National Brands And Private Labels

Published Date: 23 Mar 2015 Last Modified: 16 May 2017

Different peer reviewed articles and articles published in newspapers, business magazines, retail industry websites and industry experts, test a hypothesis and to draw a conclusion.

Findings:

The findings from the study suggest that private labels are generally considered low on price and quality. Incidence of rejection generally happens prior to purchase due to extrinsic cues. Store loyalty and image plays a crucial role in selecting the private labels. Retailers derive higher margins, differentiate themselves from competitors and have better control over value chain in the case of private labels. To compete with national brands, retailers these days are developing a portfolio of private labels across price points, improving the extrinsic cues to improve the perceived image of private labels. Managers can enhance consumers' perception of the PLB image by improving the service quality that relates to the PLB and provide PLB products with good quality and reliable performance safe for use to reduce perceived performance risk and physical risk, which in turn will increase consumers' purchase intention for PLB products.

INTRODUCTION:

Private Labels:

Private labels are defined as the "products owned and branded by the organizations whose primary objective is distribution rather than production" (Schutte, 1969).

Private labels can also be seen as brands owned not by a manufacturer or producer but by a retailer or supplier who gets its goods made by a contract manufacturer under its own label. Pandya & Joshi, in their book define store brands or PLs as "brands owned, controlled and sold exclusively by retailer."Private label products encompass all merchandize sold under a retailer's brand. That brand can be the retailer's own name or a name created exclusively by that retailer.

Distinction between National-Brands and Private Labels:

The national brand is the product that is distributed nationally under a brand name owned by the producer or distributor, as opposed to local brands (products distributed only in some areas of the country), and private label brands (products that carry the brand of the retailer rather than the producer.) National Brands has longer history than the Private Label. So customer knowledge towards the national brand is higher than private labels.

With the rise of national advertising, manufacturers' brands or national brands (NBs) became widely recognized by consumers who elected their preferred brands and became loyal to them. Over time, manufacturers could exercise greater influence over the final demand for their products and secured a better bargaining position when dealing with retailers (Grant 1987). Retailers saw their margins drastically reduced, and their power to determine the prices to consumers depreciated (Borden 1967).

In the food retailing industry, supermarket chains were no longer able to compete, solely, on the basis of price. A way found by retailers to beat competition was through the establishment of Private Label.

TYPES OF PRIVATE LABEL

Generic private labels

Private labels first came onto the scene several decades ago in the US and Europe, and about a decade ago in India, as cheap, inferior products. They were presented as 'generics', often not bearing the name of the retailer, but simply the name of the product, such as 'milk' or 'butter', in plain script on a white plain background. Mostly basic food products, canned goods and paper goods, they were offered at low prices, competitive with the lowest priced product in that category. The product range appealed to the budget-sensitive shopper. They were seen as low quality but cheap. Retailers rarely run price promotions because the product is cheap already and there is usually only one product to choose from. It emphasizes on the basic use of a product and is available in simple packaging, limited advertisement and cut in quality and therefore occupies the lowest price tier.

Classic /copy cat private labels

Copycat store brands carry the name of the retailer and tend to have packaging and price points very close to the products that they compete with. The retailers tend to target branded products that are already successful then produce a copycat that has similar ingredients, packaging and pricing. Copycat retailers can thereby cash in on the success of the branded product without having to incur the costs associated with developing the product and researching the market. Marketing costs are also kept down since the product is instantly recognizable as being associated with the product it is copying. With copycat brands there is no cost of failure to absorb since only successful products are targeted. The retailer tends to produce a similar product and offer it at a lower price than the branded product - so the message to the consumer is that it is as good but cheaper.

The advantages of having copycat brands is not only to make profit on the sale of the product itself, but it creates competition for the existing manufacturer branded products as well as increasing the retailer's bargaining power with the manufacturers, since the retailer has the option to promote its own brand in competition with the original brands.

The Spanish clothing chain Zara is a very successful copycat company that sells private labels only, producing fashion clothing at very low prices that imitates famous designers and well-known brands. They employ talented and unknown young designers to pick up on key trends and translate them into clothing for the Zara chain. Its strategy allows it to operate with extremely low costs of advertising, staffing, market research, and so on, that the manufacturer brands continue to incur.

Premium private labels

As retailer strategies have developed, the approaches have evolved to incorporate premium store brands. Retailers have seen the opportunity to differentiate their products and thereby target a whole new section of the market. The latest trend is to establish high quality products with distinctive packaging, presented as a whole new product line by the retailer, targeted at competing with the top brands in the range.

"Kumar and Steenkamp" define two types of premium brands: the premium private label which is exclusive, higher in price, and superior in quality to competing brands; and the premium-lite store brand which is promoted as being equal or better in quality to the competing brands, while being cheaper.

Value innovators in private labels

Value innovators are the fourth main category of private labels. The retailers following this approach have focused on cutting down costs and processes to simplify the production and marketing of product ranges, so that a good quality product can be offered at very low prices. The value innovator approach differs greatly to the generic, copycat and premium label approaches. There are a number of key principles that must be adhered to for this approach to be successful.

Limited number of products

Low costs of production and marketing

Good quality products at low prices

PRIVATE LABEL BRANDS IN INDIAN MARKET

» India's largest retail company Future Group has 12 apparel, 4 FMCG and 2 household product private labels in its formats Big Bazaar, Food Bazaar and Pantaloon. Besides these it also has many other private labels across categories and formats.

» Aditya Birla's private labels segment has 7 brands which Aditya Birla Retail Limited provides customers products under its own labels. Private label Food Brands include Feasters, Kitchen's Promise, and Best of India. Home & Personal care brands include Enriche, 110%, Pestex, Paradise and Germex. It is also planning to launch its private labels in milk and dairy products.

» Tata Croma has plans for 100+ private labels across categories like personal care equipment, laptops, small appliances, etc.

» Reliance Fresh sells staples and food items under Reliance Select and Reliance Value brands. It has recently launched Dairy Pure, in the liquid milk segment. Reliance also sells a number of private labels in other categories like apparel, through its various other formats.

» Shoppers Stop has around 10 private labels, the prominent ones being Stop, Kashish, Life, etc.

» Bharti retail recently launched 8 international private labels of Wal-Mart in its supermarket chain, Easy day.

» Myntra is looking to launch its own private label by Q3 2012, which according to him, will contribute to a better bottom-line for the company, since the margins in private labels are higher.

» Flipkart has entered the private label league through online store brand 'Digiflip', a brand that sells digital accessories such as laptop bags, sleeves and camera bags & pouches.

» Ruchi Soya Corp has tied up recently with Future Group for manufacturing its private label brand - 'Fresh & Pure'.

Internationally

» Nestle works with Lidl, a discount retailer, to create products and packaging in many categories across countries. In the Indian context, Brand owners and manufactures like Indo Nissin (Brand: Top Ramen), Dynamix Dairy (Brand: Dynamix) etc. also manufacture private label brands for their retailers to occupy their excess production capacity.

» Wal - Mart's private label 'George' is one of the highest selling apparel brands in the US.

» Aldi, the German deep discounter has more than 90 per cent of its sales coming from private labels. Some of its private labels sell more than any national brand in Germany

ADVANTAGES AND DISADVANTAGES OF PRIVATE LABEL:

The advantages and disadvantages vary depending to which market sector we are referring to. These can be defined as follows:

For Retailers:

Advantages:

Reduction of producer domination in the marketplace

Increase in consumer loyalty

An opportunity to differentiate and provide variety

Flexibility in pricing strategy

Positive control over stock keeping inventory

Better bargaining position in a depressed economy

Disadvantages:

Erosion of brand image and brand value if private label quality is poor

Lack of standardization of private labels between categories upsets the customer

Financial control concerns

Excessive focus on the private label at the expense of other products

The retailer could be perceived as less powerful in the marketplace as they don't promote recognized brands

Low price may equate to low quality

Lack of financial support from suppliers

For Consumers

Advantages:

A guarantee of the same quality for a serious price differentiation

More variety within the category

A trusted retail name equals trust in the product

Product provides a need based on a want, where products were missing within the category. E.g. ethnic foods, diet foods, sugar free foods and so on.

Disadvantages:

Low quality product. Consumers may have a prejudice to low price equaling low quality

Previous customer failures could affect the whole private label range in a store.

INDIA SCENARIO:

Correlated with the immense growth in the retail sector, the growth in sales of private brands stands at an impressive 30% (YOY). As per an AC Nielsen study groceries account for 46% of Private Brand sales. Correlated with the immense growth in the retail sector, the growth in sales of private brands stands at an impressive 30% (YOY). As per an AC Nielsen study groceries account for 46% of Private Brand sales.

"Strategic Issues for Retail CEOs", a thought leadership report by PricewaterhouseCoopers, puts forth that private label products will be a major lever for growth of participants in India's retail sector. Indian consumers, often referred to as value conscious, will find major benefit in purchasing private label products since final promotional offers to quickly move their own brands. India's major retailers expect to embark upon the following strategies for their private label products: costs paid are lower. A demanding and aspiring middle class of 300 million people (or 75 million households) and a large young population of 500 million under the age of 25 years are just two of the demographic-oriented statistics that suggest a large market for private labels in India.

In India, private labels are becoming a major component of retailers' long-term strategies encompassing product development and sales. Most retailers are investing towards creating robust private label ranges which will appeal to consumers, delight consumers and also meet consumers' price preferences. Those retailers who develop good quality, well-priced private labels, and focus on branding and promotion, will increase both their top and bottom lines in a retail environment where innovation, meeting customers' needs and efficiency are imperative. (Indian Retail embraces private labels by N. V. Sivakumar).

The greatest potential for private labels lies in developing countries, where retail chains with well-developed private-label ranges are growing rapidly. Although growth for private labels is expected in all most all sectors, the highest growth in share is anticipated in the ready-meals sector. The growth of private labels in the international market, especially in developing countries, will be guided by the demands of busier lifestyles. Delivering higher quality and convenience, and introducing innovation in product ranges will help the private-label market to expand further. Retailers can make use of these opportunities by offering good-quality private labels that will foster a sense of brand quality among the customers. Over the long term, this could offer retailers a significant advantage in the global retail sphere. (Going global with private labels: Sandeep Puri & Dr Harsh Dwivedi).

Private labels are still nascent in India which is to be expected given that modern trade started in the late 1990s. Given the variances in market maturity between India's retail sector and that of other retail markets in the US and in Europe, it is natural that private labels have yet to achieve a level of sophistication in India that they enjoy overseas.

RESEARCH FINDINGS:

Some of the significant findings from the PLMA (Private Label Manufacturer's Association) Research Report 2010 & 2011 are:

1). Consumers continue to turn to private-label products in these supermarket categories in which they had formerly purchased only a national-brand product. Around 43 percent of these consumers report that they have recently forsaken a familiar national brand for a private-label counterpart-a marked increase since the GfK study conducted in June 2009, when only 35 percent of consumers said they had done so.

2). Ninety-seven percent respondents compared private labels favorably to their previous national brand choices in the same categories. About 49 percent said that their new private-label selections compared "very favorably" to their earlier selected national brands. This is an impressive increase from 2009 when only 26 percent reported the same.

A 2010 online global survey conducted by The Nielsen Company reveals that 60 percent of consumers across 55 countries from Asia Pacific, Europe, North America, Latin America and Middle East/Africa (comprising countries from Saudi Arabia, Pakistan, United Arab Emirates, Egypt and South Africa) say they are buying more private-label brands because of the economic slowdown. An uncertain economy encouraged many customers to try private labels for the first time. Once this initial barrier was breached, they found private labels to be as good as their branded counterparts, albeit at economical prices.

PRIVATE LABELS VS NATIONAL BRANDS:

There are a few reasons driving private label growth: an increased concentration among retailers, an improved quality perception among consumers, and a rising social acceptance of private labels consumption. In addition, the current economic downturn has further boosted the appeal of private labels because of their price utility.

To combat the threat posed by private labels, consumer packaged goods companies frequently adopt new innovation strategies focused on delivering new value to consumers. Furthermore, research shows that national brand manufacturers have mainly focused on increasing their distance from private labels through innovation and advertising in order to provide a superior value to the consumers compared to private labels brands. In this sense, product innovations help to sustain a national brand's competitive advantage and provide a basis for a sustainable price premium over store brands. Research also shows that introduction of new products by national brands has a positive impact on their brand equity which makes them less vulnerable to PLs.

CHALLENGES AND OPPORTUNITIES FOR PRIVATE LABELS IN INDIA:

1).Lack of retailer sophistication could hamper private label growth

There is lack of supply chain sophistication among Indian retailers. Most retailers still exchange information manually with suppliers. Indian retailers are yet to implement bar-coding techniques properly, let alone sophisticated technologies such as radio frequency identification (RFID). There is also a lack of integrated IT systems, coupled with low overall IT spending. As is evident, Indian retailers have a long way to go before they can be compared with international retailers such as Tesco and Wal-Mart, in terms of technology and supply chain sophistication. Therefore, unless retailers pay attention to these issues, they will be unable to make successful private label portfolios.

2).Rural areas unlikely to be tapped by private labels in the near future

While it is widely acknowledged that the 'real' potential in Indian retail lies in rural areas, the rural retail scenario continues to be unorganized and highly fragmented. While FMCG manufacturers - such as Hindustan Unilever and ITC - continue their efforts to solve the rural 'retail jigsaw' through projects such as Shakti and e-Choupal, major retailers have tended to stay away from the rural scene. In light of high access costs due to infrastructure bottlenecks, along with absence of a successful rural retailing model, the above trend is likely to continue in the coming years. Therefore, the Indian private label market is expected to be largely confined to urban areas (metro cities), with some growth also coming from semi-urban areas (tier II towns).

3).Psyche of the urban Indian consumer is both a hurdle and an opportunity

In an ACNielsen consumer survey in 2005, only 56 per cent Indians agreed that private labels are a good option in comparison with brands - as against four in five consumers in developed countries. Further, the same survey also concluded that a majority of Indian consumers associate private labels with low cost, and are, therefore, apprehensive about compromising on quality. The target segment for organized retail in India is still predominantly urban, and in the context of private labels, it is more inclined towards 'upwardly mobile' urban consumers. This segment gives high priority to quality, and the 'budget label' perception does not help at all.

Further, Indian retailers have not been able to develop a bond with consumers. Consumer loyalty has been seen to provide impetus to private label growth in developed countries such as the United Kingdom. The lack of this bonding and loyalty could hamper private label penetration in coming years. At the same time, though, the Indian consumer's psyche also provides an opportunity for retailers. The Indian urban consumer is price-conscious, but also expects high quality. Private label products could actually fit the bill perfectly.

4).Intense competition in Indian retail could provide impetus to private labels

With the entrance of several corporate majors such as Reliance, there is intense store-level competition in the current Indian retail scenario. However, if Indian retailers were to follow the UK model, this could actually turn out to be a boon for private label growth. Major UK retailers such as Sainsbury and Tesco have successfully used private labels to differentiate themselves. This scenario could be replicated in India in the near future.

5).Private labels likely to exhibit maximum penetration in 'food and groceries', 'clothing' and 'consumer durables' segments

All segments where percentage of organized retail is relatively high, and which are also exhibiting the highest overall growth rates, are most likely to show maximum private label penetration in the near future. The following figure illustrates the findings of a simple analytical model based on the above two assumptions. Private label penetration by category

http://www.indiaretailing.com/images/private10.jpg

6).Ability of retailers to innovate likely to drive future growth of private labels

The main USP of private labels is their customization according to user demands. They are then promoted by various means including innovative packaging, promotional schemes, and placement within the retail store. Therefore, success of private label retailers globally has been dependent on their ability to innovate in all aspects of a product - formulation or ingredients, supply chain, packaging, advertising, promotional schemes, and so on. The dynamism of private label retailers, in responding to changing consumer needs through suitable modifications, is also critical. In light of the intense competition in Indian retail, coupled with the choosy Indian customer, future success of private labels would depend on the ability of Indian retailers to innovate. This is again a question mark, given the reputation of Indian companies as poor innovators.

RECENT TRENDS:

Private labels are a growth opportunity that retailers cannot afford to ignore and many are assessing market potential by conducting pilot projects to assess the impact that own brands have on visibility, sales and revenues. Others are working on enhancing depth and breadth of private label ranges. Other selected observations include:

While low-price private labels exist, retailers are changing their focus from "a price game" to one that involves developing a portfolio of brands with distinct positioning for each brand.

Retail chains are trying to understand unfulfilled demands existing in Indian market through need-gap analysis. Retailers are incorporating demographic and psychographic indicators into their need-gap assessments.

Retailers are also learning from the lessons of experimentation; the quality of their private labels is being improved, product extensions are being created, etc.

Some retailers are launching dedicated formats for private labels in apparel and accessories. In the early stages of being launched, this is an indication of the level of commitment that retailers are exhibiting to private labels.

Retailers are also working to increase and improve the level of trust that consumers have with regard to private label offerings. That said, sharp promotions, competitive pricing, freebies, etc. are some ways in which retailers can incentivize consumers to try private label products.

Factors Influencing Private label Strategies:

Private labels apparently be successful without having to rely on the price weapon?. Economic theory hold that the price consumers are willing to pay for a product depends on the utility they derive from consuming the product. A major source of utility is the perceived quality of the product. Perceived quality is defined as the degree of perceived performance excellence of the product. How well does the brand perform its function in the eyes of the consumer?

Perceived Quality, Not Price, Drives Private Label Success

To understand the relation between perceived quality and price, we need to understand the different types of buyers:

Random Buyers are not particularly price sensitive and see little difference in quality.

Brand buyers are consumers who are low on price sensitivity and perceive a large quality difference between leading national brands and the store brands .They will buy national brand

Private label buyers are price - sensitive consumers who perceive a small quality gap between leading manufacturer brands and the store brand. They will purchase the store brand.

Toss-ups are consumers who are high on price sensitivity and perceive large quality differences between leading national brands and the store brand

The battleground is among toss-ups and random buyers. However the strategy to induce them to private labels is very different. Random buyers can be attracted to the private by using in-store stimuli that guide the shopper to the private label, such as favorable shelf facings, shelf tag ons, and end-of the aisle displays. Toss-ups will usually purchase national brand since for most consumers quality is more important than price. This is especially true if the national brand regularly runs price promotions, which will appeal to the toss-ups high price sensitivity. Private labels can convert toss-ups in to private label buyers only if they convince consumers that the quality of the private labels is comparable to, if not better than, the quality of the national brands.

National Brands Irrational Price Premium

The question to ask is whether consumers willing to pay more for better quality?

It is beneficial that they value quality, but better - quality products often cost more to produce, which translates in to higher prices. Thus the question is whether products of higher perceived quality also command a higher price in the marketplace.

Consumers are often willing to pay disproportionate price premium for better quality, because quality typically has more weightage than price in purchase decisions. When the relationship between perceived quality gap & the price premium commanded by the NB's over PL's for CPG'S (consumer package goods) was examined on 75 CPG categories in France, one of the world's most important and competitive private label markets, the following insights were seen

In categories where the perceived quality of national brands exceeds the quality of store brands, the average price premium for manufacturer brands is 56 percent.

In quality- equivalent categories (i.e., categories where consumers do not perceive a quality difference between national brands and store brands), the price premium commanded by national brands is 37 percent.

The French findings are consistent with the evidence from the United States.

A recent study ( using " objective" quality as reported by Consumer Reports) finds that a 1 percent quality gap between manufacturer and store brands is associated with a 5 percent price gap

The price premium that national brands command in quality- equivalent markets is the same as in France, or 37 percent.

In 33 percent of the cases, consumers perceive manufacturer and store brands as quality equivalent; however they are willing to pay the same price for the store brands as for the manufacturer brand in only 5 percent of the cases.

Conclusion

The perceived quality gap between NB's and store brands is a major factor driving the price gap

Quality is not the only factor; there is "residual" price gap that cannot be explained by quality perceptions. The findings we had in categories where consumers do not perceive a quality difference between national and store brands , the price premium commanded by manufacturer brands is substantial 37 percent . Consumers are unwilling to pay equivalent prices for store brands even if they perceive them as quality equivalent.

This last result is rather depressing for retailers. Why are consumers willing to pay a price premium for manufacturer brands, even when they do not perceive a quality difference between national and store brands? The reason is that national brands have a clear advantage on brand imagery.

BRAND IMAGERY AND THE PRICE GAP

National brands offer something intangible that most private labels do not (yet) offer. They allow consumers to identify with the values imbued in the brand, and help consumers express who they are and how these brands fit in to their lifestyle and self concept. Brand imagery refers to the personalized social-emotional bond the consumer has with the brand. What does the brand stand for, and does that appeal to me? Consumers show no difficulty in assigning personality characteristics to brands, in thinking about brands as if they are animated, humanized, and personalized. For example brands like Marlboro, Harley- Davidson, Jack Daniels, and Levi's glamorize American ideals of the West, strength, and masculinity, while sophisticated brands like Gucci, Chivas Regal, Revlon, and Mercedes are associated with aspiring imagers such as the upper class, glamour, and sexiness.

These image components, regardless of the functional qualities of the product, can be extremely important to people. Two brands may be quality equivalent, but if one brand is stronger on image; it will generate higher utility in the target segment. Consumers are willing to pay a price premium for image utility.

Using the French CPG data mentioned earlier, the findings are as below

The average price premium commanded by manufacturer brands in categories that are low on imagery (e.g., floor cleaners, kitchen paper, canned green beans) is 38 percent.

The average price premium commanded by manufacturer brands in categories that are high on imagery (e.g. deodorants, hair coloring products, whiskey) is 61 percent.

Thus the price premium associated with brand imagery is, on average, 23 percent and contributes significantly to the price gap.

Although the importance of brand imagery varies across consumers, some generalizations still emerge.

Younger consumers attach more importance to brand imagery because of their greater desire for social acceptability, besides being more image conscious in general

Singles and couples attach more importance to image utility than larger families.

Poorer consumers give more weight to brand imagery. This seems paradoxical since they stand to gain most from purchasing a lower priced store brands. However, it allows them to show the world that they are also "sophisticated" consumers .Thus the fact that the poor buy private labels more often than the rich is because they have to, not because they want to.

IMPLICATIONS FOR RETAILERS

We have seen that there is a lot more to private label success than price. We can formalize these ideas by drawing on economic theory. Consumers will purchase a private label if the price premium for the national brands exceeds the utility the consumer derives from the surplus in perceived quality and imagery generated by the national brand.

Thus private labels do not have to compete on price alone. Beyond managing the price gap, they can also compete on two non price strategies. We will discuss them first before turning to managing the price gap.

Decreasing the Perceived Quality Gap

One way to decrease the perceived quality gap with the national brands is to increase the objective (actual) quality of the private label by using better materials, procurement from top-notch suppliers and so on. Objective quality, in turn, is positively correlated with perceived quality, although the correlation is far from perfect.

A second patch to decreasing the quality gap is to adopt a copy cat strategy, whereby the retailer introduces a private label as a me- too product that is very similar to a leading national brand. The copy cat strategy accounts for more than 50 percent of the store brand introductions.

Copy cat is an effective retailer strategy to decrease the price premium commanded by national brands. In France the price gap between national brands and private labels in categories where private labels have successfully implemented a copy cat strategy is ,on average ,30 percent , while the price gap is 69 percent in categories where the degree of similarity between national and store brands is low.

Decreasing the Image Gap

Another way to avoid the price game is to imbue one's store brand with imagery. Traditionally, compared with manufacturer brands, private labels have fared much worse on brand imagery than on perceived quality. To reduce this gap retailers have also started to advertise their store brands in the media. Ten years ago retailers focused on the top national brands in television advertising. Today every retailer is doing some or the other kind of advertising through , print media , television and hoardings to promote the store brands and letting the shoppers know 'This is the only place you get our brand'. Britain's Tesco and the Netherlands's Albert Heijn are among the biggest advertisers in their countries. In India, Big Bazaar, Pantaloons and Globus are constantly advertising their respective brands. By decreasing the perceived quality and/ or brand imagery gap with manufacturer brands, the retailer increases the attractiveness of its private label. This allows the retailer to increase the price of its private label and hence to move the game from price to non- price competition.

Increasing the Price Gap between National and store Brands

The retailers might also play the classic price game. In this case, it attempts to increase the price gap between the store brand and the national brand to ensure that the price premium commanded by the national brand exceeds the gap in the perceived quality and image utility with the store brand. One way to increase the attractiveness of its private label is to increase the price of the national brands. In general this is a risky strategy because the prices of national brands are readily comparable across retail chains. Consumers use prices for national brands charged by different retailers to form an impression of a retailer's overall price image. However sometimes retailers disfavor national brands that they imitate by charging higher prices , while lowering the price of national brands they do not imitate.

The obvious alternative is to offer the private label at a low price , so that the price gap between the national brand and the retailer's own private label becomes sufficiently large - at least for a sizeable market segment - to compensate for the lower perceived quality and / or image utility of the store brands . This raises the question, what is the optimal price gap between private label and national brands for the retailer to maximize its category sales?

The optimal price gap depends on the price sensitivity of the national brands, the price sensitivity of the store brand, and the effect of the national and the store brand prices on each other. Too big price gap reduces the sales the retailer derives from national brands. However, and counter intuitively, it may also reduce private revenues. Why is that the case .The reason being the demand for private labels may be not particularly sensitive to (1) the absolute level of the price of the store brand and (2) the price gap with the national brand. Retailer category revenues may be higher if the retailer charges higher prices for its private label.

It is not that that competition on price is not a viable strategy. Price gap management is a vital component of any private label strategy. Investing money in improving objective and perceived quality (e.g., through brand imitation) and creating imagery for the store brand are often more effective. Moreover, it directs mainstream retailers away from head - to - head competition with hard discounters, battles they increasingly find hard to win.

Private label Maturity Model: A model for framing private label strategy

Third Eyesight( a retail consultancy firm based in Gurgaon) has evolved a Private Label Maturity Model (see the accompanying graphic) that can help retailers think through their approach to private label, whether their product offering is dominated by private label, or whether they have only just begun considering the possibility of including private label in their product range. The model sketches out a maturity path on five parameters that are affected by or influence the strength of a retailer's private label offering:

• consumer knowledge and insight

• product design and quality

• pricing

• promotion

• supply chain & sourcing

Private label maturity model:

Nascent

Developing

Sophisticated

Consumer Insight

Little or no structured use of consumer insight for private label

Moderate but regular use of consumer insight

Frequent consumer research specific to private label, actively used to drive strategy

Product Design, Quality

Me-too / Knock-off; Moderate quality, may or may not be comparable to national / international brand

Investment in research, selection, some uniqueness in design; structured quality parameters

Oriented to unique development(incl. raw materials) rather than selection; quality comparable to industry benchmarks

Pricing

Significant discount over national / international brand (25-30% or more)

Moderate discount over brands (15-20%)

Little or no discount to comparable branded products

Promotion

Little visible promotion of private label

Mainly in-store promotion and visibility with some visibility in mail-shots to loyalty database; active selling by sales associates

Identifiable brand visibility, direct outreach to consumers, as well as presence in mainstream channels (ad. and / or PR), sales associates highlighting product differences

Supply Chain and Sourcing

Loose, product-selection based transactional relationships

Identified finished product suppliers, but little or no retailer investment of effort or money in upstream (raw material)

Controlled groupof suppliers, strategic approach to supply chain, focus on development of innovative products, upstream investment (effort and / or capital)

In some cases, retailers may have multiple labels, some of which may be quite nascent while others might be highly evolved, clear and comparable to a national brand. This could be by default, because the labels have been launched at different times and have had more or less time to evolve. However, this can also be used as a conscious strategy to target various segments and competitive brands differently, depending on the strength of the competition and their relationship with the consumer.

Field Research: Interviews with Industry experts and retailers

A). Consumer durables: A comparison between two stores of different formats

Interviewee: Sales and Merchandising manager (CD&E), BIG BAZAAR Mumbai (Name not disclosed upon request)

1). Are private label an important source of profit for your business?

Yes, definitely because they are 30-40% lower priced than most of the national brands and BIG BAZAAR being a value format we are able to achieve higher volumes (almost 40% of turnover) from private brands like KORYO and SENSEI. This makes them an important source of our profits and an integral part of our business strategy although the gross margin percentages are almost same as that of national brands. (When asked about GM percentage on private labels, declines to comment as he was not authorized to do so).

2).What is the growth prospect of private labels?

These will be the future growth drivers. We are able to achieve a consistent 15% YOY growth rate.

3). Do you think price is the primary reason for purchasing private label products?

It depends upon specific consumer's behavior. Some are price conscious and buy solely on price while others think lower price may be a proxy for quality. But private labels are generally purchased by price conscious consumers who think lower priced products may not necessarily be inferior quality.

4).Do you think private labels could be priced above national brands in India?

They could be priced at par if compelling branding, more features are incorporated but even then it is very difficult to push sales. How could we price it above national brands?. National brands certainly have edge over private brands in terms of brand image, for which they charge price premium. There is a limit up to which price could be increased, above which consumers will switch to national brands.

5).What do you think about the quality of private labels as compared to national brands?

It depends upon the classification of private labels like generics, copy cats or value innovators. If a private label is priced too low, it is not possible to provide a comparable quality as a national brand and even the target audience does not expect. Our endeavor, over the years, has been to continuously improve the quality of our products and provide them at lowest possible prices. It is important that a consumer feels value for money.

6).Has the perception of consumers changed over the years towards private labels?

With the advent of newer products and categories and planned brand development by retailers, consumers have now beginning to believe that private labels could be a good choice. Again it depends upon consumer to consumer. The consistent growth rates recorded by our labels indicate that consumer perception towards private labels has changed for the better.

7).How do you promote private label purchases?

By providing impressive discounts and advertising with other group schemes in leading dailies. We have also done in-store branding, provide bigger space, visibility and train salespersons to promote private labels.

8).What role does store image play in private label purchases?

Store brand image definitely plays a very important role in private label purchases, especially if both have same brand name. Quality perception toward store, store loyalty, customer experience is very important.

9).What is your private label strategy for the future?

In keeping with the format philosophy of "Isse sasta aur achcha aur kahin nahin" provide customers with products of comparable quality at lower price. Private label development is an integral part of group strategy. We strive to regularly launch innovative products, improve brand elements, and provide excellent service experience to improve the quality perception of our products.

Interviewee: Marketing manager, Infinity Retail Ltd. (CROMA) Mumbai

1). Are private label an important source of profit for your business?

The CROMA private label has shown impressive growth over the years. It is present across categories from televisions to IT products like pen drives, hard disks to niche categories like digital photo frames. It fetches 5-6% more margins than national brands even though it is priced 15-20% lower than national brands.

2).What is the growth prospect of private labels?

They are only going to become stronger in the near future.

3).Do you think price is the primary reason for purchasing private label products?

Price is one of the important factors but not the sole factor.

4).Do you think private labels could be priced above national brands in India?

No. private label retailing has not reached that level of innovation in India.

5).What do you think about the quality of private labels as compared to national brands?

Some retailers think that quality could be substituted by lower price. We do not compromise on quality given the expectations of our target audience.

6).Has the perception of consumers changed over the years towards private labels?

Acceptance is increasing. Again it depends upon the brand building activities of the retailer. At CROMA it is imperative for us to keep up the TATA trust with the brand.

7). How do you promote private label purchases?

We do not advertise on mass media as this will increase the costs and we would not be able to offer competitive prices. Discounts and bundling offers are used. Replacement warranty gives differentiation to the brand.

8).What role does store image play in private label purchases?

Store and product brand have a mutual relationship. They foster each other. In our case the trust associated with TATA brand, pleasing store atmospherics and superior customer service play an important role in driving sales of own brand.

9).What is your private label strategy?

We do not want to be too aggressive on price as this will dilute our brand and affect our quality. We are registering a favorable growth rate to sustain the private label. Enhancing the quality perception through better models, pleasing aesthetics and developing niche and emerging categories like digital photo frames, tablet PC's, etc. are some of the aspects.

Store visits to find the practical implementation of the strategy:

BIG BAZAAR:

The prices of KORYO products were 40-50% lower than national brands. For e.g. 32" LCD TV was priced `16990 where as those of national brands were above `30000 range. Most of the small appliances were 50% lower than national brands like mixer grinder for `1200 onwards whereas the range of leading national brands starts from `2000 upwards.

The brand was not present in emerging categories like tablet PC, IT products. There was minimal in-store branding. The salespersons gave a positive feedback about the growth of private label but said there are some after-sales service issues. Promotion was mainly in terms of mark-downs.

This corresponds with the facts put up by the sales and merchandising manager and we can conclude that BIG BAZAAR is mainly competing on price in the private label segment as it is a value format and caters to value seeking customer. It is not making much effort to give exclusivity or differentiation to the brand.

CROMA:

The range was more comprehensive, consisting of products in emerging categories. The product aesthetics were more pleasing, product was more prominently displayed, and effort was made to give exclusivity to the brand. Price of the products was 15-20% lower than most of the national brands. For e.g. 1.5 Ton AC was priced `17990 onwards whereas leading national brands start from `19990 onwards. Mixer grinders etc. start from `1900 onwards whereas brands like Philips, Bajaj were priced `2200 onwards. We can conclude that a differentiation strategy has been adopted not much consideration has been paid to compete on price as it may dilute the brand and may not suit with the expectations of the target audience. The brand value of TATA has been leveraged.

B). APPAREL

Similar experience was gained on interviewing store/brand managers of BIG BAZAAR and LIFESTYLE.

BIG BAZAAR:

While BIG BAZAAR, being a value format, does not pays too much attention to differentiate its brands and mainly tries to increase the price gap between private labels and national brands. It has adopted straddling strategy in some categories like in men formal where it has three ranges: AFL-`299 to `499, KNIGHTHOOD-`499 to `799 and PRIVELEGE CLUB-`799 onwards. This is to target different consumer segments. In entry brands price is the main factor whereas in premium labels effort has been made to increase the brand imagery and reduce the perceived quality gap as compared to national brand.

LIFESTYLE:

Its main private labels are MAX and CODE. MAX is a casual and sportswear brand whereas CODE is a formal wear brand. These are expensive as compared to the private labels of BIG BAZAAR. Attempt is made to improve the brand imagery and reduce perceived quality gap by good in-store branding, product display, catalogues and brand ambassador use. Price of CODE could be compared with national brands like ARROW, BLACKBERRYS etc. as it is in the range of `2000-`2500. But they are running a limited period offer of BUY 2 and GET 1 free. This may be because they do not want to dilute the brand. MAX is priced much lower than NB's with range `399-`899 whereas leading NB's start from `1000 upwards.

Food and FMCG: A comparison between private labels and national brands at BIG BAZAAR:

Future group Big Bazaar has been leader in organized retail in India and a pioneer in the private labels business across formats and categories. It has the largest number of private brands across price points which offer a wide variety to the consumer and value for money. In FMCG it derives about 30% of its revenue from private labels which is a big number. This has given future group considerable bargaining power against national brands. It has a dedicated company, Future Brands, to manage the large portfolio of its brands and another company, Future Media, to promote them. Some brands of products are manufactured by the company itself like Pure & Fresh by Future Agrovet Ltd. and others are licensed to other manufacturers. Future group uses extensive marketing and branding of its private labels and tries to maintain comparable quality as national brands at equal or lesser price points which is the main reason of the tremendous success of its private labels. In this note we have made a comparison between the private labels of Future Group and national brands across various categories on parameters like strategy, price, quality, image, promotion, value proposition and consumer benefits.

Category 1: FOODS

SOUPS

BRANDS

PRICE

PROMOTION

PL/ BRAND

TASTY TREAT

54-60gms @ ` 34

-

PL

KNORR

43gms @` 35

Buy 2 for 49

BRAND

Chings

35gms @ ` 33

-

PL

Strategy: Tasty treat was offering more quantity at same price as Knorr but now that Knorr has started a bundling offer (2 for 49) Tasty treat will have to lower its price or start its own bundling offer.

Positioning: Tasty treat is positioned at par with national brands or a little premium whereas Chings is High premium private label. Tasty treat has similar packaging, branding as HUL's KNORR therefore it could be said a Copy Cat or premium lite whereas chings is mainly focused on Chinese segment and a focused differentiator brand and not many Chinese dedicated brands are available therefore it charges a premium.

Quality: The quality of private labels is perceived to be equivalent to national brands as revealed during interviews by a few consumers. There is no loyalty build-up, consumers are ready to experiment.

Image and value proposition: All Private labels use the same image and value proposition of soups as real and made fresh at home. Chings uses the proposition of Real Chinese.

KETCHUP

BRANDS

PRICE

PROMOTION

PL/ BRAND

TASTY TREAT

MRP: ` 85 FOR 1 K.G.

Offer price 79

PL

KISSAN

` 105 for 1 K.G.

-

BRAND

MAGGI

` 70 for 500 gms.

Free pastaaz worth rs. 16

Brand

HEINZ

` 115 for 1 k.g.

Free home style chutney

Brand

Strategy: Tasty Treat has clearly been positioned as price warrior and could be said as Value for Money private brand. Low cost strategy is used to drive volumes and it is mainly targeted towards the aspiring class to increase usage and to increase penetration. It may also snatch some sales of the national labels. A new tetra pack has been used to retain freshness and reduce cost for Tasty Treat

Positioning: Tasty treat is positioned as a real tomato sauce at par with other brands but as a sales promotion its price has been reduced from ` 85 to ` 79 for 1k.g. Other national brands are more or less similarly positioned as real tomato sauces with Heinz claiming itself to be the thickest for a very long time.

Quality: Quality is not much different from national brands at least better than other local players with similar prices.

Image: Real tomato sauce

Shelf Space: less shelf space given as it is low priced and demanded by customer itself. It is displayed separately also on a nesting table, platform with the price label to attract attention.

ATTA:

GOLDEN HARVEST- M.R.P. ` 180 for 5 k.g., offer price ` 115

AASHIRVAAD- M.R.P. ` 168 for 5k.g.

Strategy: To price the private label Golden Harvest a little above Aashirvaad to convey same proposition, quality but to increase sales, sales promotion on price is used and its price has been reduced to Rs.115.

Positioning: It has been positioned as Atta made from finest quality wheat and as fresh as home ground Atta, having extra fiber, vitamins, etc. which is very similar to national brands. Could be said to be a value for money private brand

Quality: Comparable quality for its price as perceived by most of the customers.

Space allotted: Same as national brands

GHEE AND OILS:

BRAND

PRICE

PROMOTION

PL/BRAND

FRESH & PURE

` 270

OFFER PRICE 260

PL

GOVARDHAN

` 295

OFFER PRICE 283

BRAND

Strategy: Priced a little low than Govardhan and Amul while maintaining good quality. Copy Cat private label.

Positioning: Fresh and pure ghee made from cow's milk. Positioning similar as national brands.

Quality: Comparable as national brands.

Space allotted: More than national brands. About twice, which indicates it is fast selling.

JUICES

BRAND

PRICE

PROMOTION

PL/BRAND

SACH

` 75 for 1l

Buy 2 for Rs. 109

PL

ONJUS

` 60-100

Offer price 60

Brand

SAINT

` 80-100

Offer price 60

Brand

TROPICANA

` 80

-

Brand

GODREJ

` 99

-

Brand

Strategy: Copy Cat product. However, with co-branding done with Sachin Tendulkar it has great appeal and is doing very well. Packaging and branding is very similar to Saint.

Positioning: As a real fruit juice with no additives and preservatives.

Benefit: Costing ` 5 less on promotion. But single pack buyers may switch to Onjus or Saint.

Space allotted: Same as other brands at the middle of the section.

SOFT DRINKS:

BRAND

PRICE

PROMOTION

PL/BRAND

AJE BIG

` 40 for 1.5 ltr

Buy 4 for 99

PL

PEPSI(ALL VARIANTS)

` 50 for 1.5 ltr

Buy 2 for 89

Brand

Strategy: Generic private label. Packaging, Branding is very ordinary. Catering to lower class to grow category and competing mainly on price as it has huge profit margins. But a Pepsi or Coca cola buyer may not shift.

Positioning: No definite positioning is used.

Space allotted: Similar as other brands. Three variants are available.

MANGO DRINK

BRAND

PRICE

PROMOTION

BRAND/PL

TASTY TREAT

MRP 80 for 2ltr

Offer price 59

PL

FROOTI

MRP 80 for 2ltr

Offer price 72

BRAND

Strategy: Value for Money private label. Similar packaging is used as Frooti, could be called a copy cat.

Positioning: Made from real mangoes with vitamins and minerals.

Quality: good for its price but not as thick as Frooti or Maaza

Space allotted: same as other brands

SOAPS

BRAND

PRICE

PROMOTION

PL/BRAND

SACH

` 114 (3*120GMS)

OFFER PRICE 89

PL

PEARS

` 135 (3*125GMS)

OFFER PRICE 130

BRAND

Strategy: Value for money. Good appeal because of Sachin tendulkar.

Positioning: A glycerin soap in variants like sandal, lime, honey

Benefits: Similar as Pears but at much less cost. Value for money, may capture some share of national brands.

Space: More than Pears or any other brand

TOOTHPASTE

BRAND

PRICE

PROMOTION

PL/BRAND

SACH

` 27 for 100 gms

200gm+80gm+toothbrush @ 74

PL

COLGATE active salt

` 33 for 100 gms

200gm+100gm+toothbrush @ 91

BRAND

COLGATE Max fresh

` 34 for 80 gms

-

BRAND

CLOSE UP gel

` 34 for 80 gms

-

BRAND

PEPSODENT 2-in-1

` 34 for 80 gms

-

BRAND

Strategy: COPY CAT private label. Packaging, branding is very similar to national brands. It is available in two variants simple and gel. Price a little less than Colgate, Closeup, Pepsodent but greater benefit to customer on purchasing combo packs. Combo pack made to drive volumes.

Benefits: Similar benefits

Space allotted: same as national brands

HANDWASH

BRAND

PRICE

PROMOTION

PL/BRAND

CARE MATE

` 100 (3*250 ml)

-

PL

LIFEBUOY

` 39 for 200 ml

-

BRAND

Strategy: COPY CAT .Various variants available. Strategy to give the same value proposition as other brands of 100% germ killer at less cost

Space: More space and stock than lifebuoy or other brands

BATHROOM CLEANER

BRAND

PRICE

PROMOTION

PL/BRAND

CLEAN MATE

RS. 79

BUY ONE GET ONE

PL

DOMEX

RS. 55 for 500 gm

-

Brand

Strategy: Deep discounting, value for money to consumers. Copy cat as very similar packaging, bottling is used as Domex, harpic

Benefits and value proposition: Very similar to national brands

Space allotted: Almost twice that of Domex, Harpic

Conclusion:

Thus for Successful Retailer Private label strategies, the following has to be taken care.

Manage the price gap with national brands by varying the prices of the private labels rather than by increasing the prices of national brands, since the latter has a detrimental effect on the retailers' overall price positioning.

Understand that there is a large variation across categories with respect to perceived quality of a store brand vis-à-vis national brands.

Recognize the more consumers are quality sensitive rather than price sensitive, and therefore a small quality gap may matter more than a large price gap.

Concede that even in quality-equivalent markets, national brands command a price premium of 37 percent, and this price premium is due to the superior brand imagery of manufacturer brands.

Compete on both price and non price aspects (quality and brand imagery), it is especially attractive for store brands to compete by improving quality, reducing quality gaps through copy cats, and creating brand imagery.

Maintain a small price gap between national brands and the store brand, since contrary to what one may expect retailer revenues are higher with smaller price gaps.