National Brands And Private Labels

National Brands And Private Labels 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 retailers brand. That brand can be the retailers 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 retailers 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  » Indias 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 Birlas private labels segment has 7 brands which Aditya Birla Retail Limited provides customers products under its own labels. Private label Food Brands include Feasters, Kitchens 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 Marts 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 dont 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 Indias 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. Indias 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 Indias 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 Manufacturers 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 brands 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 consumers 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 NBs over PLs for CPGS (consumer package goods) was examined on 75 CPG categories in France, one of the worlds 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 NBs 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 Levis 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