Wednesday, June 26, 2013

Store brands to Rule 40% of Indian Grocery Budget

They will soon account for close to 40 per cent of what Indians spend on food and groceries every year, says new research. And if you consider that Indians spend more than 20 per cent of their annual income on food and groceries, it is going to be a huge market for those retailers who get the formula right.

Reckitt BenckiserConsumers are making the biggest move to private labels or "store brands" in staple categories such as sugar, rice, atta, even masalas  and condiments. Supermarket house brands now command up to a quarter of sales, say retail analysts. And you have the usual suspects to assign the blame or the credit, depending on which side of the table you are sitting. Concerns about the state of the economy and low consumer confidence are driving the acceptance of private labels, particularly among middle-income homes. That coupled with an increase in the range of private label products on the shop shelves has led many consumers to shift to home brands, say at least two reports on the subject.

Of course, private labels have always been there - your local retailer would bung in "loose" tea or flour in a pack that would proudly proclaim his shop's name or logo. Many analysts see this as the start of a trend to which big retailers caught on. Low-involvement categories such as household cleaners were among the first to see the entry of supermarket labels, which now account for 20 to 40 per cent of sales in modern trade, bringing in huge margin-lifts for retailers. In categories such as jams, biscuits and staples, private labels contribute more than 20 per cent of modern trade sales.

As big retailers improve financial and managerial commitments to their private label offerings, branded consumer product companies would have to execute a complex balancing act to manage their brands and retail relationships effectively. The sheer growth and the kind of shelf space private labels have begun to hog represent a huge dilemma for many consumer product companies. On one hand, they are a competitive threat. On the other, they are also the products of major customers. Can branded manufacturers afford to compete aggressively with supermarket brands? Will that compromise trade relationships? These are some key questions consumer product companies have to resolve quickly.

Look at the kind of power private labels have vested with retailers. A year and a half ago when Reckitt Benckiser decided to cut sales margins on its products, some of India's biggest retail chains got together to banish the British multinational's products from their shelves. In doing so, they did what many global retailers had done with great success. Creating store brands is one way a retailer can differentiate his firm from competition; it also helps him flex his muscles in his relationship with the brand manufacturer.

Little wonder, then, that retailers are now mining shopper data to make private labels shed their "lowly" - low involvement and low cost - tag. To this end, store chains are segmenting their brands, combining with more than one brand for special/cut-price offers and stepping into high-involvement product categories. Packaging, which has been largely overlooked, is getting more attention. Major supermarkets are also spending big on activities aimed at blurring the lines between branded and in-house products. These retailers are introducing premium, organic and "fair trade"/"cruelty-free" lines to attract a new generation of private-label buyers. The targets are the middle-and higher-income groups because they present the best growth opportunities.

Mind you, there is potential for a perfect storm. The short-term benefit of lower prices for consumers will come with a sting in its tail; experts say buyers may eventually be faced with less choice. The face-off between Reckitt Benckiser and Big Bazaar-Spencer's et al in 2011 showed that the consumer may end up being the collateral victim. Also, all of this discounting means that someone is paying the cost of buying Rs 30-per-kg sugar or Rs 30 per-kg atta. More often than not, producer margins are squeezed as supermarkets discount heavily to increase store traffic.

In sum, for brand manufacturers this may be the most difficult period to navigate - a time when their own sales are stagnating or even falling and when the economy, consumer predisposition and retail competition are all favouring the growth of private labels and store brands. It is a time when the battle lines have to be redrawn - where consumers are still adjusting to the "new normal", new products are pushing older ones from the shelves and share points are up for grabs.


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