Private labels V/s national brands-The undercurrent battle!

Private labels V/s national brands-The undercurrent battle!

This is very interesting to note that what is making national brands vexing is not the competitors alone but the surge of private labels which seems to be eating out major chunk of the pie, traditionally a part of the appetite of the former.

Private Label Manufacturer's Association categorizes PL manufacturers into 4 main categories:

Large national brand manufacturers that utilize their expertise and excess plant capacity to supply store brands.

Mall, quality manufacturers who specialize in particular product lines and concentrate on producing store brands almost exclusively. Often these companies are owned by corporations that also produce national brands.

Major retailers and wholesalers that own their own manufacturing facilities and provide store brand products for themselves.

Regional brand manufacturers that produce private label products for specific markets.

In 2008, private labels had taken over 25% to 50% in most European markets and 20% in the US. They account for 40 per cent of Wal-Mart sales ($126 billion or Rs 5,16,600 crore), 50 per cent for Tesco ($36 billion or Rs 1,47,600). In Germany, private label has shot up from 12 per cent of sales to 34 per cent.

In India for instance, private brands like John Miller, Lombard, Annabelle and Bare contribute as high as 80% of total sales within formats like Pantaloons.

Apart from these, this Olympian Indian retailer has many other private labels in its kitty like; Honey, Mix and Match, F-Factor, Fresh and Pure, Ekta, Caremate, Premium Harvest etc in several different categories.

So how these private labels have evolved?

Private labels have come a long way over the last three decades. They started with retailers wanting to offer cheaper substitutes. This was for two reasons. One, having a private label meant that retailers could negotiate a better margin from the manufacturer. And the other, when they had private labels they had a differentiator. While every shop sold a Coca-Cola and Pepsi, a private label meant that the store now had something that other stores did not.

The biggest change in the last decade or so has been the entry of premium private labels. They are no longer saying “buy us because we are cheap”, instead today; they are saying “buy us because we are the best”.

And what is their strategy?

A. These in house brands accounts for higher gross overall margins.

B. Convenient pricing for customers.

C. Many retailers consider private labels as key in their effort to create consumer loyalty and to differentiate themselves from the competition

D. Retailers’ intensifying involvement in new product developments, which has further fueled the market share growth of private labels. Like Carrefour private label revenues are beyond 20bn $, which affords access to R&D and innovation resources.

So, what role do private labels have to play in Indian retail?

Nirmalya Kumar, Professor of Marketing and Director of the Aditya Birla India Centre, London Business School, and co-author of Private Label Strategy, says private label brands, which occupy less than 5 per cent of the market in India now, are likely to corner 50 per cent of the market as the retail space opens up and matures.

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.

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.

But do private labels have enough brand equity to launch and sustain successful innovation?

The answering is yes, accordingly to a recent study performed by IE Business School that analyzed all new product launches in last two years in several consumer packaged good categories.
The reasons behind this result are related to the increased consumer familiarity and experience with private labels, along with a positive consumer perception of the price utility now provided by private labels even in new products.

So what should be an ideal mix of private labels with national brands in a retail space?

Retailers must make sure that they don’t over exercise the private label option. If they fall into the trap of using too many private labels, they will end up losing customers. It has been seen that when retail chains rely heavily on private labels, customers feel they lack choices.

Many retailers have suffered due to this; Sainsbury is a classic example. The UK-based retail chain was a mainline traditional retail chain, but when it used too many private labels, customers did not find regular brands at its stores, and as a result, sales dropped.

Some experts suggests it not to be over than 50% while some goes to the extent of 60:40 private to national brands ratio in a store in one or more categories.

Now how can manufacturers compete with private labels?

Innovate brilliantly, this is the first thing manufacturers need to do. They need to keep coming up with new products and new value additions continuously. By doing this, they ensure that they are a moving target and not a sitting duck.

We have seen that in industries where manufacturers have innovated and upgraded their products regularly, the share of private labels has been low. Gillette is an excellent example. Worldwide, Gillette so far, has constantly innovated its product. It has launched new razors, new blades and upgraded its products regularly, hence the share of private labels in razors is very low.

Lastly what is the future of private labels?

As Professor Nirmalya Kumar says; Private retailers will occupy 50 per cent of the market the world over. At 50 per cent, they begin to saturate. If they try to occupy more than this, then consumers feel that there aren’t enough choices. In countries such as Switzerland and the UK, private labels have reached this limit and these markets have saturated. But they will continue grow in the other countries till they reach the same level. And this will happen very soon in India, too.

Compilation & excerpts sources:

http://www.thehindubusinessline.com/catalyst/2007/09/27/stories/2007092750020100.htm

http://www.businessworld.in/index.php/Books-and-Guides/Private-Label-Is-The-Brand.html

http://business.in.com/article/ie/sleeping-with-your-enemy-private-labels-and-national-brands-who-innovates/9792/1

http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/Food-brands-and-retailers-Private-labels-get-branded-push/articleshow/5562342.cms