With consumer focus on ‘value’ rather than ‘cheap’, there has never been a bigger opportunity for private label brands from economies and retailers all over the world. The following article from the India’s leading business daily, Business Standard is an interview with Nirmalya Kumar, director of Centre for Marketing, and co-director of the Aditya Birla India Centre at London Business School, and co-author of one of the essential books on private label “Private Label Strategy.” In the interview Kumar tells author Alokananda Chakraborty what Indian retailers could do to leverage Private Brands and effectively challenge manufacturer brands.
Q&A: Nirmalya Kumar – Private labels in India are about margin enhancement rather than differentiation
In your book on private labels you have noted how private labels have evolved from cheap and nasty knock-offs of manufacturer brands in the markets of the West. How evolved is the private label strategy for retailers in India today? Do you see a move towards increased incorporation of private labels into retailer’s strategic vision?
For the moment, as is to be expected in the early stages of modern organized retailing, Indian mass retailers are for the most part pursuing the “cheap and nasty knock-off” private label strategy. Of course, in the future, the private label portfolio of leading Indian retailers will evolve to become more sophisticated and segmented into first price with the claim cheapest item in category; copycat with the claim cheaper but same quality as manufacturer brands; and premium with the claim better quality with price on par or even higher than manufacturer brands. To achieve this will require retailers to build sourcing and innovation capabilities, which will take time, effort and resources.
Every Indian retailer having absorbed the lessons from global retail best practice has incorporated private labels into their overall strategy. For the moment, given that the organised modern sector of mass retailers (supermarkets, hypermarkets, department stores etc) in India is struggling to achieve profitability whilst executing on ambitious growth plans, it is only reasonable that the private label strategy is about margin enhancement rather than differentiation. Margins are enhanced in two ways through private labels, one is the higher margins on private label products (only helps if private labels sell in any significant volume at the retailer) and other is through using the private label presence as a threat to induce higher margins from manufacturer brands in the category.
As you mention, private labels play an important role in retailers’ strategies beyond adding value through convenient pricing for consumers. However, ‘copycat’ private labels remain a strong strategy for retailers in India. What can Indian retailers really do to shake off this perception and leverage private labels effectively?
Building consumer trust in the retailers’ private labels takes time, and typically objective quality must be improved prior to observing increases in perceived quality. The process here is similar to how perceptions of Japanese and then Korean, and now Chinese products are changing worldwide. Previously, they had poor quality but at an attractive price to gain a toehold in terms of market share. Then over time, objective quality improved through investments in innovation and manufacturing processes. Today, Toyota, Samsung, or Huawei are leading brands in their sectors. The “cheap and nasty” perception of Japanese, Korean, or Chinese products is now buried. Expect to see a similar evolution of retailer brands in India. Until one has strong private labels which consumers see as an adequate substitute for manufacturer brands, the retailer does not really gain any leverage against manufacturer brands.
Five years ago in your book you had said that part of private label growth in a recession is permanent, caused by consumer inertia. Do you still subscribe to that view?
Yes, I do. The data from the 2007/2008 recession also supports evidence of down trading during recession. However, since we do not have the data on what happens after the recent recession is over, as it is still continuing in the West, we cannot say what happens after the recession is over using data. However, I doubt the results will change as the findings we reported in the Private Label Strategy book were based on several recession cycles between 1971 and 2004 across Belgium, Germany, the UK and US. So these findings are extremely robust.
Manufacturer brands consider innovation an exclusive competitive advantage over private labels because consumers tend to associate more risk with buying a private label product. With increasing acceptance of private label products, do national brands still retain this competitive advantage?
To answer your question precisely, I have to be a bit nuanced in my answer as manufacturers’ brands do retain an innovation advantage over private labels but not as an “exclusive” competitive advantage. First, overall, manufacturer brands retain innovation advantage over private labels since manufacturer brands devote more resources to innovation compared to the retailers and focus their efforts on a limited number of categories unlike retailers who compete in a large number of categories. However, this advantage is for leading manufacturer brands such as the market share leader (for example, Tide), sometimes a strong number 2 brand (for example, Pepsi), or premium niche brands (for example, Lindt).
Many manufacturer brands which have small market shares without occupying a premium price position in the category do not demonstrate any innovation advantage over the retailers. They tend to be fast followers in terms of innovation in the category similar to retailers’ private labels. Second, this advantage over retailers is generally only with respect to mass multi category retailers. Focused retailers such as Body Shop, Starbucks or Zara often have an innovation advantage over the manufacturer brands in their category. Finally, even multi-category mass retailers can have an innovation advantage in certain types of niche areas. For example, in orange juice and breads where freshness is important and manufacturer brands have long supply chains, or emerging niche positions such as organic foods where retailers have been quicker to introduce products than the large manufacturer brands.
What are the three things organised retailers should keep in mind if they are to have a successful private label strategy? Here I am talking specifically about India…
First, think beyond margin enhancement and leverage with manufacturer brands to creating a differentiated position for the private labels. Mass multi-category retailers must learn to sell manufacturer brands profitably and make a business out of it before adding private labels in any substantial manner. The latter is not a substitute for a bad retail business model. Second, improve objective quality dramatically as that is the obstacle for consumer adoption of private labels. Third, once objective quality is on par with the leading manufacturer brands, work on getting customer trial through objective quality tests such as “blind taste tests” or “buy the leading manufacturer brand and get the private label for free” in the category.
Source: Business Standard