Private Labels by Online retailers won’t work. Here’s why.

Generally called as store brands, Private labels are products that are manufactured (sometimes designed), distributed, and marketed by retailers themselves. They are often pitched as a cheaper option yet have the same quality as national/international brands.

Private Label 1This is a practice that brick-n-mortar stores have been up to for quite some time. Below is a chart that shows Indian stores’ private labeling practice.

Private Label 2It is estimated that by 2015 the overall private-label share will hover at around 30 percent of global food retail sales, according to Rabobank. And, by 2025, it will reach as much as 50% of food retail sales.

The private label apparel business is falling out of fashion in the struggling retail environment, as branded clothing is seen as a more compelling option for consumers — and less risky to retailers. Or is it?

Why retailers sell Private Labels

  • Profit margin is the main reason that makes retailers try out private labeling. Margins in retailing have become razor thin with tough competition. When the volume goes up, retailers begin to try out their own labels. This works with categories where brand affinity is low, like socks, trousers, etc. But, some retailers try out big ticket items also like watches and sunglasses. Typical margin for a ‘B’ brand is around 35%. When the retailer sells it for Rs. 100, he pays around Rs.65 to the brand. His cost of logistics, marketing, sale, gateway/COD and operations will eat away around 20-25%. He is left with 10-15%, which is quite low. This falls drastically in commoditized categories like FMCG, electronics, etc., where it can fall to as low as 2-3%. In a volume of around one crore per month, this can be around 5-10 lakhs. In India, a revenue of Rs 1 crore/month is a dream to most retailers. The marketing spend the online retailers go through is phenomenal. So, to most retailers margin pressure is huge. It can increased by out-right buying. This typically is another 15% increase in margin. But, again capital required to achieve this huge. Retailer is left with no option but to create private labels.
  • Another reason is when the retailer has a vision of becoming a brand and wants to test out the market with their own label on select categories.
  • Customer loyalty is another reason. A private labelled tee-shirt will just keep reminding the user about the retailer. The buyer just feels closer to the retailer.
  • Acting on the analytics and data collected from the user is quite easy when the retailer controls the design, manufacturing, marketing, distribution and profits.
  • Price sensitive users will just love the private labels. Private labels are really competitively priced because of no brand building cost and marketing. Hence, most retailers just place their labels along with national/international brands and influence users.
  • It helps retailers negotiate better prices with the brands.
  • Unlike FMCG & electronics, fashion labels needn’t go through stringent regulatory approval or certification processes.

Can this strategy be replicated in online stores in India? We think it can’t be replicated in its current form.

Why it won’t work with Indian Online shops

1. Lack of designer depth

This has been the general problem even for B-brand suppliers, who supply manufacture for retailers. They are the white labelling specialists.

Designers want to work for niche markets or big brands. They don’t want to think of the third option. This is a problem for B and C-brands also.

Hence, lack of innovative and experimental designs.

2. Lack Innovations and foresight

The gross margin does not however, cover all costs associated with private-label products. The retailer will need to invest to market intelligence, in-house marketing expertise, product innovation, purchasing, tracking/tracing the supply chain and knowledge of raw material. In addition, not all private-label product introductions will be successful, start-up costs are not always recovered in the gross margin.

There is no scale to afford a team to handle market intelligence and forecast. They are mostly a season behind the market. The buyers with the retailer will mostly act as forecasters.

If the retailer wants to overcome it, the R&D expenses will shoot up.

3. Copy-cat tactics won’t work in fashion

Private labels grow out of copying. Period. Retailers continuously monitor the sales and come up with categories that they want to enter. This works for FMCG, food and beverages but not in fashion.

Indians have become very brand conscious, particularly when it comes to fashion. The crowd that visits an online store is very savvy and likes to be associated with only known brands.

4. Risk in non-availability of secondary market

Brands have access to secondary and tertiary market for over stock but, private labels don’t have access to such markets. Hence, there is lots of risk in manufacturing and inventory.

This indirectly force the private labels to avoid risk in design process and manufacturing. The designs are very conservative and tried-and-tested. This works against the labels since the buyers perceive private labels as stale.

5. Failure of the product will create a negative image

Poor selection of products will work against the retailer and wipes away any kind of loyalty they have earned. This is the huge risk and can just be one big red flag. Buyers won’t appreciate private labels being bombarded. And, imagine it being bad. Buyer won’t return.

Opportunities and Limitation of Private labels

Private LabelsThis summarizes the opportunities and limitations of private labels. Private labels can overcome some limitations using services like WSGN, etc that help in forecasting trends. Market perception and brand equities can be developed by spending on marketing and brand building activities. It just takes time and can be a fruitful exercise.

There have been success stories of private labels giving stiff competition to A-brands but it requires consistent focus and effort. It doesn’t make sense for Indian online retailers where biggies like Amazon have been treading this path very cautiously with Amazon Basics store-brand.

Indian online retail is still too nascent for retailer to get into such endeavors. It requires volume, good shopping frequency and loyalty.

About the author

Karthick Kalidoss is the Co-Founder of Querate, a firm which does market research and validation of designed products. Labels and brands use Querate to test out innovative and niche designs before they get into manufacturing, thus avoiding the risk.

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