BRANDS VS. PRIVATE LABELSBY JOHN A. QUELCH

A HARVARD BUSINESS REVIEW ARTICLE

AND AN OUTLOOK AT INDIAN PRIVATE LABEL MARKET

Presented byVishnu Priya Aryabhumi,

IITMadras

What are private labels?

• Private label products or services are those manufactured or provided by a company under another company’s brand.

• These are promoted within the store and are never sold outside.

• Private label products are commonly referred to as name brand, store brand, own label, retailer brand or generics.

European Vs. American Supermarkets

Supermarkets

% of sales from private Labels

% Pretax Profit

European 41-54% 7%American 15 2%Higher % sales from private labels lead to higher % pre tax profits in European markets

Reasons for the strength of private labels in Europe

• Regulated television markets– cumulative advertising for name-brands has

never approached U.S. level

• Domination of National Chains – greater power of retailer over manufacturer

compared to that of US

• Top five chains account for 62% and 21%

of national supermarket sales in UK and US respectively

Why Private Labels??

But growing numbers of U.S. retailers such as the Kroger Company believe that strong private-label programs can

successfully differentiate their

stores and cement shoppers’ loyalty, thereby strengthening their positions with regard to brand-name manufacturers and increasing

profitability

New Channels for Private Labels have emerged

• New Channels are Mass merchandisers, warehouse clubs, and othersSupe

r Markets

Mass merchandisers

% of private labelled-soft-drink volume sold

21% 39%

National Chains No Yes

Have procurement clot that can ensure

consistent quality at low cost thus

increasing profit margins

New categories of private Labels have emerged

Traditional: Milk and Canned peas

New: Health and beauty aids, Paper products such as diapers, Soft drinks, and Beer

Leading to

With this Expansion and Quality, comes

increased

acceptance by consumers

“Gone are the days when there was a stigma attached to buying private labels”

What drives private label shares?

1. Product category characteristics2. New-product activity3. Private-label characteristics4. Price and promotion factors5. Retailer characteristics

1. Product category characteristics• The product is an inexpensive, easy, low-risk

purchase for the consumer.• It is easy to make from commodity ingredients.• It is perishable, thereby favouring local

suppliers.• Product category sales are large and growing,

so private labels can more easily garner sufficient volume to be profitable.

• The category is dominated by a few national-brand manufacturers, so retailers promote private labels to reduce dependency on them.

2. New-product activity

National-brand new-product introductions are infrequent or easy to copy, so National brands are offered in few varieties, enabling…a private label with a narrow line to represent a clear alternative to the consumer.

• Consumers can easily make side-by-side comparisons of national brands and private labels.

3. Private-label characteristics

• Availability of Private-label goods to consumers for many years.

• Well developed distribution• Quality: High and improving wrt National

Brands; Low variability• Increase in Consumer confidence to make

comparisons about quality.

4. Price and promotion factors

• Relatively high Retail gross margins in the product category

• Wide Price gaps between national brands and private labels

• High expenditures on price promotions by National-brand, raise price sensitivity and encourage consumers to switch brands.

• The Risk of perception of Low credibility of national-brand due to frequent and deep price promotions

• Low expenditure on advertising by a National-brand

5. Retailer characteristics

• The retailer being part of a stable oligopoly sells national brands at relatively high prices.

• The retailer has the size and resources to invest in high-quality private-label development

Summarizing what drives private label shares…

1. Product category characteristicsProducts where consumers perceive little differentiation; Commodity driven and High purchase categories

2. New-product activityLimited variety offered by National brands as opposed to Private labels (PLs)

3. Private-label characteristicsImproving quality; well developed distribution leading to rise in consumer confidence

4. Price and promotion factorsIncreasing offer sales=> lower profit margins in national brands unlike PLs

5. Retailer characteristicsIncentives to produce coupled with availability of size and resources

THEN WHAT EDGE DO BRAND-NAME GOODS HAVE??

5 points!

1. The purchase process favours brand-name products

• Brand names exist because consumers still require an assurance of quality when they do not have the time, opportunity, or ability to inspect alternatives at the point of sale.

• Brand names simplify the selection process in cluttered product categories; in the time-pressured dual income households

2. Brand-name goods have a solid foundation on which to build current advantage.

• Strong Brand-Equity• Little Change in Consumer rankings of

national brands unlike retailer brand names (Ex: Walmart)

3. Brand strength parallels the strength of the economy

• As the United States has emerged from recession, manufacturers of national brands have increased advertising and won back some consumers who had turned to private labels

• In 1993 48% of packaged-goods buyers knew what brands they wanted before entering the store, up from 44% in 1991

4. National brands have value for retailers

• When a store does not have popular brand, it is at a risk of losing its customers

• Retailers must not only stock but also promote, often at a loss, those popular national brands that consumers use to gauge overall store prices

5. Excessive emphasis on private labels dilutes their strength

• The problem is that stretching a store name—just like a manufacturer name—over too many product categories muddies the image

• excessive emphasis on private labels lead to consumers’ perceptions that the retailer’s assortment was incomplete as well as to reduced store traffic and poor profits

FACED WITH THE PROS AND CONS OF PRIVATE-LABEL PRODUCTION, WHAT SHOULD

NATIONAL-BRAND MANUFACTURERS DO???

A. Companies which did not start a private label manufacturing

B. Companies that are already into private label manufacturing

Category AFor Companies which did not start a private label manufacturing

“Our recommendation to companies that do not yet make products for the private-label market is simple:

Don’t start.”

Because…

• Risk of cannibalizing its brand-name products

• Making private label products to use excess capacity can become Narcotic – A manufacturer that begins making private-

label products to take up excess capacity may soon find itself taking orders for private-label goods in categories where the market share of its own brand is weak..

But if You are totally into private label….

Then we give you Two alternatives namely,

Examining the private-label production opportunities on • An incremental marginal cost basis• A full-cost basis

Why so???

The more private-label production grows

as a percentage of total production,

higher will be the relevance of FULL

COSTS

Again, Why?!

Because private-label manufacturing when evaluated on a fully costed basis rather than on an incremental basis, it

would, in many cases, appear much less profitable

Because…1. In many cases, the

cannibalization rate will be higher than “fair share” cannibalization rate reducing the profit margin earned by the private brand

“fair share” cannibalization:loss of share in the national brand equal to gain of share by the private label

In this example, Consumer decided that the risk outweighed the reward; it invested more in the branded product.

Because…(contd.,)2. Private-label production can result in additional

manufacturing and distribution complexities that add

costs rather than reduce them

3. Efficiencies of selling private-label contracts are also

exaggerated

4. It is easy to overstate the relative contribution of

private-label goods and therefore to understate the

cost of cannibalization

When the companies try to manage to both…

1. With total category solution, pressure rises from demanding retailers to give priority to less profitable private-label shipments, and results in unproductive use of management time in reducing conflicts

2. In separate divisions, to compete better with the lean cost structures of private-label-only manufacturers, private-label manufacturing cannot be contained, and inevitably the private-label goods cannibalize national-brand sales

Category B• For Companies that are already into

private label manufacturing

• “Our recommendation is to Evaluate their private-label business”

Steps to evaluateConduct a private-label audit

Calculate private-label profitability on both a full-cost and marginal-cost basis

Examine the impact of private labels on the market shares of your national brands

Close excess capacity in low-return private-label business

9 WINNING STRATEGIES

To stem share- gains by private labels

Here are THE 9!!1. Invest in brand equities2. Innovate wisely3. Use fighting brands sparingly4. Build trade relationships5. Manage the price spread6. Exploit sales-promotion tactics7. Manage each category8. Use category profit pools as a performance

measure9. Take private labels seriously

PRIVATE LABELS IN INDIA

The trends- The driving force- The future

Indian scenario• The private label market in India is currently estimated at

INR 13 billion, which accounts for 10-12% of organised retail in India.

• Private label’s share in organised retail in India is about

7%, but it is as high as 40% in European countries, and as low as less than 1% in China.

• Most successful Private label market in South East region.

It grew 27% between 2012 and September 2014

• Market penetration– 5% in India– 50% in South East markets

THE SUCCESS

Top segments and Top retailers

Food dominates India’s Private label market

The food category alone accounts for

76% of the total sales in private label

Though the growth of private labels was seen across categories, growth in grocery was prominently seen in supermarkets at

15% and hypermarkets accounting for

30% of total value sales. 

Non-food Category

• In the non-food category, household cleaners hold the top position, accounting for nearly half (48%) of the private-label sales.

• Personal care, fabric care and the general category are other segments which contribute significantly to non-food

• Consumer durables, staples and home care segments are driving the private label segment

The retailersFor most retailers, 20-30% of overall sales come from private brands.

The top retailers in the private label market

VIEW OF NATIONAL-BRANDS ON THE SUCCESS

The second side of the coin

What is the view of the natural-brands?

• Harkirat Singh, MD, Woodland India, is not alarmed by the renewed focus of multi-brand retailers on their store brands.

• He says, "As more consumer shift from unbranded to branded products and modern retail, the sheer numbers will insulate leading brands like us from any adverse impact."

Type of expenditures incurred by retailers

Mr. Govind Shrikhande, CEO of shoppers Stop, says that for retailers with private label contribution of

• < 20% (16-17 per cent for Shoppers Stop), investments would be mainly in advertising to build the brand-image, and

• >70% of revenues from them would need to make both supply chain and advertising investments.

THE TROUBLES

Issues and back steps of top retailers

The Other side

Big retailers are pulling out their private labels or

delaying launches in home appliances and electronics space, failing to repeat their success in apparel, food and personal care segments.

"Launching private labels is not everyone's cup of tea, especially when there is already a flurry of established

brands" -Harminder Sahni, MD at consultancy firm Wazir

Advisors.

A back stepSpencer's Retail• To pull out durables private brand Gerat, after failing to

create back-end service supportFuture Group• To pull out of categories such as headphones and computer

peripherals, rationalise product mix and focus on smaller towns

Next Retail• Roped in Hyundai to develop it as a private brand that can

match LG, Samsung in brand recallReliance Retail• Not to venture into durable private labels due to high

associated costs like setting up service centres and ensuring availability of spare parts

THE FUTURE

A look forward

The future• Considering the steady growth rate of private labels

through modern trade, it looks as though India’s FMCG market will continue to diversify with increasing levels of private label and national brand products on offer.

• Private label is still an emerging concept in the Indian environment.

• The experience of mature markets shows that the success of private labels hinges on the strength of the retail brand.

• The success of any retailer would be determined by how they take a balanced mix approach of building a unique business model to cater to Indian consumers and plugging-in the demand gaps by offering selective private labels.

CreditsSlide Source

38 http://www.nielsen.com/us/en/insights/news/2013/what-makes-private-labels-click-in-india.html

36 http://www.indiaretailing.com/7/23/25/9469/The-Growth-of-Private-Labels-in-India

43,48 http://articles.economictimes.indiatimes.com/2010-05-27/news/27627740_1_private-labels-retail-product-mix-retail-players42,46 http://articles.economictimes.indiatimes.com/2010-12-08/news/27624440_1_private-labels-spencer-s-smart-choice-koryoOverall Excerpts from the HBR article: Brands vs Private Labels- A fight to win by JOHN A. QUELCH

Disclaimer"Created by Vishnupriya Aryabhumi, IITMadras, during an internship by

Prof. Sameer Mathur, IIMLucknow.www.IIMInternship.com"