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The Impact of Private Labels on FMCG Companies in India

Private Label AdoptionInitiated by the Value Proposition but Sustained Due to the Quality Offered
Report summary
An insight into the changing consumer attitudes and shopping behavior in India with the launch of private label FMCG brands Insightful analysis into consumer's attitudes, beliefs and motivations behind private label versus famous brand purchases Focus areas for FMCG companies in terms of product development and positioning to avoid competition from private labels Geographic scope is India

Information of private labels strategies of retailers in India and highlights the implication on FMCG companies

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About this report

Introduction
This report is based on a consumer survey, which is focused on the preference for private labels in various product categories. It highlights the private labels strategies of Indian retailers and brings out its implication on FMCG companies. It also provides information on the steps FMCG companies can adopt to differentiate their product offerings from private labels. A rapidly growing organized retail sector is driving growth in the share of private label brands in the average Indians shopping cart. Driven by the urge to satisfy the growing consumer demand for value-for-money, most major retailers have launched private label products across several fast moving consumer goods (FMCG) categories. These changes in the market dynamics are encouraging traditional FMCG companies to respond with marketing mix changes to stay competitive.

Key findings and highlights

With the growth of organized retail in India, retailers are realizing the higher earning potential of private labels though private labels account for only 78 per cent of the overall organized FMCG retail sales, Datamonitor estimates that this share will grow to 1112 per cent by 2012. To respond to competition from these store brands and other regional players, FMCG companies should focus on investing continuously in innovation in product design and packaging, and on new consumer segments to generate growth this report details such strategies, which will be relevant for FMCG companies in framing their product strategy. The adoption of private label brands has been rapid in the household care industry. Datamonitor expects that a customer satisfied with a private label brand in a low involvement industry such as household care will have a greater chance of trialing in other industries such as food and beverages and personal care.

Reasons to buy
Information of private labels strategies of retailers in India and highlights the implication on FMCG companies Consumer insights to help FMCG companies in framing their product and marketing strategies Suggests actions which FMCG companies can follow to avoid competition from private labels

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Sample pages

The Future Decoded

Action Points

INSIGHT: Indians are attaching significant importance to natural/organic ingredients in personal care products, but less so in food and beverages
Indians have started attaching greater importance to health and wellness which is encouraging FMCG majors to launch more expansive products with health-related claims. In a recent survey conducted by Datamonitor, respondents were asked to rate the importance of several parameters in making a purchase decision, across categories such as haircare, skincare, oral care, fragrance and makeup/cosmetics. As shown in Figure 13, the respondents ranked natural and organic ingredients among the top three parameters when selecting personal care products. For haircare, skincare, and cosmetics, the importance attached to natural ingredients also outweighed the option of 'buying the favorite brand'. So, natural and organic ingredients is an important factor in personal care product purchases in India, and while not many Indian retailers have launched their private labels in the personal care industry with such claims, Datamonitor expects this industry to grow in the short to mid-term.

Figure 25:

National brand owners are faced with a dilemma over whether they should produce private labels

M itiga ting factor s Strength of market position Overall level of private lab elthre at The impact of the broa derecono my Consumer sentiment towards brand Reliance/relationship w ith distrib utors

Do not p ro du ce Avoid becoming involved in PL manufac turing with strong belief and invest m ent in core brands

Pro duce Bec ome involved in PL manuf a cturing in recognition that additional retailer co-operation is a necessity

Figure 13:

Indian consumers attach significant importance to natural/organic ingredients when purchasing personal care products

Reactive strategy Wait for the distributors reaction and only then respond Most suitable for strong natio nalbrand manufactu rers Enables natio n al manufactu rers to follow struc tural changes in the economyand then decide

Proactive str ateg y Respond w ith preventative steps to continually maintain a differen t ial with PL alternatives Suits brands that have lost their ex clusivity over the years but still enjoy larger market shares

Active approach Such manuf acturers believe that there is a ch ance that their label will eventually recapture its previous m a rket share, and they may be able to avoid making private brands for distribu tors

Pass ive approach R ecognition that producing PL is a k ey business opportunity with w inw in relationsh ips to be had. The t hree options here include: co-opera tion; private premium brand; categories management.

Brand quality impro v ement without pri ce increa se

B rand quality improvement with price increase

Reducin g brand price

Di fficu lt w ith rising co mm odity costs

Increase advertisi ng
Highlight br and feat ures and b enefit s

Short-term sales promotion

S h ould only a pply wh ere private bra nds are more p ref era ble

Offer a me too value flanker

Makin g it mo re difficu lt for t he privat e brand t o a pp e ar attra ct ive

Ma y in clude th e a dditi on of new f unct io nal feat ures, en h ancin g brand s up port (e .g. s ervice, and ne w/upd ated design)

Source: Datamonitor analysis, adapted from Herstein and Gamliel (2006)

DATAMONITOR

In the context of India, FMCG companies would benefit in the long run by manufacturing a lower-priced variant of their product as a private label and thus benefiting from a flanking strategy, where the lower price ensures that they cater to a broader target segment and also give them a higher negotiating power with the retailer. For example, Australian Foods Pvt, which owns the brand Cookie Man (also present in India), is manufacturing low priced cookies for Spencers sold under the brand name 'Spencer's Smart Choice'. A 30g pack of these cookies is priced at INR10. This strategy will not cannibalize the sales of 'Cookie Man' as the cookies are sold at a comparatively premium rate, it has dedicated retail outlets for selling cookies, and its cookies are not sold through retailers such as Reliance or Spencer's. Another such example is Tasty Bite Eatables which owns the Tasty Bites brand of ready-to-eat foods in India. Tasty Bites is manufacturing frozen green peas for Reliance Retail under the brand name Reliance Select-Frozen green peas.

Source: Datamonitor Consumer Survey, April/May 2009

DATAMONITOR

The Impact of Private Labels on FMCG Companies in India

Datamonitor. This brief is a licensed product and is not to be photocopied

DMCM4723/ Published 11/2009 Page 25

The Impact of Private Labels on FMCG Companies in India

Datamonitor. This brief is a licensed product and is not to be photocopied

DMCM4723/ Published 11/2009 Page 42

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Table of contents
OVERVIEW
Catalyst Summary INSIGHT: Private label adoption among Indian consumers is based on price and perceived quality - Key takeouts and implications: success of private labels in the household industry is likely to filter down to other product sectors and categories

THE FUTURE DECODED

INTRODUCTION: Private label is an emerging retail and consumer trend in India TREND: After household care, private labels in India pose most threat in the food and beverages industry TREND: Private label evolution in India is emulating Western markets - Understanding the evolution of private label elsewhere is a useful signpost of likely developments in India - Key takeouts and implications: the next stage of evolution for Indian retailers will be to focus on private labels targeted at specific consumer segments TREND: Indian retailers are expanding their private label portfolio and targeting multiple consumer segments through tiered pricing and claims - Having established a significant presence in the household care industry, Indian retailers are now launching private labels in ready-to-eat foods, beverages and personal care segments - For food and beverages, the high likelihood of trial provides good growth potential for private labels - Only very limited uptake of private labels is occurring in personal care - A stronger private label foothold is apparent in the Indian household care industry - After beginning as an 'economical alternative', some private label offerings are now tiered across different price points - Indian retailers are building private label brands with product attributes that mirror national brands - Retailers are investing in individual brands comparable in quality and price with the national brands - Key takeouts and implications: as private label in India evolves, it will shift the bargaining power from FMCG companies to retailers INSIGHT: Indians are attaching significant importance to natural/organic ingredients in personal care products, but less so in food and beverages - Key takeouts and implications: FMCG companies looking to differentiate their offerings from competitors can focus on organic products INSIGHT: Customer service, convenient store opening hours and in-store ambience are key influencers for Indian consumers - Key takeouts and implications: Indians are increasingly preferring modern retail formats for shopping which has made the role of retailers more significant

ACTION POINTS
ACTION: Differentiate product offerings with unique packaging and product design to avoid competition from private labels - Results-led innovation must be pursued to continually engage consumers and prevent basic commodity status being attached to product offerings - National brands need to invest in innovative packaging to clearly differentiate from private labels ACTION: Focus on new customer segments for generating higher growth - Develop products to cater to localized needs or different consumer segments - Increase focus on product development and logistics to target the high growth rural market - Launch low cost products for rural India to help FMCG companies boost earnings ACTION: Determine whether you want to manufacture private label brands or not

APPENDIX
Definitions Methodology Further reading and references Ask the analyst Datamonitor consulting Disclaimer

LIST OF FIGURES
Figure 1: Figure 2: Figure 3: General purpose cleaners and toilet care markets are the most established private label FMCG formats in India Indian retailers can evolve further to launch private labels with a higher value-added proposition Indian retailers have successfully launched their private labels in the food and beverages, personal care, and household care industry Indian retailers are launching store brands across F&B categories such as staples, pasta, snacks, and beverages Indian retailers are increasingly attempting to target the personal care industry by launching private labels in categories such as hand wash, toothbrush, and shampoos

Figure 4: Figure 5:

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Table of contents (continued)

Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Big Bazaar and More have launched their umbrella brands Clean Mate and 110%, respectively, to target the household care industry Indian retailers are launching value and premium versions of their products to target multiple customer segments Reliance Retail has launched sugar in the value as well as premium range with differing product claims After launching its value range of products, Spencer's is now launching products in the premium range While the price differential between a store brand and a national brand is reducing in the household care industry, it remains significant in the personal care industry Indian retailers are launching private label products with packaging and claims mirroring the national brands to create a similar quality perception Big Bazaar launched its tetra milk with product claims similar to leading national brand in India Indian consumers attach significant importance to natural/organic ingredients when purchasing personal care products Indian consumers attach lower significance to organic products when deciding the location of their grocery shopping Quality of customer service, convenient store opening hours, and in-store ambience are the top three influencers for grocery shopping in India Indian consumers shop for top up and urgent requirements from kirana stores Indian consumers consider private labels as good as national brands in quality in the laundry, foods, and household care industries Indians attach significance to 'value-for-money' in choosing cleaning or laundry products Gillette has stayed ahead of the competition by constantly investing in product innovation Innovative packaging has helped national brands differentiate from competitors Launching multiple product variants helped Kurkure address local demand Different variants of Horlicks helped it cater to different target segments FMCG majors are partnering with local bodies to set up retail stores in rural India FMCG companies are launching product variants specifically for the Indian rural market National brand owners are faced with a dilemma over whether they should produce private labels National brand manufacturers are also producing private label products for Indian retailers

Figure 11:

Figure 12: Figure 13:

Figure 14:

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Figure 18: Figure 19: Figure 20: Figure 21: Figure 22: Figure 23: Figure 24: Figure 25: Figure 26:

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