It's well known that private labels fetch better margins for retailers and hence higher profitability. A private label in a category like apparel fetches margins as high as 60-65 per cent (compared to established brands which offer 35-40 per cent margins), while cosmetics gives 70-75 per cent margins (around 25-30 per cent from brands) and grocery is about 10-14 per cent (vis-a-vis established brands which offer 7-10 per cent). However, if you are an ecommerce retailer, your private brand strategy could help in stepping up the valuation of your business.
A KPMG report on online private label growth, launched at Retailers Association of India's Retail Leadership Summit 2020, says that an ecommerce electronics or apparel retailer with substantial private label offering can get 2.5 times higher valuation (than a retailer which doesn't have private labels), while a grocery company can get 1.3-1.4 times higher valuation. "If you have consumer stickiness for your private label brand and it's profitable, it helps in increasing your value in the minds of the investor," says Harsh Razdan, Partner and Head (Consumer Markets and Internet Business), KPMG.
Razdan cites the example of an ecommerce grocery marketplace that transitioned into an inventory-led model and introduced private labels. He says that over the next two years the revenue grew 2.5 times and next margin expanded by 300bps. Private labels, he says, currently is around 20 per cent of the company's revenue. "Higher scale, efficient operating model and improved margins driven by the realigned strategy led to a huge surge of about 2.5X in the valuation in the latest round as compared to the previous rounds of funding," he further explains.
Apart from offering high margins, private labels allow companies to exercise greater operational control over its end-to-end value chain thereby reducing value leakages and that makes them attractive for investors, says the KPMG report. "But for valuation, one has to ensure that the private label has a reasonable amount of stickiness. Companies have to invest in building the brand and continuously innovate," says Razdan.
Nykaa, the private brand of online fashion retailer, Nykaa.com is an example of one such brand which has a strong equity in consumer minds. Tasty Treat of Big Bazaar is among the retailer's leading brands that is now available online on Amazon. Reliance Retail also has a huge private label presence across all its formats which have been playing a huge role in its online strategy. Its consumer electronic brands such as ReConnect and LYF, Best Farms and Good Life, its grocery private levels and DNMX, Netplay and Performax, its apparel brands, have a reasonably good recall, especially in Tier 2, 3, 4 markets where consumers are still getting used to brands. Similarly, Croma CEO, Avijit Mitra, in a recent interview with Business Today had said that though private brands are about 6 per cent of the durable retailer's revenue, but the categories (such as air-conditioners, refrigerators, and TV panels) in which it offers private labels, consumers tend to buy them more than the established brands. The private labels come at a huge price advantage of 15 per cent to 20 per cent cheaper than the established brands.
The KPMG report says most online retailers are increasingly focusing on their private label strategy. It says that most platforms have at least two-five private label brands in categories such as wellness, electronics and cosmetics, while larger categories like apparel and grocery have nothing less than 15-20 private label brands. "Category focused (cosmetics or furniture) platforms were early to enter and launch private labels and currently have 25-40 per cent sales contribution from such labels, while multi-category platforms have around 5%-10% of sales attributed to private labels," says the report.