Saturday, January 10, 2009

Why is HUL worried?


Predictably, for now the categories that are attracting maximum momentum in Indian retail are low-involvement ones – food (especially staples), perishables, personal care, apparels and accessories. Let’s say a Mrs. Roy goes for her monthly shopping to a Big Bazaar outlet. She assuredly picks up HUL’s Surf Excel detergent, moves on and picks up Care Mate, an in-store personal care label of the retailer, loves a Tee she bought for her 3-year old (the brand is another in-store label called Little Devils), but when she reaches the dairy products section, she can’t see her favourite brand of butter (it’s there actually – hidden in the second row). What she sees instead is Fresh-n-Pure butter. Puzzled, she asks the in-store helper for his opinion, who assures her of the quality. Even the price is lower than the usual big brand she buys. Boasts Rakesh Biyani, CEO, Future Retail: “The price that we offer is also much lower than any other player.” Result: she happily drops Fresh-n-Pure butter into her overflowing shopping bag and makes for the cash counter.

And that, my dear reader, in a nutshell, is why big brands are feeling the heat. Hindustan Unilever, P&G, Marico and ITC to Madura Garments and Arvind Mills have begun shivering in anticipation of the brand bloodshed that awaits them. As the organised retail cart gathers more momentum, and as more retailers realise that private labels not only give them better margins (they can rake in as much as 20% higher margins as opposed to outside brands), but also put them in a position of strength to negotiate betters terms with the big outside brands, the die will unflinchingly be cast in the retailer’s favour. In the US, 20% of all store sales on an average come from private labels, and the percentage zooms up to about 30% and over 50% in Canada and Europe respectively. And while some retailers have tuned in to the Marks & Spencer model a la Tata’s Westside and Trent, others like Spencers and Nilgiri have proven that even the supermarket model (a healthy mix of private labels and outside brands) can flourish in India. Explains Thomas Varghese, CEO, Aditya Birla Retail, “That private brands are slowly beginning to capture share of market in almost every category is a fact. Sales are increasing at rates faster than the national brand counterparts.”

As for the consumer, he is lured by the promise of similar quality and a cheaper price tag. A big reason why private labels are priced competitively is because they have virtually non-existent marketing and distribution budgets. Marketing is done for the store rather than for in-store brands. While this may be a point of frustration for many private label managers, yet absence of such costs enables retailers to pass on the benefit to consumers and also improve overall product quality. Walk into a Westside store, and you’ll see sneakers that look similar to a pair of shoes from Nike, just at much lower prices. Nike refuses to comment and when we asked Smeeta Neogi, Head-Marketing, Westside, she simply said: “We don’t see a reason for a brand to be threatened by another.”

But the fact is that in-store brands are winning the price war. There is also the underlying factor that the point of purchase (the retail store) is under the retailer’s control and he can choose to display his brands more favourably than outside brands. Adds R. Subramanian of Subhiksha: “We focus on in-store advertising for our brands as it influences the buying behaviour of consumers.”

However, organised retail has only just penetrated 5% of India’s total retail environment. So, clearly these private labels are missing out on a large untapped market segment. Besides, low prices cannot entice the really brand conscious consumer. Analysts feel that this is where branding comes in and global retailers like Wal-Mart and Tesco have set a classic example of positioning their private labels by deeper penetration, and by tying up with other retailers across segments. This ‘multiple availability’ format ensured that global retailer Carrefour could create successful brands in the personal care segment. Has the same begun to happen in India? “You can’t tie up with rivals to promote your private label, but you can always do that with players who are not into typical retailing business,” replies Damodar Mall, CEO, Innovation & Incubation, Future Group. Sources reveal that Future Retail is already mulling a tie-up with BPCL’s In & Out Stores. Such multiple availability of these private brands will send the signal that a new brand has arrived in the market. But that’s not enough to create brand value. Retailers are now resorting to channel blurring, and in some instances, even advertising their respective brands (Remember John Miller from Future Brands). “If food services companies bring their products on retailers’ shelves, then retailers can also sell their products through food service outlets. Such co-branding is common in Europe,” explains Jonathan Banks, Business Insight Director, The Nielsen Company, UK.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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