Mapping the Gap

Aided with data on consumers, analytics on need gaps and waning brand loyalty, e-tailers abandon discounting to climb on to the private label bandwagon

A 100 new categories across its eight private labels — that’s the target Adarsh Menon, head of private labels at India’s largest e-tailer, Flipkart, has set for his team for 2018. Meanwhile at Myntra, Flipkart’s subsidiary and leading fashion portal, Manohar Kamath, who heads the portal’s fashion brands, is thinking about increasing its portfolio of private labels, which is currently at 13, to 18 by the end of the year. Manish Tiwary, vice-president, category management at Amazon India, emphasises that private labels are an “important avenue” to give customers what they are looking for. 

Zivame, the online lingerie retailer, started as a marketplace with multiple brands in 2011 and launched its private label journey in 2013. It now has 90% of its business coming in from private labels. The Aditya Birla Group, which shut down its online fashion portal, Abof, a few months ago, is planning to relaunch it with private labels. 

Big e-tailers are not the only ones who are going big on private labels. According to media reports, online home services firms, UrbanClap and Housejoy, are planning to launch private labels in categories such as spare parts for home appliances and even beauty services. Even GoCoop, a social enterprise and online marketplace that connects rural artisans to local and global customers, launched a private label called The Good Loom at the Lakme Fashion Week in February.

What, then, is the lure of private labels? “The logic for indulging in private labels is simple. They give better gross margins to retailers across the board. Also, independent brands are unable to cater to all price points and consumer demands. Private labels address such need gaps,” says Ankur Bisen, senior vice-president at Technopak Advisors, a management consulting firm. “With large amounts of transactional and behavioural data, e-tailers are often able to identify these gaps quicker than other retailers and brands,” adds Devangshu Dutta, chief executive of Third Eyesight, a consulting firm. Private labels, he says, allow a platform to “strengthen relationship with the customers, drive additional business and stickiness, and also drive healthier margins since there is less competition in the segments they are looking to address.” Harish Bijoor, brand specialist and founder of Harish Bijoor Consults, sees private labels as a “strategic” move by e-tailers to “remain relevant, original, innovative and profitable not only in the short-term, but also in the distant future.”

The e-tail game in India has, till now, been about growth. The focus of every e-tailer has been to grab customers, mainly via discounts. However, as the industry matures, there is an increasing sense that discount-led growth is not a sustainable model. Ensuring customer loyalty through differentiation and a sharp focus on the bottom line are crucial to stay ahead in the game. As e-tailers move towards the next phase of their journey, building an arsenal of private labels is not just a natural progression, but a critical one too.

Strategic imperative
Karan Mohla, partner and executive director at IDG ventures, which had Flipkart and Myntra in its portfolio, feels that private labels impart value to a business and help boost its image as a brand and not just a retailer. “Private labels help the business not only from the unit economics perspective but profitability as well. That is the reason why Myntra was acquired by Flipkart. Even four years ago, Myntra had a good collection of private brands,” he reveals.

However, Menon of Flipkart insists that although the private labels business contributes 1,000 basis points higher margins as compared to the rest of the business, it is not driven by the quest for higher margins. “Any good retailer will have a sizable private labels business. It is an integral part of a successful retailer’s journey and for us at Flipkart, it is a strategic imperative,” he adds. Accounting for around 10% of Flipkart’s total business, Menon has fixed a target to increase private labels to 15% over the next two years.

It was in mid-2016, during Flipkart’s annual strategy meet, when the top management decided to re-enter this space. It had tried to do so earlier without much success, and felt that the time was apt to give it another shot; this time more methodically. It put together a team that studied best practices worldwide and came up with a white paper outlining the key principles for launching a private label. In December 2016, Flipkart launched SmartBuy with two products — a mobile cable and a mobile charger. Since then, Flipkart has grown its private label kitty to eight brands and around 100 categories comprising smartphones, apparel, footwear, home appliances, jewellery, furniture, large appliances and more. 

Explaining Flipkart’s approach to private labels, Menon says, “We have very detailed data across the 3,000 categories on our platform. Our data tells us that in every category, there are gaps that the consumers perceive. This could be in terms of quality, selection, pricing, or the lack of a trusted brand. The best way for us to plug these gaps is to launch our own set of products. Thanks to our data and analysis, we know exactly what the consumers are looking for. Ranging from product definition to development, quality, pricing and distribution, the entire value chain is under our control.”

Flipkart’s private label products are typically priced 10-20% cheaper than most other brands in any given category. This is because the percentage per unit share of the private labels is in double digits and the products are profitable. Each of Flipkart’s private labels, Menon adds, is being built as a s brand in itself with a strong proposition “no different from what a Unilever or Procter & Gamble would do.”

Amazon India follows the customer backward approach. Gaps in offerings are first communicated to sellers and brands in the marketplace, and then to the large OEMs, who are then encouraged to design exclusive products to meet the customers’ requirements. “In case these methods do not yield results, we work towards catering to such selections through our private brands,” says Tiwary.

AmazonBasics, Amazon’s first private label in India, was launched in 2015 with consumer electronics products. The global private label had been introduced in the US as a collection of consumer electronics. Since then, it has expanded to over a dozen categories including household supplies and sporting goods. In 2016, Amazon India launched three private labels: Solimo (kitchen and home furnishings), Symbol (apparel and footwear) and Myx (women’s ethnic wear). Last year, it decided to up the ante in the smartphone category and launched 10 smartphones. Apart from AmazonBasics, Amazon India’s other private labels are part of its ‘Crafted for Amazon’ programme — a multi-category programme launched in December last year as an India-first initiative. 

While e-tailers stress on the ‘need gap’, the viability of introducing private labels in highly saturated categories such as smartphones, where existing brands offer all shapes, sizes and price points, beg a question. Mohla of IDG points out that it’s mainly about understanding the customer segment and their loyalty. “For example, if you introduce a phone with the same features as that of an iPhone or Xiaomi at a lesser price point, iPhone users might not move, but the Android users might. Brand loyalty differs by the customer set,” he notes, suggesting that for a large set of Indian customers, product aspiration is of a greater priority than brand aspiration. “Aspiration is tied down to the product they are buying and not necessarily the brand. There is always a clear demand for American, Japanese and European products, but there is also a large faction of customers who go for Chinese or Indian products.”

Building exclusivity
For Myntra, apart from filling the white spaces, private labels are crucial for the exclusivity that they offer — a strong differentiator in the fashion business. As the name of the business unit ‘Myntra Fashion Brands’ suggests, its private label business has been treated as a business of brands from the very inception. “Private labels can have only a limited play; brands on the other hand can explode,” says Kamath.

Myntra’s 13 private labels include celebrity brands such as Hrithik Roshan’s ‘HRX’ and Deepika Padukone’s ‘All About You’. Myntra also has two of what Kamath terms as “tech” brands, named Moda and Here & Now, which are highly data-driven along with a fast fashion supply chain. The cycle of understanding consumer trends to launching new products typically takes six to nine months. Kamath’s team has reduced this to less than two months for these tech brands. 

For FY19, Kamath is aiming for business worth $500 million from private labels alone. This part of Myntra’s business broke-even in June last year, and this year, 90% of the fashion brands are profitable at an Ebitda level, he adds. He expects to end the financial year 2018-19, with a cumulative Ebitda of 4-5%. The margin difference between what the platform gives at any point in time to what its fashion brands give is in double digits, says Kamath, adding, “Whenever your focus on profitability increases, private brands can take you there faster.”

So far, Myntra has invested around 4-5% of the brand’s gross merchandise value on three brands — HRX, All About You and Roadster. As the other brands grow to a suitable scale, Kamath plans to invest more in them too. 

Pepperfry CEO, Ambareesh Murty, has similar marketing spend plans and has earmarked a total of $1 million every quarter for the brands starting later this year. “As in any sector that is largely unorganised, we saw a clear opportunity to build our own brands. It helps us to build long-term differentiation and also create a quality ethos amongst the small businesses we work with,” he says. The furniture and home décor market in India, estimated to be around $30 billion, is almost completely unorganised. Only around 5% comes from the organised segment, which includes e-tailers such as Pepperfry and Urban Ladder and physical retailers such as Godrej Interio, HomeTown and Home Center. Half of Pepperfry’s sales today are from its house brands, which offer margins that are 10% higher than other products. The brands are manufactured by the marketplace merchants and products that meet the company’s design and quality standards become part of the house brand collection. The e-tailer, which has over 10,000 merchants and over 100,000 product listings, has built a portfolio of 10 house brands in the past four years. It was a no-brainer move that Murty made in late 2013, around two-and-half years after setting up Pepperfry. 

Operating in yet another unorganised market, online grocer BigBasket’s private labels focus on making the product natural, says Seshu Kumar, the company’s head of buying and merchandising. For example, it does not use any synthetic chemicals in its bread. This means that even though the shelf life is lower than other brands, the breads from BigBasket are preservative-free, he says. 

“We started private labels in 2012 in our fruits, vegetables and staples category. We are the only retailers in the country who started branding fruits and vegetables because we are confident of the quality of the products we deliver.” BigBasket has around 10 brands and sub-brands. Private labels currently account for 37% of BigBasket’s total business. Kumar wants to increase this to 40% over the next 12 months.

Recipe for success
So, what is an ideal mix of private labels and other brands for e-tailers? Experts are divided on this. “A 20% private label ratio would help an e-tailer keep a slow, small, but solid footing in its own strength categories. It is likely to look unique as well,” says Bijoor. Bisen of Technopak, however, feels that there is no set template. What does hold true across categories for a successful private label business is product range and price competitiveness, and this, he says, demands a supply chain, a merchandising approach and an ecosystem that matches with the best and established brands — something that almost every e-tailer lists as its biggest challenge. 

The equity of the category in the mind of the consumers also plays a role. Bisen explains, “For instance, a plain white T-shirt has a lower entry barrier in a consumer’s mind and therefore, he would appreciate a private label for this versus a chocolate for which the consumer aspires for a branded consumption.” But he adds a caveat to this — the positioning of categories in the minds of the consumers is not permanent. Citing the example of large appliances such as microwaves, Bisen says, “A few years back, it was unthinkable to imagine a private label play in categories where the likes of Videocon and Samsung were the leading brands. But today, consumers have started viewing these appliances as utilities. They are willing to settle for private labels offered by e-tailers such as Flipkart and Amazon, or retailers such as Croma because the perceived branded differentiation has reduced.” 

Ramesh Kumar, professor of marketing at the Indian Institute of Management, Bangalore, notes that the consumer buying a private label has to, “forgo the intangible value that a brand offers,” and therefore, the challenge for a private label is to “create value through the right price to offset the effect of the lack of brand symbolism.” 

Bijoor offers another perspective. Pointing out that most private label brands tend to occupy a mid-market imagery, he says, “This is a disease they must avoid. The premium category offers big opportunities for private label brands. They need to use it to their advantage.” Bijoor also suggests “cutting the umbilical cord” with the mother brand and giving private labels “a life of their own.”

Experts point out another challenge — conflict with other sellers and brands in the marketplace. E-tailers, however, are not worried on this front. “We don’t want to have internal cannibalisation, and thus, we focus on differentiated products. Each of our private label products complements the other brands and we have found that in the categories where we have launched our private labels, the household penetration has gone up,” asserts BigBasket’s Kumar. Amazon’s Tiwary says growing this selection is of utmost priority for the e-commerce major. “We have a robust platform which is open to all. Our relationship with all the sellers is equal and transparent.” 

Flipkart’s Menon concedes that, at times, customers prefer to buy from private labels. He insists it is due to the value they bring and says that their private labels are licensed out to sellers on the platform who have a good record of selection, pricing and quality. Myntra’s Kamath adds, “This market is about competition. We have 2,000 brands on our platform and only 13 private brands.”

Clearly, as e-commerce in India moves to its next phase of growth, competing with private labels of e-tailers is something that all sellers and brands need to gear up for. As Bijoor says, “The trend of private labels will only grow stronger in the coming years as e-tailers re-invent their models for profit-play.”

With inputs from Shilpa Elizabeth Abraham