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Out of the closet

When the Tata-owned Trent, which today runs 50 stores across the Westside, Star Bazaar and Landmark formats, recently announced that it was getting into a franchisee agreement with the UK-based retailer Tesco for its hypermarket business Star Bazaar.

When the Tata-owned Trent, which today runs 50 stores across the Westside, Star Bazaar and Landmark formats, recently announced that it was getting into a franchisee agreement with the UK-based retailer Tesco for its hypermarket business Star Bazaar, its managing director Noel Tata said that the latter?s expertise would be utilised to develop private labels among other benefits that would accrue to it as a result of the association.

Yes, private labels. An opportunity no retailer wants to miss out on.

Walk into any large retail store today and chances are you?d come across a section devoted solely to exclusive brands. Here national or international names are not what you?d find, but inhouse or private labels. They span categories. Food, apparels, accessories, general merchandise… you name it. Quite often they occupy the prime position in a store, deliberately so to ensure that prospective customers don?t miss the target altogether.

This thrust on visibility is not without reason. Retailers are increasing their focus on private labels today. What is driving this phenomenon is the need to improve margins. In the cutthroat world of retail, where the bar on price is getting lowered by the day, this is becoming imperative.

For instance, if the benchmark brand in apparels gives a margin of about 30-35% to a retailer, he can take it up to about 60-65% with his private label alone in the category. Similarly, in fast moving consumer goods, another important segment, where the average margin on the benchmark brand is about 15%, a retailer can easily double the figure to about 30-35% with his own brand.

The same goes for electronics, where margins can be thin on the benchmark brand, as low as 5%, for low-value items. In such a case, the retailer can take his margin up to about 15-20% by selling his own brand of electronic products.

Retailers keep a bigger margin by cutting out intermediate levels. When a retailer decides to sell a product manufactured and owned by a private label, he?s in control of the process from manufacture to final sale thereby increasing his share of the profit margin substantially. This is one reason why private labels today present an exciting new option for retailers. It is simply too difficult to resist. As Raman Kwatra, vice-president, buying and merchandising, Ebony Retail, explains, ?The single-point agenda of investing in private labels is to improve margins.?

Indeed, improving margins is at the heart of the matter, something a retailer like Trent will vouch for, given that it has devoted much of its attention to private labels at its chain of Westside stores. Almost 90% of the merchandise at Westside comprises private labels. But there are other reasons too for the kind of support retailers are willing to give to their private label initiatives. Uppermost is the need to drive volumes.

Retailers in the developed world, for instance, have seen where private labels can take them. Almost 40% of products sold at Wal-Mart, for instance, are under their own labels. The UK-based retailer Tesco has about 50% of its products sold under private labels alone.

This transformation in topline and bottomline, however, didn?t happen overnight. In their path-breaking book Private Label Strategy, authors Nirmalya Kumar and Jan Benedict Steenkamp have said that private labels began their journey as cheap substitutes to manufacturer brands about three decades ago. In a sense, they were spurious products that the established brands had to contend with. The change in mindset, especially among consumers, was gradual, aided by initiatives taken on by retailers.

One was the launch of premium private labels. These are not cheap products at all. Their mark-up price instead is much more than the established brands in their respective categories. This has helped retailers to shake off the tag of their products being cheap substitutes.

But the real differentiator has been the quality of these products, which retailers play up everywhere?in stores, ads and so on.

According to Nirmalya Kumar and Jan Benedict Steenkamp, this is a key reason why customers abroad gravitate to private labels making them a success there.

In a value-for-money market like India, where the buck really stops at price, private labels play an important role in pushing up sales?they can be retailed at a price much lower than the benchmark brand. By some estimates, this can be at least 10-15% lower than the key brand in the category, which makes it an exciting target for consumers. As Esha Anand, head, marketing and visual merchandising, HyperCity & HyperCity Argos, says, ?Private labels provide great value to customers as they do not have the huge marketing spends of national brands and therefore can be retailed cheaper to the latter.?

What this means to a retailer then is that he can pull more customers with the help of his private label or labels as opposed to the competing national brand or brands in the category. It?s working well for some of them.

Take Big Bazaar, for instance. The sales, says Kishore Biyani, chief executive officer, Future Group, of its various in-house apparel brands at the hypermarket is about 60-65%. General merchandise is about 40%, electronics and food is about 18-20%. ?If you take into account grocery and staples in the foods category,? says Biyani, ?Then the figure goes up to about 30%. For us, private labels are serious business. We don?t take it lightly.?

Retailers such as Biyani have made their mark with private labels much like Trent has. It is natural then for him to devote his time and attention to in-house brands. Future Group?s flagship company, Pantaloon Retail stores, which is primarily into fashion wear, began selling private labels way back in the 1990s and continues to maintain a high percentage of these products, as high as 70-75%, according to Biyani. Rajan Raheja group?s Globus is another store that has devoted much of its attention to private labels.

At its massive Mumbai store in the suburb of Bandra, for instance, the entire ground floor is dedicated to the latter. The situation is no different with the Delhi-based retailer Vishal Mega Mart or the Mumbai-based HyperCity Retail or even newer players such as Aditya Birla Retail or Reliance Retail.

For many, private labels are their unique selling proposition?their distinctive style that helps them to differentiate their offerings from the others. As Gibson Vedamani, chief executive officer, Retailers Association of India, explains, ?With private labels, a retailer can bring exclusivity to the merchandise mix. It helps in setting apart one retailer from the other, otherwise all multi-brand retail operations would appear the same.?

This point is reiterated by Anand of HyperCity, ?Exclusive brands do help to differentiate your product offering. It does help.? At HyperCity, for instance, the retailer offers an assortment of international cheese, hygienically packed meat and fish all under private labels.

If all of this imparts exclusivity to a retailer?s merchandise, setting it up is akin to a science. Most retailers today are paying attention to minute details when launching private labels. From where the product is being sourced, what need gaps does it address, is the packaging and branding right, are consumers interested in the product etc.

Take Spencer?s. The retailer systematically went about setting up its private label business about a year ago. ?It?s not just about sticking labels on food products or branding goods whose manufacturing has been outsourced. We have methodically gone about getting our private labels in place,? says Sumantra Banerjee, president and chief executive officer, RPG Retail. ?We consulted experts, took their inputs on what was required to be done. We outsource production based on specifications we provide and make sure that stringent quality standards are maintained. This is a huge effort and the investment is substantial. But that doesn?t worry us because if we get it right the returns will be substantial.?

The results are showing. The migration of consumers from national brands to its private brands has been about 15-20% over the last few months. The contribution to topline from its private labels is about 10% as of now. This should go up in the coming months as the products become popular with consumers, say Banerjee. ?It?s been about a year since we started the private label initiative. Going forward, we see sales picking up.?

Name of the game

Spencer?s has labels for both the value-for-money conscious and upscale consumer. Its mass-market private brands, for instance, retail under the umbrella of Spencer?s Smart Choice. Its niche brands retail under different brand names, such as Maroon for kitchenware, 360 degrees in luggage and Collage Studio for stationery. In apparels, the retailer has brands spanning segments ?Mark Nicholas for formal wear, Asankhya for fusion wear and so on.

At Reliance Retail, for instance, its private labels under food include Reliance Value and Reliance Select. This again is a positioning exercise targeting the mass-market and upscale consumer respectively. Products are differentiated on quality and pricing parameters etc.

This way, say experts, no consumer is missed out ensuring that there is a decent amount of sales at the end of the day. After all, who wouldn?t like to hear the cash registers ringing.

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First published on: 09-09-2008 at 02:26 IST
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