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Retailers take on FMCG firms with private label push

Raghavendra Kamath  |  Mumbai 

Star Bazaar, the Tata group’s hypermarket in Thane on the outskirts of Mumbai, has several racks reserved for its private labels in noodles, breakfast cereals and other processed foods, just next to those from fast-moving consumer goods (FMCG) majors. But, while the racks of big brands carry just price labels, Star Bazaar’s own products have big placards, saying these are 21 to 37 per cent cheaper than national brands.

Star has also launched 50-odd private labels from its franchisee partner, UK’s Tesco, in its stores, mostly in the health and beauty category. Kishore Biyani’s Future group, which has nearly 300 “private brands” in 65 categories, plans to launch 10-12 more product lines in the next year in areas such as personal care and toiletries, the stronghold of such as Hindustan Unilever and Procter & Gamble, among others.

Future has begun marketing its select private brands such as Cleanmate in floor-cleaners, Sach in toothbrush and Tasty Treat in processed foods to hotels and small retail chains, among others. It has advertised that buyers would get a margin of up to 55 per cent on the maximum retail price.

Big retailers such as Future, Tata’s Star Bazaar, Aditya Birla’s More and Spencer’s Retail are increasingly taking FMCG head on, with entry into newer categories, aggressive marketing and brand push in a bid to push margins and profits.

“Retailers are continuing to push their private labels, as these can fetch better margins for them. They are saying if you (suppliers) don’t give better margins, we will push the margins through our products,” says Anand Raghuraman, partner and director at Boston Consulting Group.

Private labels in food and groceries carry margins of 25-35 per cent, while that of national and regional brands give margins of 10 to 12 per cent. For most of the retailers, who are still many years away from break even, private labels can be a key factor in boosting profitability, retail consultants say.

In fact, Biyani’s Future Group withdrew products of global confectionery major Cadbury Schweppes, Pepsico’s Frito Lay potato chips and GlaxoSmithKline (GSK) brands because the global FMCG majors were refusing to offer higher margins.

Vineet Kapila, chief executive of Spencer’s Retail, which gets around a quarter of its total revenues from private labels, says “We are funding the promotions of our brands. If national brands do not promote theirs, we cannot do anything about it.’’

Retailers have also adopted differential pricing in their products to be able to attractive to buyers. For example, half of Future’s private labels sell at 15 to 20 per cent less than national brands and the remaining half is sold at five to six per cent less. They save 15 to 20 per cent in distribution costs and three to four per cent on marketing, compared to FMCG companies

However, FMCG companies, whose share of revenues from modern trade is in single digits, say they are not perturbed by retailers’ ambitious plans. “I do not see this as a big thing. Not in personal products, at least. Yes, it is there in categories such as food. But, I do not see a major impact as a result of this,” says Godrej Group chairman Adi Godrej.

Avers Sunil Duggal, chief executive officer, Dabur India: “Organised retail, as such, comprises seven per cent of overall business for us. And, we are not seeing a private-label push in our categories. Private labels exist in categories where brand preference is not high,” he adds.

Though the world’s biggest retailers such as WalMart and Tesco derive half of their revenues from private labels, most Indian retailers are trying to have a share of 30-40 per cent in the next four-five years, from the five to 25 per cent at present.

Private label ambitions are taking retailers such as Future into newer areas like oral care, where 80 per cent of market share is controlled by Colgate Palmolive and Hindustan Unilever. “No new toothpaste brand has been able to establish itself in the last 20 years. I hope we will be able to break that jinx with our toothpaste brand, Sach,’’ says Biyani.

Some say private labels may be the potential answer to the challenges faced by Indian retailers such as lower fill rates (the proportion of orders that can be immediately met with stock in hand), fewer product launches by FMCG companies, margin issues and so on. The fill rate at modern retail outlets in India is 65-70 per cent, compared to the global 90-95 per cent.

“Private brands are insurance against lower fill rates in some categories. If your shelves are empty, the customer goes away,’’ says Devendra Chawla, the Future Group’s business head, private brands.

Praveen Kulkarni, general manager, Parle Products, admits the trend of private labels is growing. “In the next two-three years, the proliferation of private labels will be there. Categories that are not strong on branding are targets for private labels,’’ he adds.

“For manufacturers, the need is to focus more on brand building, build a strong price-value equation, focus on quality, etc. This is what will help them contain the onslaught of private labels,’’ he says.

(With inputs from Viveat Susan Pinto)

First Published: Fri, March 26 2010. 01:11 IST