Private Label Strategy - Part II

Is it worth it?

The natural question that would come to anyone’s mind is whether all this effort is worth it? After all there is a cost attached to all this effort too.

The answer is an unqualified Yes. The effort is more than worth it. Let us see how.

The biggest benefit lies in benefiting from the differentiated cost structure. A retailer typically leverages the existing manufacturing capability of someone else and hence does not have to incur fixed costs with regards to manufacturing. This is a clear savings and a significant one. Second, most store brands leverage existing technology and as such there is no R&D cost to be recovered. Third, there is no need for a separate sales team to generate demand and hence the cost of that effort is also saved.

In addition to the absence of the above mentioned costs, store brands incur far lesser advertising, marketing and transportation costs as they piggy back on the existing infrastructure and promotion of such products is usually done in-store which is not very expensive. In fact some chains actually promote such products as “No Name” brands to strongly communicate the extreme price value that these products deliver.

China’s emergence as a manufacturing base for the world has created a lot more of opportunities for private labels which international retailers are keenly taking advantage off. This is basis the cost advantage detailed above.

Next, a good and well planned private label portfolio helps the retailer in increasing sales in addition to margins. The cost advantage enables the retailer to price these products significantly lower and/ or give added features too. Not only does this induce customers to switch to private label products which deliver higher margins, but in most cases it also increases the overall category sales. This is because of the fact that brand loyalists continue to patronize the brands and many new customers start purchasing the private label products.

A classic example is the private label CFL that was introduced by a leading retailer. CFL bulbs are a nascent category and are only now beginning to make a mark in the sales charts of any retailer. When the private label product was introduced, many new customers entered this category and the overall sales went up. Although most brands did not lose out too much with regards to sales, the private label picked up a majority of the new, incremental sales. Similar examples abound in several categories. In fact, during the early days of corporate retail store brand jams have had a similar story.

Most importantly, store brands offers an exclusivity that further fosters loyalty of the shopper and creates yet another strong reason to shop at a particular chain only.

So, the rewards of a private label program goes beyond just margins and sales and over a period of time can become an important element of the overall strategy. Is it any wonder that some chains generate more than 40% – 50% of their sales from private label products.

Private Label Strategy - Part III

The Indian Private Label Story

In the Indian context the private label play is slightly different from how international players do it. Internationally, the product team is extensively involved in the product development and has a say in each component and feature of the private label product. Many a time the representative of the retailer is a regular visitor or even stationed there to monitor the production.

This is possible because of the enormous volumes that this is made possible by the large number of stores that international retailers have. These volumes are good enough for even larger manufacturing units to dedicate their entire production for a few months or even dedicate one production line permanently.

However, Indian Retail has not yet reached that stage and it would take time. So, how does private label work in India?

It is largely done as a pricing play. This means that existing products being manufactured are chosen and packaging is changed to reflect the store brand. In certain cases the features or composition is tweaked marginally to create a differentiation.

The other peculiarity with regards to Indian Retail is the high percentage of basic grocery sales. As much as 25% – 30% of a family’s monthly shopping consists of staples. Other than Oil, Masala, Salt and Atta, there are no major brands in most other grocery products. So by default every retailer starts off with a private label contribution of anywhere in the region of 20% - 25%. Then comes the other private label products which would average 10% to 15% nowadays, barring exceptions.

The exceptions are stores which have only store brands in their range and have adopted it as a business strategy. Internationally Marks & Spencer’s have done this and in India, Westside does this successfully. If successful the upside to this approach is enormous starting from a shorter cycle time to break even due to higher margins. The downside is that this becomes an all or nothing game.

Lastly, Private Label or Store Brands are an undeniable part of any retailer’s life. Scale enables it and it enables scale and that’s the chicken and egg part of the story

A rose by any name???

I recently read an article about how several retailers in India have managed to use distorted/ modified versions of several international retail brands very successfully. This has been implemented so well in certain cases that if the international retailer were to enter India, they might have a serious issue in terms of not only competition but also consumers mixing up the retail identity.

It was rather co-incidental that I happened to come across this store in Kerala during a recent trip. Interestingly the name is the same as that of a famous supermarket chain. Is it that the chain is so well known in Kerala and this operator is leveraging it or is it completely unknown that no one can make the connection!!

Differentiated range

The fourth article in the series about a basic retail model and its various elements was published in Business Line today.

"Customers frequent retailers who stock a range that is relevant to them. A look at the factors that help the retailer arrive at the right mix.. "

- Differentiated range

Retail Brand Building

Retail brand building happens at the customer’s home. Expectations created needs to be met and if possible surpassed. Take the example of this advertisement which I saw today. This retailer has smartly identified one of the core pain points of consumer durables purchase; Delivery and installation.

Note the promise of having a running AC tonight. After spending a fairly significant sum of money no one would like to chase the retailer or the installation team to start enjoying the benefits of such a purchase.

A simple promise to enable you to enjoy the benefits almost immediately is indeed a powerful one. If this expectation is met and maybe surpassed, where do you think the customer would buy their next consumer durable from?

So, where does the faith and trust in the retailer get built? At the customer’s home, post the installation when the room is chill and comfortable. Same is the case when one purchases almost everything, especially grocery and rice.

Simple but powerful truth of retail!

Delivering better value

An article written by me, about delivering better value, published in The Hindu Business Line.

Supermarkets should aim to become the neighbourhood contact point, touching every facet of their customers’ lives.

More value for your money’ is the oft-repeated cliché of most marketers. This favourite line is used or rather overused, more so in retail than anywhere else, because of the power of that statement. However, consumers are growing increasingly weary of empty words and statements without experiencing the same......

The URL for the article -

- Delivering better value

100 days and counting!

I have been blogging for 100 days now.

5,000 plus walk ins, lots of comments for various posts, a Google page rank of 2, etc.

A big ‘Thank you’ to all the readers and supporters of this blog.

Decided to do something interesting for all the readers of the blog and those who follow me on Twitter and Facebook, to celebrate all these milestones. So, have planned a daily post through the month of July ’09, wherein each post would feature a Retail jargon, its meaning and sometimes my interpretation too! I plan to include all the conventional established jargons as also a few weird ones, which may or may not be commonly used.

Hope to receive your feedback regarding this series. Some of you might find these posts too basic, please bear with me.

Not the end of the rack. Part I

Article written by me for the magazine “Indian Management”, June 2009

There are gloom and doom stories about Corporate Indian Retail everyday and just as it was in the stock market crash, everyone wants to stand up and claim, I told you so! But, is it really the end of the great Indian Retail story? I don’t think so.

Store Level Reality

The stores are being closed for very valid reasons which are linked to making the Retail model viable.

The store is a key OPEX component and as such the cost structure of each store is crucial to the success of any Retailer. In India, the typical margins that a supermarket would realize is in the range of 18 - 19% and three of the biggest cost components are rent, manpower and energy costs. These should ideally be in the range of 12 - 13%. However, over the past years the rental costs alone have risen to as high as 7 - 8% in many cases. Coupled with the other components the top three cost components today typically totals up to 15 - 16%. Which means that the store is either losing money or the positive contribution is not large enough to sustain the other common costs being apportioned.

This steep escalation in the rental component is a direct consequence of supply and demand. With so many mega plans having been announced and location being a supposedly crucial factor, what else can one expect?

So, the first take out is that at a store level, if the cost structure does not make sense no amount of any other corrective action will make up for that.

The downturn and the falling demand in real estate is an excellent opportunity to correct the initial mistake of indiscriminate store opening without regard for high rentals. The chains are renegotiating rentals and right sizing stores to make the cost structure workable.

The cost structure is linked to projected or estimated sales. All the percentages I mentioned before have a common base. That is the optimum sale that is required for a store to be sustainable. Typically supermarkets used to generate an average of Rs. 1,000 per sq. ft. per month and this became the benchmark for developing the supermarket model. However, nowadays the typical average in a supermarket is in the range of Rs. 700 with the lower end of the spectrum touching even Rs. 450.

The simplistic solution is to realign costs to this sales figure, so that percentages remain the same. However, it’s easier said than done, especially for cost components like rentals, which is being done by most Retailers.

The other option is to increase either the sales or the margins which is the tougher thing to achieve, because there are several very valid reasons for low sales, one being oversaturation of similar stores in a locality. So, the closing or down or right sizing of stores is possibly the most prudent activity in the current context and reflects that corporate Retail not only knows what needs to be done, but is acting on that.