How Private Labels are Outselling Established Brands

Five years ago, when Nilesh Gupta took the plunge into private labels—home-grown brands hawked by retailers—the market for such brands was minuscule in India. Gupta, who runs the show at electronics retail chain Vijay Sales as its Managing Director, has spearheaded a business that has grown from less than 80 physical stores to more than 110 stores across the national capital region (NCR), Maharashtra, Gujarat and Andhra Pradesh. In 2019, it acquired Hyderabad-based electronics retail chain Tirumala Music Centre to further accelerate its growth. But it is its private label brand—VISE—that continues to emerge as the clear winner. Growing at a high double-digit rate, Gupta says the in-house brand has been outperforming Vijay Sales’ overall business growth since it was launched in FY2015-16. Currently, the private label brand—under which Vijay Sales at this point sells only smart LED television sets—contributes nearly 10 per cent of its revenue from the product category, and helps it garner higher profits.

Encouraged by its success, Gupta and his team are now chalking out plans to expand the group’s private labels business into other products in the large home appliances segment, which has become an essential part of daily lives across middle-income households. “Positioned at the opening price points for smart LED TVs —measuring 32-43 inches—the brand is doing very well. Currently, we are monitoring the market dynamics as we plan to expand into categories like air conditioners and washing machines,” says Gupta. For perspective, a 32-inch VISE television set costs Rs 11,990 compared to around Rs 23,000-30,000 for bigger brands such as LG, Samsung or Sony.

Gupta isn’t alone. Over the past few years, the growth in the private label space has increased significantly as retailers launched new home-grown brands in search of better margins and higher sales. From physical retail majors such as Reliance Retail, Spencer’s and METRO Cash & Carry India to e-commerce players like bigbasket and Purplle.com and many others, everyone is churning out private labels like their survival depended on it.

Well, data shows that growth, at least, is much shinier when private labels are in the picture. As per a report by professional services firm KPMG and industry body Retailers Association of India (RAI), the organised retail market in India is growing at 19 per cent CAGR since 2016, while the growth rate for private labels during the same period stands at a remarkable 38 per cent. Comparatively, the rate of growth for India’s overall retail market (including organised and unorganised) is 12 per cent. As a result, private labels are estimated to grow into a Rs 2.94-lakh crore market in 2022—up from Rs 42,000 crore in 2016.

What is fuelling this growth?

Both experts and industry insiders are of the opinion that the surge in retailers’ push for private labels would find its roots in higher sales growth and the better margins that in-house brands offer. Data from the KPMG-RAI report shows, private labels offer 40-175 per cent higher margins compared to regular brands that retailers sell in their stores and digital platforms. The numbers are slightly lower for segments such as wellness and grocery—private label brands offer margins of 25 per cent and 14 per cent, respectively, compared to 18 per cent and 10 per cent for regular brands. For segments like consumer durables and IT products, the margin is as high as 55 per cent, compared to 20 per cent for regular brands.

Sounds great for the seller, but why is the consumer buying private labels? That, says Harish Bijoor, brand strategy specialist & owner, Harish Bijoor Consults, is due to the increasing awareness among consumers about product offerings and pricing, apart from declining brand loyalty and increasing commoditisation of consumer goods. “The consumer is increasingly questioning the value that they are getting from established brands, as lookalike products are available at a cheaper rate in the form of private labels,” he says. According to Harsha Razdan, National Leader—Consumer Markets, Life Sciences and Internet Business, KPMG in India, with rising disposable incomes and with online channels booming, consumers of unbranded products are rapidly switching to branded products. This is fuelling the growth of private brands—making them an attractive, affordable alternative to otherwise higher-priced branded products.

Kumar Rajagopalan, CEO of RAI, says the pandemic has further added tailwind to this trend. Nearly 85 per cent of consumers are now experiencing online shopping for the first time, giving retailers a new window of opportunity in their private label push. “As many of the prominent retailers now have omni-channel presence, advancing their plans with private labels has got an impetus. Presence across regions with massive distribution networks is a key factor behind the rise of private labels,” he says.

Brands at work

Take Reliance Retail, for instance. India’s largest retail company, with Rs 1,49,925 crore of revenues in FY21, has launched a veritable blitzkrieg of private label brands. The behemoth has rapidly expanded in the consumer goods market with over four dozen private label brands. For instance, it has launched Snactac to cater to categories like snacks, biscuits and instant noodles; Desi Kitchen in instant mix, flours, pickles and blended masalas; and Good Life in pulses, rice and edible oil. It has also launched private labels like Netplay (formal office wear), Performax (specialised active wear), Fusion (fusion-wear for women), Avaasa (ethnic wear for women) and Rio (fashion wear for working women) in the fashion and apparels space. According to its annual report, in FY21, Reliance Retail garnered over 75 per cent of its revenue under its fashion and apparels chain Reliance Trends from its ‘own brands’ and for (Reliance) Trends Footwear, the contribution of private labels to its revenue stood at over 60 per cent.

That’s not all. To further augment the performance of its private labels, Reliance is focussing on “developing own brand portfolio in categories such as health and immunity-boosting foods in grocery, and productivity devices and appliances in consumer electronics”, it said in its annual report. Additionally the group is “developing a portfolio of own brands for new commerce” with an eye on “exclusive brand licences and own brand products through Reconnect, JioPhone and LYF”.

Or take bigbasket, the online grocery retail major. The company, which has a bunch of private brands like BB Royal, BB Home, Tasties and Fresho, generates an impressive 38 per cent of its Rs 9,000-crore yearly sales from private labels. “Right from the outset, we have focussed on being a high-quality online grocery retailer, and not a marketplace. In accordance with this vision, we have launched several private label product categories, all of which enjoy great customer trust and credibility as well as a greater market share than the industry average,” says Seshu Kumar, National Head-Buying and Merchandising, bigbasket.

Kolkata-headquartered Spencer’s Retail, which already has a strong presence in packaged snacks, juices, instant noodles, cookies, honey, home-care products and electronics with its half-a-dozen private labels, is now focussing on high-turnover mass categories. According to Shashwat Goenka, Director at Spencer’s Retail, private labels have been a focus area for the company. “We have firmed up our plans for the future. Our private brands’ portfolio contributes 13-14 per cent of our overall business. The key growing private brands include Smart Choice, Double Tick, Numkeen representing major food categories, while HandsOn, Clean Home, Bath & Beauty Co are our fast growing labels in the home-cleaning and personal care space. In the home and kitchen segment, we have witnessed increased demand for our Inscapes & Kitch private brands,” says Goenka.

With nearly 8 per cent of its business coming from private labels, the Rs 6,738-crore (revenues, FY21) METRO Cash & Carry India is now pushing its products in general trade as well. “Traders and kiranas are buying a lot more fast-moving consumer goods (FMCG) products under own brands, and we witnessed a 10-12 per cent growth for FMCG by kirana customers,” says Arvind Mediratta, MD & CEO of METRO Cash & Carry India. Apart from consumer-facing brands like ARO and Fine Life, METRO’s private labels such as METRO Chef and Metro Professional are big successes in the HoReCa (Hotel, Restaurant and Cafe) channels. METRO already has over 1,000 items under its private labels, and is now “more focussed on driving” its in-house brands.

According to Venu Nair, MD & CEO, Shoppers Stop, the leading fashion and apparel retailer has lined up 14 private label brands like Altlife, STOP, Ivy, Fern and Fratini, which cater to segments like menswear, womenswear, kids, beauty, and home décor. Consistent efforts in the space have resulted in the share of private labels growing to 15 per cent, from 11 per cent, in recent years. “The private brands business is one of our key pillars of growth. There is a huge focus on product, placement, and marketing,” says Nair.

Even a relatively new retailer like Purplle.com—a 10-year-old Mumbai-based e-tailer start-up in the beauty and wellness space—has forayed into the private labels space. According to Manish Taneja, Co-founder & CEO, Purplle.com, they now contribute some 45 per cent towards the e-tailer’s parent company Manash Lifestyle. “The beauty and personal care market is growing at 10-15 per cent, while our private brands are growing at 60-70 per cent year-on-year. Private brands are very important for any retailer to thrive,” he says, adding that Purplle aims to increase the contribution of private labels further.

Strategic thinking

According to Vijay Sales’ Gupta, absence of intermediaries is a key factor that allows retailers to pass the additional benefits to consumers in the form of discounts that further boost the sale of private label items. The sentiment is echoed by bigbasket’s Kumar: “One of the biggest benefits that private labels offer to us is that the entire supply chain is controlled in-house, and we don’t have to deal with external uncertainties of the market. Private labels also give us complete control over procurement and quality of the products, and help generate greater return on investment.” KPMG’s Razdan points out that retailers require almost no investment in channels to reach consumers of private labels. That’s because they already have an established network across the country, which they can leverage to tap new customer segments. “Retailers can control their displays by restricting their stock best suited for their customers and are able to offer an assortment of products that are customised to their shoppers’ needs at very competitive prices,” he says.

According to bigbasket’s Kumar, expansion into newer categories has helped immensely and the share of private labels has grown by three percentage points in its revenue since 2019. The key to its success with private labels, he says, is in identifying and filling the gaps that conventional brands fail to cater. “For a private label, it is imperative to identify these gaps and fill them with clearly distinct and top-quality products. Customers prefer private labels primarily on the faith that the products will be customised and of better quality. When the quality is assured, and customer satisfaction is achieved, the private labels tend to gain pricing leverage and offer a better rate of success, even in a high competition domain like grocery retail,” he says. Driven by its relentless search for gaps in the offerings from established brands, bigbasket is planning to expand its market coverage and network rapidly. “As and when new gap areas are identified, we will launch new private labels or products to cover those gaps accordingly,” Kumar told Business Today.

There are other things, too, that make private labels a success, apart from better value for money. According to Goenka of Spencer’s, attractive positioning and packaging of articles, affordable pricing vis-à-vis national brands, and ensuring consistent availability backed with consumer promotions across regions are crucial. Further, “strategic visibility across shelves plays a critical role in maximising consumers’ basket contribution”.

“Every retailer is trying to grow private labels at a faster pace vis-à-vis national brands both in B2C, e-commerce and even in the e-B2B space. Private brands find a lot of success in categories where the brand association and engagement is lower, and there is a need gap which can be fulfilled with brand substitutability. For example, pushing own brands (private labels) in the cleaning and home hygiene space, wherein the brand engagement is relatively low, becomes easier than in the personal and skincare categories wherein brand engagement and brand sensitivity are higher,” says Mediratta.

While private labels are growing much faster than regular brands and the overall sales of e-commerce platforms, their success is still limited to the mass market segments. According to Bijoor, however, the retailers are soon going to target the premium price points. “Currently, private labels are primarily pushed through discounted pricing but their real test would be in the premium segment. In future, there would be expansion of private labels in the premium categories,” he says.

Goenka of Spencer’s is unfazed, saying there’s room for much more. According to him, while in other major economies, private label brands enjoy more than 16 per cent market share (in 2019), in India it’s much lower; as per KPMG-RAI its about 3.5 per cent. This indicates potential for growth. “Private labels across modern trade are on growth mode, with evolved hygiene and staples categories fuelling the growth. Choosing markets wisely is critical for efficient growth. However, the aspect of right pricing should be considered in parallel. Right pricing becomes critical, as 76 per cent of shoppers claim to compare the prices of private labels with leading brands,” says Goenka.

It’s time for the regular brands now to wake up to the challenge from their own retail partners.

 

@arndutt