Devangshu Dutta
January 5, 2010
If we were to look at phrases that have cropped up during the recent recessionary times in the consumer goods sector, “private label” has to be among those at the top of the list.
From clothing to cereals, toothpaste to televisions, there is hardly a category that has not seen retailers trying their hand at creating own labelled products.
The first motivation for most retailers to move into private label is margin. On first analysis, it appears that the branded suppliers are making tons of extra money by being out there in front of the consumer with a specific named product. The retailer finds that creating an alternative product under its own label allows it to capture extra gross margin. Typically the product category picked at the earliest stage of private label development would be one for which several generic or commodity suppliers are available.
At this early stage, the retailer is aiming for a relatively predictable, stable-demand and easily available product whose sales would be driven by the footfall that is already attracted into the store. A powerful bait to attract the customer is the visible reduction in price, as compared to a similar branded product. If the product can be compared like-for-like, customers would certainly convert to private label over time.
However, maintaining prices lower than brands can also be counter-productive. In many products, while customers might not be able to discern any qualitative difference, they may suspect that they are not getting a product comparable to one from a national or international brand. And while private label can drive off-take, the price differential can also erode gross margin which was the reason that the retailer may have got into private label in the first place. Over time, such a strategy can prove difficult to sustain, as costs of developing, sourcing and managing private label products move up.
The other strong reason a retailer chooses to have private label is to create a product offering that is differentiated from competitors who also offer brands that are similar or identical to the ones offered by the retailer. Department stores, supermarkets and hypermarkets around the world have all tried this approach – some have been more successful than others. The idea is to provide a customer strong reasons to visit their particular store, rather than any of the comparable competitors.
Of course, when differentiation is the operating factor, the products need more insight and development, and closer handling by the retailer at all stages. A price-driven private label line may be sourced from generic suppliers, but that approach isn’t good enough for a line driven by a differentiation strategy. In this case, costs of product development and management increase for the retailer. However, to compensate, the discount from a comparable national brand is not as high as generic nascent private label. In fact, some retailers have taken their private label to compete head on with national brands – they treat their private labels as respectfully as a national branded supplier would treat its brand.
So what does it take to go from a “copycat” to being a real brand?
Third Eyesight 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:
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.
The interesting thing is that size and scale do not offer any specific advantage to becoming a more sophisticated private label player. Some extremely large retailers continue to follow a discounted-price “me-too” private label strategy where even the packaging and colours of the product are copied from national brands, while much smaller players demonstrate capabilities to understand their specific consumers’ needs to design, source and promote proprietary products that compare with the best brands in the market.
For a moment, let’s also look at private labels from the suppliers’ point of view. As far as we can see, private label seems to be here to stay and grow. Suppliers can treat private labels as a threat, and figure out how to ensure that they retain a certain visibility and relationship with the consumer. On the other hand, interestingly, some suppliers are also looking at private label as an opportunity. They see the growth of private label as inevitable, and would much rather collaborate in the retailer’s private label development efforts. This way they can maintain some kind of influence on the product development, possibly avoid direct head-on conflict with their own star branded products and, if everything else fails, at least grab a share of the market that would have otherwise gone over to generic suppliers.
If you are retailer, I would suggest using the Private Label Maturity Model to clarify where you want to position yourself, and continue to use it as a guide as you develop and deliver your private label offering.
If you are a supplier concerned about private label, my suggestion would be to gauge how developed your customer is and is likely to become, and ensure that you are at least in step, if not a step ahead.
Of course, if you need support, we’ll only be too happy to help! (Contact Third Eyesight to discuss your private label needs.)
Devangshu Dutta
January 4, 2010
Prompted by an article in the New York Times, Bernice Hurst, Contributing Editor of RetailWire, brought up an interesting subject to discuss – the tradition of small, independent retailers on Manhattan’s Lower east side, their survival despite the recession, and their determination to thrive.
One of the retailers interviewed for the article said that the business was “so much fun”. In referring to the kind of products she was developing said, “there are no boundaries to these things”.
Imagination may have no boundaries, but markets always do. When you’re small fry the pond seems limitless. And if all is in harmony (no tuna to gobble you, all fry remaining small, enough algae to feed off, forever), then the market is a good and boundless place. If only.
Personally, I hope there will always be some ponds with room in them to let such small fry bubble up their innovations: they keep the fashion business alive.
They also serve to remind us that there are reasons for running business that are not based on the race-to-scale.
The New York Times article is here – Yes, We’re Open – and the Retailwire discussion is here – Manhattan Still Home to Independent Retailers.
Devangshu Dutta
December 18, 2009
(Contributed to the BusinessWorld cover story – “What 2 Expect in 2010”, issue of January 4, 2010)
Everything that can be said and assumed about the Indian market is true at some level of granularity. Very simply, in India there is a segment for every product, an opportunity for every service, be it ever so small. But when bubbles are bursting all over, as the Noughties Decade comes to a close, the puzzle that is Indian consumer market also warrants a fresh look.
For most of the Noughties Decade India has seen Generation-C, the “Choice” generation, coming of age. They have moved over from being “secondary customers” consuming off their parents’ incomes, to entering the work-force and becoming customers in their own right.
It may sound trite, but Gen-C customers have grown up with many models of 2-wheelers and 4-wheelers and colour television with multiple channels. They have many more career options and many more opportunities in each career. Not only have they grown up on a diet of choice, they have also grown up with much higher confidence about the future, about their place in the world and what they can expect. And they have infected the outlook of generations older than them as well with a similar confidence.
Therefore, for most of the decade, it has been a distinctly rosy picture for consumer goods marketers and retailers. Business plans routinely expected 20-50% annualised growth, and businesses even delivered those figures on some basis or the other. Organizations as diverse as retailers and management consultants were inspired by India’s age-old image as the Bird of Gold. Supermarket chains mushroomed like never before, department stores and speciality retailers grew their footprints, quick-service and casual dining expanded covers, while electronics, durables, leisure companies, and car brands all counted India among their hottest markets.
Product off-take reflected this outlook. Amongst the FMCG sector, while basic items such as the bath and shower segment demonstrated a steady annualised growth of about 7%, premium cosmetics galloped at almost 20% a year. While the relatively mature 2-wheeler market grew at just over 7.5% annually between 2002-03 and 2008-09, the 4-wheeler passenger vehicle market demonstrated growth of almost 14% a year in the same period.
All this was before the recent rude interruption.
A speed-breaker began showing up in the consumer market in late-2007 and grew larger through 2008. Once the global financial markets melted down in late-2008, media sentiment turned acutely negative about the Indian market as well. And, eventually, with uncertainty prevailing around the world, consumer spending in India did take a hit. Consumers cut back on the frequency of purchases or traded down.
On the trade side, retail businesses began acknowledging that stores were performing below plan and went into rationalisation mode. For branded suppliers, where some of the growth had come from stuffing the pipeline and filling new shelves, wholesale order books became thinner.
Yet, as painful as the economic scenario might have appeared, the Indian consumer market has shown remarkable resilience. Demand in smaller cities and towns has remained robust. Regional brands, especially, found plenty of opportunity to grow in markets and geographical regions where they were under-penetrated or absent.
And as the mood lifted through the latter half of 2009, consumer demand clearly moved back up. The speed at which the demand rebounded would suggest that the Indian market was relatively sheltered from the global economic storm.
However, there are some critical differences to understand.
On the one hand, Gen-C’s confidence shook for the first time – a generation that has only seen upward mobility, witnessed job cuts and salary freezes or declines even if only second-hand. Comparisons with the Great Depression may be exaggerated but it is a scenario they can now imagine as a possibility. At least three new professional academic batches have or will have moved into the job market under these sober conditions. On the other hand, tremendous inflation in basic costs supports some amount of uncertainty about the future. The fact that many of the Gen-C would have just begun or would be about to begin families serves to only heighten such anxiety.
So, let’s recognise two immutable facts about the Indian consumer market in the current environment.
First: that the ancestral “steel safes” are back, at least figuratively if not literally. Customers do want to save more for now. And if they are spending, they want to feel that they are extracting far more value than the price they are exchanging across the counter, value that will last long after the transaction at the store. In recent years, this inherent ‘value orientation’ of the Indian consumer was neglected by many. Now every product, service or brand must aim to deliver this sustainable value, and demonstrate the value repeatedly.
Secondly, each business needs to look at the lifetime value of a customer if it can. Rather than cutting the golden bird open and trying to extract all the golden eggs at once, one needs need to keep the bird well-fed, happy and healthy, and enjoy its rewards over several years. Rather than creaming the market, pricing, branding and distribution need to be structured for a sustainable relationship with the customer.
Some businesses will work better than others in this market, and strategies will need to be adapted. A lifecycle approach may handy in identifying the business segments which might meet the steel safe criterion, or the golden goose criterion, or both.
The first segment that comes to mind is weddings. Wedding expenditure is seen as a “social investment” for both the families, and the actual items bought are an investment into the couple’s future together. So, bridal trousseaux and wedding wardrobes, wedding arrangers and catering, and household goods provide significantly more tangible and intangible value than the money spent.
Similarly, “first child” isn’t usually a segment in any marketing handbook, but should be. The couple’s first born, especially if the baby is the first in its generation will usually get a disproportionate amount of attention and spending on clothing and utilities. A baby’s growth into a child, of course, can provide a relationship and marketing opportunity that can last for years, but the first 2-3 years are specifically valuable. What’s more, given India’s demographic dividend in the form of a sustained under-30 age group, baby products have a sustained and growing value as a market.
As the child grows, there are clear indicators of current and future value that can drive purchases. While base schooling is an essential expenditure, extra-classes and tuitions are a high-value discretionary investment that parents are choosing to make. Sports, on the other hand, however essential they may be to a child’s development are often seen as a distraction. That is, unless the child is attending sports coaching and the parents have an eye on helping the child create a career from it – in which case, a coach who is apparently good, branded equipment and kit are definitely worth investing in. So a cricket coaching franchise might just be the ticket to fortune, while a toy company may struggle. Some may decry the decline in art, craft, philosophy and fundamental sciences, but these are not on the list of priority of most parents. In the short to medium term, parents would continue to disproportionately push their wards into academic disciplines that are seen to develop marketable skills and pay well. Expect continued growth in the engineering, medical and management education market, but also in other vocational disciplines.
On the other hand, everything is not an investment for the future. Present comforts may also provide extra value, through convenience.
Some of these comforts may be as small as enjoying out-of-home exotic meals (pizza and pasta still qualify as exotic for the bulk of the population). Or if eating out looks out of budget, ready-to-eat and ready-to-cook meals are an easy substitute. Jubilant, Yum, McDonald’s, Haldiram, Sarvana’s, Nirula’s and the thousands of other casual dining and snack food chains have a long clear highway of growth ahead, as do snacks and packaged food companies such as Nestle, Britannia and ITC.
Brown goods and white goods that offer comfort and convenience – coolers, water heaters, convectors, air-conditioners and kitchen gadgets – continue their onward march, despite the huge shortfall in electricity. Even if the big brands struggle with their price points and overheads, regional brands and private labels will continue growing strongly in these segments.
Health is another area for significant investment. With prevalence of lifestyle-ailments, from stiff necks to high blood pressure, basic pharmacists to cardiovascular specialists are all in demand. Anticipate significant growth to continue in over-the-counter medication, medical devices, as well as clinical and hospital care.
At the other end of the scale, with decent and adequate public transport lacking in most cities, we can expect personal vehicles to increase multi-fold, despite the small blip in 2008-09. About 60 million 2-wheelers and over 10 million passenger vehicles have already been added during the decade, and the growth trend looks set to resume from 2010, unless there are significant oil price or vehicle taxation shocks delivered by the government.
And as consumer confidence resurges, more overt displays or personal spends will return as well, including apparel, footwear, home products, accessories, vacations, fitness and recreation, but we would expect them to follow behind the higher priority “safe” or “geese” segments.
Finally, the one thing that marketers in any product need not be really concerned about whether there is a future in this market. Even, Hindustan Unilever, a mature FMCG company with very high distribution penetration built over decades, still counts less than 60% Indians as its customers.
Surely most companies have a much longer road ahead before they need to be worried about their markets becoming saturated.
Devangshu Dutta
November 13, 2009
For someone who loves books and dislikes naming favourites, it’s tough to quickly make a list of only 10 must-read books. There are so many valuable books an entrepreneur can learn from that this list is only a starting point, rather than “the Top-10”. But, then, one of the most important things an entrepreneur can do is to overcome his or her own resistance at some of the most inconvenient times. So here goes!
The thing about lists is that even if you find one item on the list that makes a substantial difference to you, the list has been useful. Among the above, I believe you will find more than one that will create such an impact. Happy reading!
[Column written for The Economic Times, 13 November 2009]
Devangshu Dutta
October 23, 2009
Trade, of course, has been global for millennia, so it seemed hardly unusual for retailers in the US, and in Europe to begin sourcing from distant countries in Asia where certain items were more readily available or significantly cheaper. Imports have also been encouraged as a political and developmental vehicle to aid friendly countries.
So, on the sourcing-end, large retailers have been comfortably operating beyond international borders for several decades even while the stores-end of their business was entirely domestic.
For most large modern retailers however, after the post-Second World War economic boom their core markets have grown relatively slowly (and rather predictably). While the sheer size of the US market kept American retailers busy domestically, planning and legal restrictions in terms of store size, locations, market share etc. limited manoeuvrability for retailers in Europe.
Among the current major retailers, the early retail explorer, Carrefour set out into neighbouring Spain in 1973 and then into distant Brazil in 1975. Soon after, Dutch retailer Ahold landed in the USA in 1977.
However, it took the opening up of East European economies in the 1990s to really prime the pump for growth of international retail. Suddenly, many more millions of consumers became available to European retailers close to their existing markets – both geographically and culturally – and western European retailers jumped at the opportunity.
At the same time, China seemed to have become steadily more open over the previous decade and in the early-1990s India looked accessible again. Some of the Latin American markets were also steaming up.
And, obviously, the prospect of 3-4 billion new consumers in emerging or developing markets was clearly not going to be ignored. In 2001, post dot-com, another inspiring idea hit the business world that was desperately looking for hope – the golden BRICs – the four countries focussed upon by Goldman Sachs as the biggest economies of the future: Brazil, Russia, India and China.
As incomes grew in these “developing” or “emerging markets”, the hypothesis was that consumer would want products and services similar to those in the more developed markets, creating the opportunity for retailers to cross borders. In the last 15 years or so, retail internationalization (and gradually “globalization”) has become an increasingly acceptable theme – in conceptual thinking, in retail boardrooms, in white papers, and finally in trade and mainstream media. The world has witnessed a network of retail subsidiaries, joint-ventures, franchise and other relationships spreading across continents.
Certainly, through the 1990s and 2000s, growing tele-connectivity, fashion, portable TV programming concepts, movies and print media seemed to give the impression that consumers around the world are becoming more similar, and can be reached by common formats and brands. Led by the FMCG companies on the one hand and fashion brands on the other, insights, concepts, products, formats, advertising campaigns are routinely extended across countries. (Unilever’s TV commercial for Close-Up in West Asia is a great example of this – an Anglo-Dutch company’s international brand of toothpaste, Indian models in Thailand, an Arabic voiceover and a Hindi song (“Paas Aao” – “Come Closer”) by Sona Mohapatra – surely you don’t get more global than that?)
But wait! Is the picture really as clear as that?
In 2006 Wal-Mart pulled the plug on its €2 billion German business that was a combination of German chains that it had acquired. In Russia it still has only a development presence since 2005, though it is reported to be looking at opening 10-15 stores in the following three years. According to Newsweek, Wal-Mart’s 13 year old Chinese business – even after an acquisition that is still to be approved – will have fewer stores than it would have opened in the US just in 2009. In the past it has struggled in Japan and Brazil.
In June 2009, Carrefour opened its first 86,000 sq. ft. hypermarket in Moscow, and a second one soon after that. In September, the company affirmed that the BRIC markets were its highest priority for international growth. However, in October it announced that it was pulling out of Russia. Within 4 months of the first store, Russia has gone from a market with “outstanding long term potential” to being a market to exit. In previous years the company has moved out of Japan, South Korea and Mexico. The Economist reports that significant Carrefour’s shareholders are forcing it to look at selling its Chinese business as well – obviously a move that would be politically very sensitive in China. The same shareholders are also reported to be urging a sale of its Latin American business. For now, the official statement from the company maintains an ongoing interest in all these markets.
Ikea has decided to freeze further investments in Russia, and has decided not to enter India until the Indian government allows 100 per cent foreign ownership of retail operations. It entered China in 1998, and has only 7 stores so far.
Even as Carrefour and Ikea announce plans to pull out of Russia, Russian retailers have pulled out from Ukraine, while Metro is cautious in its outlook about that country. French retailer Auchan has opened three stores in Ukraine since 2007, while the German retailer Rewe has opened all of nine since 2000.
Could the juggernaut of global retail be slowing, stopping or even – shock! – reversing? Are the BRICs and emerging markets falling out of favour?
Before we jump to conclusions, as they say in the television world: please don’t adjust your sets. As the French author Karr wrote: “plus ça change, plus c’est la même chose” (the more things change, the more they are the same).
It is a fact that, no matter how international or global a company becomes, when it gets to the business of retail, it needs to be intensely local. While elements of the business – concepts, products, people, money – can travel across borders, it is extremely difficult to take across an intact retail mix and expect to address a significant portion of the population in the new country. And given how important scale is to mass retailers, lack of localization would be a significant hurdle.
A company sourcing products from a developing country can fully expect his suppliers to adapt to his practices and customs. On the other hand, the same company entering that country as a retailer needs to do exactly that – adapt to the customers – rather than expecting them to fall in line because the “best practice” manual dictates certain processes or because central merchandising found some deals that were great for the home market which are totally irrelevant in the new market.
However, there are encouraging signs that retailers looking to grow internationally understand this more and more. Tesco, for one, has been following a localized approach in Thailand and South Korea, while Carrefour, Ikea, Wal-Mart have all steadily modified their approach in China and other markets. Wal-Mart’s cautious steps in India, including the stores opened by its joint-venture partner Bharti, are a complete contrast to the aggressive “plans” that were being reported in the press 2006-onwards. Recently Wal-Mart’s international chief C. Douglas McMillon was quoted by BusinessWeek as saying “we know you can’t run the world from one place”.
For the larger international retailers this means that, the benefits from international scale would be limited by the amount of localization that they carry out in their operations. For smaller and local competitors that are based in an emerging market this means a fighting chance to remain in business and even remain market leaders.
Lastly, as far as all the dark clouds gathered over international retailing and all the retreats being announced – stay tuned – this weather will change, too.
