager – Strategic Planning, Jubilant Retail.
The 2008 economic crisis changed everything, and private brands were perfectly positioned to reap the rewards. Private label brands were traditionally defined as generic product offerings that competed with their national brand counterparts by means of a price-value proposition. It’s understandable that the consumer will want to budget for the overall price of their weekly shop and secure maximum value for money. Indeed, early ventures in private labeling yielded inconsistent quality and tarnished the overall image of a private label concept. Retailers found that consumers, faced with uncertainty, weren’t going to experiment with a non-brand name item.
A large part of growing the private label market involved improving the product’s quality. Now most leading private labelers take an active role in the manufacturing specs of the product and no longer slap their logo on whatever comes off the assembly line. The result is that often the only thing separating one product from the other is the name on the label. Attention to quality has helped grow the consumer base across economic classes.
As the scale of modern retailers grows, their ability to bargain with manufacturers/distributors becomes stronger. In addition, as the economic downturn causes a reduction in consumer income, retailers aggressively build a private label to increase profits and differentiation. One of the causes for an expanding private label is that the manufacturers/brands commit to promoting the brand image and transfer the costs to the customers. This raises prices and allows the retailers to participate in the market with lower prices.
For retail stores, apart from establishing the differentiation, a private label can also retain customers and increase yield rate. Retailers continued to push more and more private label products into different categories of the marketplace because they represented high margins and the promise of profitability with little- to- no marketing effort. The retailers are beginning to recognize that they cannot simply rely on national branded products to draw consumers into their stores and sustain loyalty. They are starting to diversify their offering beyond the expected, enabling them to compete more effectively in existing product categories and foray into new and different product categories that have traditionally been dominated by national brand players. In many instances, private labels have surpassed a national brand’s capacity to deliver on visibility, consumer interest, involvement, and appeal.
Private label’s typical consumer are traditionally well-educated high earners. As the private label’s quality improves the lower earning consumer can be more certain of the value for money ratio. Just like a branded product, once the relationship has been established, the consumer will continue to buy as long as it continues to perform well. Still as the private label industry grows, the threat to branded product rises. After all brands are now competing for shelf space with the store’s own product. What’s more, the branded product has an added burden of a large advertising-marketing budget, which can substantially impact the bottom line, particularly on low-margin goods. Therefore, developing a private label becomes an important strategy for retailers.
For the consumer, private label product represents choice and the opportunity to regularly purchase quality food and non-food products at considerable savings compared to buying national brands, without relying on coupons or promotional pricing. Moreover, private label products are made of the same or comparable ingredients as the national brands and because the store’s name or symbol is on the package, the consumer is assured that the product is manufactured to the store’s quality standards and specifications. Use of private label goes well beyond the store brands, though certainly this is the most frequent situation in which a customer will have contact with one. Since manufacturers’ (producers’) brands have large advertising expenditures built into their cost, a private labeler is able to buy the same goods at a lower cost and thus sell them at a lower price and/or at a better profit margin. In addition, private labelers have more control over pricing and are able to advantageously display their own brands for maximum impact. For example, a grocery store can quickly reduce the price of its own private-label brand in order to meet or beat a competitor’s price, or the grocery store can create a special point-of-purchase advertising display and/or give its brand predominant shelf space in order to boost sales and customer identification.
Private-label brands are usually priced lower than comparable manufacturers’ brands and therefore appeal to bargain-conscious consumers. In a nationwide study, seven out of ten shoppers believe that the private label products they buy are as good, if not better, than their national brand counterparts. A key factor for growth of the private label market in any country is sufficient penetration and muscle of organized retailers. The highly fragmented nature of the Indian retail market makes it intrinsically unsuitable for private labels. Further, most organized retailers today have a far better regional presence, as compared to a national footprint. Although most players plan to ramp up their national presence as part of their future strategy, there are several hurdles in the way. These include factors such as real estate and distribution costs, regulatory issues, and lack of skilled manpower. Therefore, unless major Indian retailers ramp up their national presence and attain sufficient penetration and resources, the private label market will not take off in India.
The retail industry in India is still nascent, as compared to matured markets such as the UK and USA. The retail market in India is currently estimated to be close to USD 500 billion. According to a research report named ‘Retail Sector in India’ by Research and Markets, Indian retail sector accounts for 22 percent of the country’s gross domestic product (GDP) and contributes to 8 percent of the total employment.
Organized retail constitutes a meagre 6 percent of the retail market in India. Private label brands have clearly become a more instrumental priority for today’s retailers and it constitute less than 5 percent of the total Indian retail market.
In the past, private label was a moniker for consumer products that were lower priced and lower value. Retailers fostered them as they represented a growth engine because of high returns in terms of margins and profitability on a relatively small investment. As the industry continues to advance, there is increased acknowledgement that this approach to private label management may allow for near-term gain, but can have a detrimental impact on a retailers’ long-term success. There has been a rapid shift in mindset about the role and requirements for today’s private label brands. Retailers are evolving to a new definition and greater focus for these proprietary offerings to elevate their stature and influence on the current and future business strategy.
