Business Today

Will the fizz last?

A clutch of third-party manufacturers made it big in the downturn, as organised retail fought for better margins and customers looked for bargains. What next?

twitter-logoManu Kaushik | Print Edition: April 4, 2010

In October last year, retail chain Big Bazaar approached Haryana - based KCL Foods and asked it to make breakfast cereals for Big Bazaar's private-label Tasty Treat. It was the second attempt in months by Big Bazaar to enter breakfast tables with its own brand. The category has been growing at 20-25 per cent annually for the last two years and a deal with KCL would give it better margins, and more bargaining power with national brands.

Murginns, KCL's breakfast cereal, had been on Big Bazaar's shelves and gaining consumer acceptance. So KCL agreed and introduced three variants for Tasty Treat. In the first month, the three gave Big Bazaar sales of Rs 50 lakh. The next month, Big Bazaar pulled Kellogg's cereals from its 148 stores over a margin dispute, even though the multinational accounted for around 75 per cent of its breakfast cereals sales. Total sales fell, but Big Bazaar still sold around Rs 1 crore worth of breakfast cereals that month. "The sales dip was not as big as expected. The litmus test is now when the market leader is coming back," says Sanjeev Khemka, President, KCL Foods. (Big Bazaar has signalled a truce with Kellogg's.)

Private label portfolio of major retailers

Fresh n Pure, Cleanmate and Caremate (FMCG), Tasty Treat and Premium Harvest (food & grocery), Koryo and Sensai (consumer electronics), John Miller and Bare (apparels)

Smart Choice (food & grocery and FMCG), Great (consumer electronics), Island Monks and Mark Nicolas (apparels)

Sudz, Endurf, Calcident and Dazzle (FMCG), Reliance Value, Healthy Life, Good Life and Dairy Life (food & grocery), Network, DNMX and First Class (apparels)

Feaster and Kitchen's Promise (food & grocery), 110 Per Cent and Fresh-O-Dent (FMCG)

KCL Foods is just one of the many companies that flourished in the downturn by feeding the appetite of retail chains for cheaper products and bigger margins — and are now poised for a national presence. Take Asian Lakto Industries, which supplies packaged juices and soft drinks to retail chains under their private labels, or JHS Svendgaard Laboratories, which began as a contract manufacturer of oral care products in 1996 for the exports but is big in dometic private labels.

According to consultants Technopak Advisors, the private label market is worth around Rs 4,500 crore (including apparel, food and grocery, home electronics, and footwear). Private labels, also referred to as inhouse or store brands, are not new to India. But the downturn created both a new "push" (retailers searching for higher margins) and new "pull" (customers seeking cheaper options). Now, even as the economy looks up, these private labels are not slowing down. Santosh Desai, MD & CEO, Future Brands, agrees that the downturn created a fresh demand from consumers.

"Consumers looking for alternative to conventional brands are increasingly switching to low-priced high-quality private labels," he says. Industry watchers say private labels are no longer considered lowquality versions of national brands, and, in several cases, these brands are becoming the first choice of many consumers. Neeraj Poddar, Director, Asian Lakto Industries, says his company has contract manufacturing tieups with Reliance Retail, Bharti Wal-Mart, Future Group, Vishal Retail, and Aditya Birla Retail's More. On an average, private-label beverages are sold at prices 10-15 per cent below that of national brands but give the retailers higher margins.

Neeraj Poddar
Director, Asian Lakto Industries

  • Private label manufacturer for Reliance Retail, Future Group, More, Bharti Wal-Mart and Vishal Retail
  • Turnover: Rs 45 crore
  • Contribution of private label to total turnover: 30 per cent
  • Contribution of private label to total turnover by 2012: 40 per cent
Asian Lakto also owns two brands sold through traditional shops. "At present, 30 per cent of our total turnover (Rs 45 crore) is private labeling, while our own brands make up the rest... By 2012, private labeling will account for 40 per cent of the total projected turnover," says Poddar. KCL Foods, a part of the paper packaging firm KCL Ltd, entered the market in August 2007, before the downturn, with its cornflakes. The challenge then was to build the right product at the right price. Then came the downturn, followed by the deal with Big Bazaar. At present, Murginns is selling through 14 retail chains and traditional kirana stores and contributes 75 per cent of KCL's turnover of Rs 2 crore a month. The rest comes from contract manufacturing for Big Bazaar.

"When Big Bazaar came to us, we were running at around 18 per cent of our total capacity (600 tonnes a month). The deal gave us a stable source of revenue," Khemka says. For KCL Foods, margins on both Murginns and Tasty Treat are similar (eight per cent). Big Bazaar, though, gets 4-5 per cent more from every packet of Tasty Treat cornflakes sold compared with what it gets from Kellogg's. Dynamic pricing also attracts customers to the private labels. For example, Kellogg's cornflakes sells at Rs 130 for a 475-gm pack. Tasty Treat is priced at Rs 125 for the same weight, but is given at a discount and sometimes with a freebie. "In the next 30 months, we are expecting to touch an annual turnover of Rs 100 crore, with Rs 15 crore coming from private label business," says Khemka.

Rahul Mehta
Managing Director, Creative Garments

  • Private label manufacturer for Shopper's Stop, Future Group, Lifestyle and Vishal Retail
  • Turnover: Rs 350 crore
  • Contribution of private label to total turnover: 10 per cent
  • Contribution of private label to total turnover by 2013: 20 per cent
Vineet Kapila, President, Spencer's Retail, says the private labels' share of the overall consumers' bills has gone up significantly in the last one year. In 2008, private labels accounted for 25 per cent of the average bill. "In the last one year, it has more than doubled to around 50 per cent. We are seeing good repeats in our nectar juice drinks category, where the market share of our private label brand is 30 per cent," Kapila says.

Private labels offer margins of 20-25 per cent against 12-15 per cent on the normal brands. Margins in apparel and accessories business can go up to 40 per cent.

Says Anand Ramanathan, Manager, KPMG Advisory Service: "The obvious reason for the success of private labels is their price advantage which is made possible by the minimal spending on their brand promotion." Such spending is incurred only when the private label gives discounts or bundles two-three products.

The push factor is also evident from the fact that almost all the retailers—big or small—are expanding their private label portfolio. While the Future Group, of which Big Bazaar is a part, is planning to launch its own toothpaste brand "Sach", Spencer's has lined up launches in FMCG, apparel and electronics. Kapila says Spencer's has launched over 60 products across different categories over the last one year, "way above the number we have ever launched in a single year".

"Due to higher margins, we have given slightly higher than the fair shelf space to our in-house brands," Kapila says. Today, private labels fetch 18 per cent of Spencer's total turnover; by the next 18 months, the share is expected to touch 30 per cent. A notable success in retail has been Trent Ltd, the Tata retailer, which relied heavily on private brands at its Westside stores right from the start. As Trent's Managing Director, Noel Tata, told BT in an interview recently, "You have a lower turnover with a higher margin in private label. And margins are what pay the bills."

Sanjeev Khemka
President, KCL Foods

  • Private label manufacturer for Future Group
  • Turnover: Rs 24 crore
  • Contribution of private label to total turnover: 25 per cent
  • Contribution of private label to total turnover by 2012: 15 per cent
Asian Lakto's Poddar has added Reliance Retail and Bharti Wal-Mart over the past 12 months, and even its existing clients are expanding their product portfolio by adding flavours. According to a 2009 KPMG report, Indian Retail: Time to Change Lanes, private labels account for 10-12 per cent of the organised retail product mix in India, against 17-18 per cent globally. Saloni Nangia, Vice President (Retail & Consumer Products), Technopak Advisors, says: "In the last one year, the private labels' growth (30-35 per cent a year) has outpaced the growth of the organised retail market (25 per cent)…growth will continue to remain the same."

Delhi-based JHS Svendgaard has seen it all: for the first three years of its existence, it supplied exporters. Then, it tapped export markets directly, signing deals with US retail majors and FMCG companies. In 2002, it bagged an order from Subhiksha Retail to make toothbrushes and pastes for it. Today, it has a good 40:60 mix of exports and domestic sales, in rupee terms, and makes private label items for Spencer's, Bharti Wal-Mart, and REI Agro as well as FMCG companies such as Dabur, Oral-B and Sahara India.

Nikhil Nanda, Managing Director of JHS Svendgaard, says his private label business had been almost nine per cent of total turnover but fell to five per cent this year after Subhiksha, the south-based chain, collapsed. Nanda expects domestic retail to account for nearly 20 per cent of sales by 2015. "The overall market for in-house oral care brands is likely to grow 40-50 per cent over the next five years," says Nanda. In oral care, national brands offer margins of 25 per cent, and private labels an average of 60 per cent. "So stores will always try to create more excitement around their own labels," Nanda says.

Nikhil Nanda
Managing Director, JHS Svendgaard Laboratories

  • Private label manufacturer for Spencer's, Bharti Wal-Mart and REI Agro
  • Turnover: Rs 30 crore
  • Contribution of private label to total turnover: 5 per cent
  • Contribution of private label to total turnover by 2015: 20 per cent
Creative Garments, a Mumbaibased apparel maker, is another player aggressively expanding in private labeling. After almost two years of cajoling by Future Group and Shopper's Stop, Creative's Managing Director Rahul Mehta decided to move into the apparels business in 2003. Starting with 100-odd pieces, it now churns out 5,000 pieces a day for private labels. Creative still exports 80 per cent of its output, while the rest is split equally between private labels and own brands. This year, when exports fell, it was saved by the private label business. "Total turnover is likely to remain at last year's level...Thanks to the private label business, we have been able to break the fall in turnover," says Mehta. In the next three years, private label division will account for 20 per cent of revenues, he says.

National brands are not running scared. LG Electronics, for one, is confident that price alone will not win the battle. L.K. Gupta, Chief Marketing Officer, LG Electronics India, says: "The emergence of private label in a growing economy like India is inevitable…Through our research, we have found out that 15-30 per cent of the consumer durable purchases are made primarily on the basis of prices."For these consumers, buying a product with basic features is good enough, says Gupta.

"The only way national brands can maintain their market share is to keep spending money on product innovation and brand building," he says. He also cites after-sales service and warranty schemes as his big advantages. "I doubt private labels have the capability to offer something like this," Gupta says. For private labels this is not a priority. Their focus: get a national presence without any brand building.

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