No room for store brands

Great Value is the largest private brand at Walmart. Grocery products from Great Value, with brands such as Equate (pharmacy), Mainstay (low-cost furniture and bedding), Ol’Roy (dog food), Dr Thunder (soft drink) and Parent’s Choice (baby products) bring in close to 40% of the big-box retailer’s revenues of $421 billion. Similarly, UK-based retail giant Tesco earns 50% of its £64 billion revenue from private brands. Its two private labels Tesco Value and Tesco Finest are worth £1 billion each. 

With margins as high as 20% in FMCG categories and 40% in apparel, private labels are the mainstay of retailers worldwide. These similar quality and low-priced alternatives to regular manufacturer brands not only draw consumers into stores, they help improve revenues and drive up profitability for retailers. According to market research agency Nielsen, private labels contribute 17% to retailers’ revenues in the US, UK and France. In India, that figure is closer to 7% of organised retail sales (which itself is just 7% of total retail). 

To be fair, private labels have made their mark already, but only up to a point. The ₹10,000 crore-crore retail giant Future Group, owned by Kishore Biyani, generates ₹200 crore in revenues from them. Almost 20% of the FMCG business of the group’s flagship value format, Big Bazaar comes from its in-house brands such as Cleanmate and Sach. In soups, about 25% of sales come from its brand, Tasty Treat. Other leading chains such as Mukesh Ambani’s Reliance Retail and Harsh Goenka’s Spencer’s have long been focusing on private labels too. Over 200 stock keeping units (SKUs) of Walmart’s Great Value are available at its Easy Day stores in India. And one can see a significant presence of Tesco Value brands at the Tata Group’s Star Bazaar. Nearly 22% of the merchandise at K Raheja Group’s HyperCity, too, comprises its own brands. 

But in the absence of scale, inadequate brand building and the effects of a slowdown in consumer spending, Indian retail’s private label story has yet to take off from its modest levels. 

Too many odds

In fact, only few experts are upbeat about private labels making a significant difference to the business anytime soon. “The reason for that is none of the retail companies (barring Future Group) generate adequate volumes to invest in large number of private labels,” says Ankur Bisen, associate vice-president (retail and consumer products) at retail consultancy Technopak. 

He’s right. Walmart has over 8,000 stores across 26 countries, while Tesco has about 3,000 stores across formats in the UK alone. In comparison, India’s largest retail company, Future Group, has 240-odd stores of Big Bazaar, while hypermarket chain HyperCity has just 13 stores. In the apparel retail space, the largest player, Future Group’s Pantaloon has 70-odd stores, while K Raheja-owned Shoppers’ Stop has 50 stores. 

The recipe for success in private labels is scale leading to high volumes and, hence, higher margins and better profitability. “But in a $500 billion retail market, where organised retail constitutes only $35 billion, it is difficult to generate volumes,” says Bisen. Raghu Viswanath, MD of brand valuation and consultancy, Vertebrand, points out that most Indian retailers haven’t invested in their private brands. “Retail brands in India have done little in building equity of their store brands,” he says. “If you go to buy biscuits, there are more chances of you picking up a pack of Parle or Britannia biscuits rather than the store brand, simply because you are not too sure of the quality of the store brand.”

The other stumbling block for Indian retailers as far as private brands are concerned is mounting inventory costs (especially in apparel retail). “Stock disposal becomes a huge concern with private labels, resulting in high inventory costs,” says Punit Agarwal, managing director of discount retail apparel format, Promart. “In a low volume business, it makes more sense to buy merchandise from brands on consignment basis,” he adds. In the consignment model, the retailer stocks SKUs of a particular brand for around two-three months, and if an SKU fails to generate sales, the retailer has the option of returning it. Promart has four private label brands, manufactured by its sister concern, Vemb International. For now, Agarwal has no plans of expanding his portfolio. “Since my private labels are manufactured by our sister-concern, we only manufacture to our stores requirements. Unless the volumes of sales really increases, I don’t see the need to increase our private label contribution.” 

Three years ago, Shoppers Stop too cut down its private labels from 20% to 10%. “In the private label business, it is scale economy that works. The gross margins may be as high as 30-35% (in apparel), but it is highly capital intensive. The inventory costs are high and unless there is scale, it will be difficult to sustain,” points out Abneesh Roy, associate director, institutional equities (research) at Edelweiss. He has a point. One reason for Vishal Retail’s downfall was its private labels-only apparel strategy and, consequently, dangerously high inventory levels.

Will FDI help?

While FDI in retail may bring in more capital into the business, it’s unlikely to boost the retail business at least in the short to medium term. “We are unable to take our private label business to the next level only because we don’t have volumes. I don’t see FDI bringing about a huge change,” explains Mark Ashman, chief executive officer, HyperCity.

Govind Shrikhande, managing director, Shoppers Stop, says the success of store brands hinges on consumer maturity, the quality of private label development and retailers price positioning. “FDI and private labels are not related. A multi-brand retailer in luxury or bridge to luxury positioning would always maintain a lower private label ratio, whereas a mass retailer would continue to increase the private label share,” he says.     

Retail industry experts don’t see the current modern retail contribution of 7% going beyond 20% in the next 10 years. “It will take at least three-four years before store expansions happen and for retailers to actually invest in a robust private label business,” points out Roy. The reason for the slow growth is again to do with the policies. “There are several issues such as high real estate, high sourcing costs, labour laws, etc that needed to be sorted out in order to fuel growth,” points out Bisen of Technopak.

While private labels bring in higher revenues and profitability in the long run, the question being asked is how committed are retailers to their private label business at a time when their core business is floundering. “Most Indian retailers are yet to understand the dynamics of the market,” says Santosh Stephen, managing director of Symega Savoury Technology that makes table top seasonings, spice blends and soup mixes for chains such as Reliance Retail, Star Bazaar, Hypercity and More. “Till about 2008-2009, their growth trajectory was positive and encouraging. However, since then there has been a steep decline in volumes and the number of outlets opened. The volumes forecast never materialised,” he adds. Located at Pancode in Kerala’s Ernakulam district, Symega makes 10% of its annual revenues of ₹65 crore (FY13) from private label supplies in India.

 “Retailers are yet to come to size and scale to start thinking about private labels,” says Nikhil Sen, CEO, Unibic, which supplies cookies and other confectionary products to retailers such as Big Bazaar and Reliance Retail, among others. “We have had instances where inventories were returned as the retailers were not able to gauge demand correctly. I expect this segment to grow in future as it has done in the West. But modern retail has to first turn profitable and get scale.” Currently, the ₹150-odd crore cookie manufacturer gets close to 15% of its revenues from contract manufacturing.

In India, vendors that manufacture private labels are usually SMEs that lack capabilities to supply to retailers nationally, unlike the ones in the US and the UK, which churn out revenues of $10-12 billion. Vertebrand’s  Vishwanath says Indian contract manufacturers operate on limited quality standards or supply-chain capabilities. “Once global retailers come in, it is unlikely that they will source from them. A large scale consolidation will be on the cards. Only the bigger ones will remain in business, the smaller ones will either get acquired or will fold up.” 

While private labels are undoubtedly the way forward for modern retail in India, like elsewhere, the jury is still out how an evolving retail sector buffeted by the effects of the economic slowdown and spiralling costs, will address this challenge. Will Big Bazaar’s Tasty Treat Noodles ever outsell Nestle’s Maggi? Will Tasty Treat ever make it to the £1 billion club like Tesco Value? That seems like a tough call, at least for now.