Business Standard, Mumbai, February 28, 2011

Sayantani Kar (with inputs from Preeti Khicha)

When some of India’s big retail chains banded together recently to substitute Reckitt Benckiser’s products with private labels to protest the latter’s decision to cut sales margins on its products, they were doing something many global retailers have done with great success. Part of their overall strategy, especially for large chains in the US and Europe, is to develop quality private label products that complement other pieces in their marketing mix. While this is one way retailers can differentiate their firms from competition, it also helps them flex their muscles in their relationships with brand manufacturers. Indeed, retail giants Tesco, Walmart and Carrefour have a significant portion of their sales coming from private labels — ranging from 10 per cent for Costco and 50 per cent for Tesco.

India is a back runner in the private label race, but it is catching up. A Shoppers Trend Study by Nielsen found awareness about private labels has gone up from 64 per cent in 2009 to 78 per cent in 2010 across 11 cities in India. Nielsen Director (retail services) Siddharthan Sundaram says, “Over the last three to four months, we found an increased awareness of private labels in categories such as staples, household products, personal care products such as soaps, biscuits and packaged groceries.” Thanks partly to the recent economic downturn, there is greater acceptance — and even loyalty — to such brands in India, say marketers. Future Group Business Head (private brands) Devendra Chawla reasons, “A label on the shelf becomes a brand by covering the two feet distance from the shelf to the trolley. After all it is the consumer’s choice.” Even in the toughest segment for private labels to crack — fast moving consumer goods including food and personal care — store labels claim share of 19-25 per cent.

Low-involvement categories such as household cleaners were among the first to see the entry of private labels (17-44 per cent of sale in modern trade), bringing in huge margin-lifts for modern retailers. In categories such as food products — jams, biscuits and staples — private labels today contribute more than 25 per cent of modern trade sales. Little wonder, retailers are now mining shopper data to make private labels shed their ‘low’ly tag — low involvement and low cost. Store chains are segmenting their brands according to consumer needs, combining more than one brand according to consumer behaviour, besides launching high-involvement premium products and innovative packaging to give national brands a run for their money.

Innovate or die
Retail innovation has had a big role to play in speeding up the process of consumer acceptance. Future Group’s retail arm, which includes Big Bazaar and Food Bazaar, calls its in-house products ‘private brands’ not labels. It has a separate team, headed by Devendra Chawla, to research and test FMCG products before launch. The team has a range of private brands — Tasty Treat, Fresh and Pure, Cleanmate, Caremate, Sach, John Miller, Premium Harvest and Ektaa. Look at how it is using shopper data to improve its products. The insight that kids found ketchup bottles cumbersome and had to be served — making it inconvenient if an adult was not around — led it to change the packaging that in turn gave the brand a margin advantage. By offering ketchup in pouches, it saved on the price of the glass bottle and freight (pouches take up less space in a truck, hence more can be fitted in). While ketchup in glass bottles continue to be Rs 99 for a kilo, its Tasty Treat ketchup pouches come in Rs 59 packs.

By working with vendors it has also come up with interesting combinations — for example, its Tasty Treat jam has three small tubs packed as one unit, each tub containing a different flavour to offer consumers larger variety.

Retailers have now donned the hats of “product selectors” and “product developers” at the same time, points out Third Eyesight CEO Devangshu Dutta. “So far, most of the retailers were just selecting products from vendors which are mostly lower-priced knock-offs of manufacturer brands,” he says. Not any more.

Ashutosh Chakradeo, head (buying, merchandising and supply chain), HyperCity Retail, explains the process his company follows: “To develop food products, we identify vendors, tie up with food laboratories, chefs and consumers to be part of the tasting panels. Before launching a private label we do at least a month of consumer testing. We identify customers from our loyalty programme called Discovery Club, which tells us who buys a certain category of product. We give the relevant consumers our private label products for trial for a month. We meet the customers at their homes, take their feedback and these changes are incorporated into the private label brand.”

“Our stores act as research labs and are a constant source of feedback,” points out Chawla of Future Group. Chawla estimates 3-4 per cent of the sales of private labels are ploughed back into packaging and design innovation. Reliance Retail CEO Bijou Kurien says, “The teams are our main investment in private labels. Our 100-strong designers across all the formats help in coming up with product designs that fill a need gap or offer a few more features at the same price as national brands.” Reliance Retail has recently launched its own brand of watches priced Rs 149-199 which “no national player can offer” points out Kurien.

The edge
Most vendors directly supply to retailers’ distribution centres, cutting out cost leakage at the distributor’s and carrying and forwarding centres. Direct access to store shelves and aisles also cuts out the high mainstream advertising costs that brands have to bear. By clever product arrangements and in-store promotions, retailers can sway the shopper and draw attention to the price advantage. Chakradeo says, “We display private labels in heavy footfall areas in the store. We complement displays — so we keep our private label ketchup near the bakery.”

To tackle the tricky personal care category of face creams and shampoos that Aditya Birla Retail’s More chain has entered, it plans to communicate promotional offers straight to its loyalty programme members. “It will help us induce trials,” says Thomas Varghese, More’s CEO.

Bundling products is another way to woo the value-conscious consumer. Six months back, Future Group started bundling its private brands. Chawla says, “Take home-cleaning, which requires a floor cleaner, glass cleaner, toilet cleaner and utensil cleaner which we combined as a shudhikaran solution of our Cleanmate brand.” The combi-pack costs Rs 125, which would come to around Rs 220-250 if shoppers bought a la carte. The margins are still high at 26 per cent. “Vendors are assured of volumes,” points out Chawla.

What it also does is convert the fence-sitter who has not yet bought into a category. For example, consumers who avail of the shudhikaran solution also get into the habit of using glass cleaners — a category which has a small base and gets most of its sales from modern trade. Similarly, Future Group saw a 25 per cent spurt in the sales of soups when it clubbed soup mugs with its Tasty Treat soup packets based on the insight that Indians preference to sip their soup out of a coffee mug.

Don’t be surprised if you see MNC brands coming out with combo-offers for their products, way bigger than the occasional bucket with a detergent!

Growing up
There are signs the industry is evolving. Private labels in FMCG are shedding their low-cost tags. But retailers know better than to vacate low price-points altogether. Instead, they are segmenting their brands just as a manufacturer brand would do. Chakradeo of Hypercity says, “Over a period, we hope to increase the stickiness and the differentiation our brands bring to our stores. Particularly, in staples where we have seen our private label business grow rapidly. This is a very quality and price-sensitive category. We started with basic products but now we have premium daals (lentils) and basmati rice as part of our portfolio.”

Future Group too has its ‘good, better, best’ policy firmly in place. In staples, the stores offer some products ‘loose’, such as rice, wheat, lentils, which is at the bottom of the ladder. Its Food Bazaar version of the products straddle the middle category, and above the two is its brand, Premium Harvest, which retails at a price higher than some manufacturer brands.

Stickiness may also result from the manner in which retailers are positioning their brands. Future Group’s brand Ektaa will retail regional food and staples across its stores in the country so that migrants can buy supplies they are comfortable with. Be it Govindbhog rice and kasundi (a rice variety and mustard sauce preferred by Bengalis), khakra (Gujarati snack) or murukku (loved by Tamilians). Boston Consulting Group Partner & Director Abheek Singhi says, “Indian retailers are not cut-pasting private label products from other markets but adapting them.”

Are private labels a risk worth taking? Chakradeo says, “The entire product formulation for our cleaners was done in partnership with Dow Chemicals, USA. We did not make any investment and we gave them a percentage of sales as fee. Investments are not huge in making private labels as in most cases it is partnered with vendors. It is more of operating expenses than capital expenditure.”

Future Group brought down logistics costs further by 6-8 per cent by appointing vendors in more than one region for 10 of its product categories to fill its distribution centres. Chakradeo adds, “As the volumes go up, we will be able to put up for backend infrastructure facilities for development and R&D.”

Should national brands be worried? Devangshu Dutta says, “As long as retailers have access to the production and development and have customers for it, the private labels will remain profitable.” India Equity Partners Operating Partner V Sitaram sums up, “In modern trade, though the market leaders will face some slip in market share, the number 3 or 4 brands might have a bigger problem in certain categories thanks to private labels.”

As retailers leverage consumer insights to deploy private labels more effectively, national brands are aggressively fighting the challenge. From sprucing up supply chains to galvanising in-store promotions, they are covering all bases. KPMG Executive Director Ramesh Srinivas says, “Earlier brands had to adjust between a modern trade and a general trade supply chain. The former had to be serviced directly at the stores or had their own supply chain while the latter used the manufacturer’s supply chain. Now, some brands separate modern trade teams and even distributors.”

Britannia Category Director (delight and lifestyle) Shalini Degan says, “We have divided our portfolio into three categories, A,B,C, each having its benchmark fill-rate. We don’t allow fill-rates to drop below those levels. Why the segmentation? We need to focus on brands which have a higher traction in modern trade when servicing it, else we might end up focusing on brands that are not modern trade-led.”

Fill-rates denote how often and to what accuracy the retailer’s orders for a product are supplied by the manufacturer. Low fill-rates could mean lost opportunity since the shopper sees an empty shelf or a private label instead of the brand she might have thought of picking up.

Samsung Vice-President and Business Head (home appliances) Mahesh Krishnan says, “We have gone in for central billing system 4-5 months back with all large-format retailers. Orders are tracked on a daily basis giving retailers more control over the chain.”

In other words, private labels are here to stay and will evolve as more and more chains gain national footprint and the economies of scale kick in. Dutta of Third Eyesight says, “Gross margins for organised retailers are still low compared to global standards: So, margin fights will continue for some time till retailers gain a bigger share of the pie.”

(Also read: The Private Label Maturity Model.)

For all those who have admired the consistency and presentability of produce in western supermarkets, here’s proof that tough times really focus us on substance and force us to look beyond skin-deep beauty.

Even in fruits and vegetables.

British supermarket Sainsbury has challenged European Union guidelines that restrict the sales of fruits by certain physical standards. Sainsbury’s is questioning EU regulations that prevent selling “ugly” fruit and vegetables. Due to EU regulations such as size of cauliflower (minimum 11 cm diameter) and the shape of carrots (requirement that there should be a single root, not multiple), Sainsbury estimates that up to one-fifth of what is produced in British farms cannot be sold in the supermarket. According to Sainsbury’s estimate, not following these regulations can help to reduce prices by up to 40%, and reduce wastage by up to 20%. The retailer is also trying to drum up customer support by running an online poll (94% responses were in favour of Sainsbury’s move, at the time this column was being written).

So less beauty could mean more veggies in the supermarket, and more money in everyone’s pocket including, hopefully, the farmer.

And this may also vindicate anyone who has complained that the beautiful veggies and fruits in western supermarkets taste inferior to their “ugly” counterparts sold on Asian hand-carts. Give us more substance and less style, any day.

Let’s look at some other substantial issues that merchants should consider.

Remember “I can’t get no satisfaction”? That’s what Mick Jagger and his mates in the Rolling Stones hit the world in the face with in 1965, allegedly in response to the rampant commercialism they had seen in the US.

After 43 years – at least judging by the modern supermarket shelves – apparently we still ain’t getting no satisfaction. In fact, the array of choice tends towards “overload”.

A typical developed country supermarket is estimated to carry over 40,000 SKU’s. Can you think of 40,000 types of items (or even 10,000) that you would need from the supermarket for your home?

So here’s the result. During my travels, if I’m in a store that is unfamiliar I could spend over an hour wheeling a trolley around before reaching the checkout. The first 5-10 minutes are focussed on figuring out the aisles based on my list. The next 10 minutes are spent picking what is actually on my list. And the rest of the time before the checkout is usually spent browsing through the thousands of SKU’s and picking stuff that we never knew we needed when the family made the shopping list.

Now, the guys who run the supermarkets are generally a smart bunch – they’ve figured that the more options you put in front of consumers, the more they buy. My cash receipts are proof of that. But, as American professor and author Barry Schwartz (“The Paradox of Choice”) says, the point where the choice becomes counter-productive is already well-past in developed markets.

With such overwhelming choice, consumers get into analysis-paralysis. And even after they finally purchase something out of the enormous range, you get shades of post-purchase dissonance. Only, in this case the dissonance, the dissatisfaction is not related to a bad product, but: “What if there I had made another choice? What if there was a better product than this? What if there was something available for less?”

During these times, it is pertinent to also put this in the context of business costs. There is surely a cost of providing that humongous choice in supermarkets. Have we considered what the saving could be, if the variety was reduced, if the product range was consolidated?

Consider the time (and therefore cost) spent on product mix and pricing decisions – surely merchandising teams have to be larger if you have a larger product mix, since each person can only handle a finite workload. Consider the cost of logistics of handling a widely diversified range. Consider the efficiencies lost in diverse production mix. So, does the consumer really need, really even want all that choice?

Retailers like the German chain Aldi raise precisely those questions. Aldi sells about 1,100 SKUs compared to the usual 40,000. And it claims that the typical shopping basket in Aldi’s UK stores is 25% less than competing supermarkets.

Indian retailers, of course, are possibly yet to reach that pain threshold of choice. There are possibly some potentially useful choices that are still missing. But even here, it is well worth taking a hard look at the product offering. With availability levels that can dip as low as 50-60%, it is probably worth asking – what if we dropped XYZ product from our range? Would it really hurt our sales or even our image; or would it help us to focus better on the products that really matter?

If we took our attention away from building such false choices, could the business become more profitable and therefore more sustainable?

The US and European markets are often the source of many a management thought and business model related to consumer products and retail, and of “best practices”.

So, in closing, I should share this question someone asked me recently: “when do you think consumer spending will bounce back in the US?” My first response was, “If only I had a crystal ball”. But the next thought in my mind was what if US consumers actually came to a decision that they had “enough”? What if their excessive consumption was no longer the role model for consumers in emerging economies? What if, instead, the frugal consumers of India and China became the global role model?

What would your business model look like then? Would your corporate be more socially responsible? And would it have a better chance of lasting longer?

For those who are interested in taking this inquiry even further, I can recommend John Naish (“Enough: Breaking Free from the World of More”, 2008), John Lane, Satish Kumar, M. K. Gandhi, Alan Durning (“How Much is Enough?”), or any number of ancient Indian, Chinese, Greek or Roman schools of thought, many of them pigeonholed into “religious” or spiritual categories.

You might also like this video of a talk by Barry Schwartz on Ted.com (below).

Do please share the results of your inquiry with us, too.

You’ve walked into your neighbourhood supermarket with your shopping list. The particular detergent that your spouse had put on the list isn’t on the shelf and the sales associate is not sure whether they have any in stock (maybe you get the standard line: “whatever we have in stock is already on the shelf”).

You’ve forgotten your mobile at home so you can’t call to check whether a substitute brand or different pack size will suffice, so you walk out with the item still on your list.

And into the local kirana store. The brand and pack size that you were looking for isn’t there either, but the shop-owner says that he will have it in stock sometime during the next 3-4 hours, and can send it over to your home. Or, he suggests, you could also buy an alternative brand (or pack size). At the end of that conversation you would have very likely bought the alternative offered, or would have agreed to home-delivery of the item you were seeking. (A study by the Institute of Grocery Distribution in the UK in 2006 discovered that, in case of non-availability, 40% of the customers end up buying the same product somewhere else.)

Some people would be cheering, “Yea, more power to the underdog small retailer”. But the point of this example is not the victory of the local, independent kirana over the chain-store. The point I am illustrating is that the difference in the business models and formats of these two competitors, and the impact of on-shelf availability.

Modern convenience stores and supermarkets, and the format that is being largely adopted by the chain-stores in India, is the western model of self-service. Compared to the kirana-model of “being served”, modern retailers depend on product being available and visible on the shelf. Very clearly, visibility and availability drive sales.

And in the current environment, retailers are or should be looking at squeezing more sales out of their existing stores (see the earlier column – “Priority #1: Same Store Growth”).

On-Shelf Availability is driven by a number of factors – some are within the retailer’s control, while others are not.

On the vendor side, availability is driven by a number of factors. In India, vendors themselves can be small to mid-sized companies, with distribution systems that are poor in terms of information linkages. The supply chain may comprise of several levels of stockists, distributors, and wholesalers, with an inherent and in-built delay in information exchange. In this situation there is always a phase difference between demand (non-availability) and supply.

Other than the phase-difference, the order-fill rates at the vendor’s end can also be poor due to supply constraints. The quantity available in stock for a certain product at a regional or state level can frequently be lower than the requirement, and in such cases the manager, or the distributor, can end up allocating the available stocks.

These causes can lead to availability that is as low as 60-65% on average, even among the popular products. “Good” vendors can have supply rates of 85-90%, but even in these there is a high variance.

However, the interesting thing is that a very high proportion of stock-outs (around 75% according to the 2006 IGD study) can be attributed to problems within the individual store. These include poor in-store disciplines, lack of awareness of the impact of low availability, too much work for the sales associates or the lack of motivation.

(For instance, 35% of sales executives in British study did not plan to pursue retail selling as a long-term career. In a study carried out by Third Eyesight a few months ago, with retail was being seen as a “growth industry”, that figure in India was about 55% and was closely correlated with the frontline attrition rates being witnessed by Indian retailers.)

One of the critical factors in how on-shelf availability is handled is the very different perception various people have of its importance. The store manager or a sales executive may directly correlate lack of availability with lost sales (and lost incentives), while a category merchant may not find it as critical since he or she may be able to balance the margins through the mix of product and the aggregation of sales across stores. The first critical element to be fixed is to have a common view on the importance of availability communicated across the retail organisation.

The second important element is highlighting the visibility of stock within the store – isn’t it surprising that despite the small size of back-office space, how stock that is showing “on the system” can be so invisible?! The product may be stacked in inaccessible boxes, or may have just been kept in the wrong location.

On busy days and during busy hours, merchandise can arrive at the store and simply “disappear” off the radar for a few hours, since the staff may not have had the time to take the stock into the store’s inventory. It sits in the shipping boxes waiting for stock intake, which may well happen after the peak selling hours have passed.

Sometimes the availability issue comes up because the product is very popular, and it becomes virtually impossible to maintain a high availability during the critical selling windows – a typical example may be health and beauty products or popular snacks, where the aggregate availability may be high during the week, but abysmally low during the peaks. A key feature of these categories is also the large number of SKUs, which can be cause for substitutions in the supply chain, and therefore poor availability of a particular SKU.
On the other hand, fresh produce and dairy may show poor availability if daily reports are configured for end-of-day rather than beginning-of-day stock-checks, since fresh vegetables, fruit, fish and dairy may actually be taken into the store during the early hours in the morning.

Many people believe that the best way to tackle these issues is through information technology.

However, IT is only a tool that can enable a business if the processes are robust and people are attuned to a common objective.

The correct sequence, as for many other aspects of business, is to tackle the people issue first. Awareness and common understand can only happen through consistent communication and widespread training. (The 2007 study by IGD (UK) on this issue highlighted the fact that 61% of the sales associates had not received any formal training, while 23% had no communication about on-shelf availability.)

This communication needs to be not just within the organisation, but across the retailer and vendor relationship. This process is, unfortunately, not enabled by the very tactical and adversarial nature of the buyer-supplier relationship. Retail buyers don’t easily share point-of-sale information with vendors due to a variety of real and perceived barriers – confidentiality, power-issues, competitive pressures.

Fortunately, although it is still early days, chain-stores and vendors in India are already beginning to work together. Very often the exercise is actually being led by the larger, multi-national vendors who have been exposed to the concepts of Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting & Replenishment (CPFR) – concepts that have been around for about 15 years.

However, these frameworks require a significant amount of joint business planning as well as point-of-sale visibility being provided to the vendor, and both of those aspects are still weak in the Indian modern retail ecosystem. Such degree of high transparency will only come in with further maturation of the retail businesses and the vendor relationships. Some of the modern retailers are already able to see consistent availability of over 90% through these efforts, and as word spreads, hopefully so will the practice.

Creating a culture of transparency and communicating the desired levels of availability is the foundation on which robust processes can be built for checking and reporting availability, which then can be enabled through technology. The correct sequence, therefore, is People-Process-Technology, and not the other way round.

In closing, let me show the other side of the coin (after all, this column is titled “Devil’s Advocate”!). The additional sales from better availability are very seductive, and can be very profitable, but up to a point. After a certain level, the law of diminishing returns takes over as the cost of maintaining high availability exceeds the additional margin. Particularly in perishables the possibility of product expiry and spoilage is quite high. Of course, during festive occasions there may be no option but to ensure high availability of perishables such as gift packs of snacks and packaged foods, even at the risk of spoilage or expiry.

Having said that, on the whole, modern retailers in India and their vendors do need to focus on on-shelf availability as a key area for increasing the productivity of the existing stores. For many stores, there is significant room an increase in sales. With real estate and operating overheads remaining high, every extra rupee of sales squeezed out of the current square footage will contribute directly to the bottom-line, a fact that Indian retailers cannot ignore today.

It’s quite amazing that “store productivity” doesn’t grab the attention of most people in the retail trade in India, despite the fact that real estate costs are riding an all-time high. It’s become quite typical for rentals to range 20-25% of sales, and in many cases even higher than that. (In those instances, a retailer could only hope to make money out of illegitimate activity or illegal merchandise, which is not part of the business plan of anyone I know!)

Many brands will (and possibly can) justify paying absurdly high rentals with the rationale that in the store portfolio, some locations will never make money, but are needed as marquee locations for “must-have” visibility. This can work if you do have a balanced store portfolio. The question is whether the low-rent locations actually have the capability to generate enough margin to support the unprofitable locations.

While some of the rentals are comparable to expensive real estate in the developed markets, gross margins in India are typically thinner than in Europe, USA etc., reducing the spread a retailer has for its operational expenses. Add to the mix over-estimation of consumer demand, and the scenario looks even gloomier.

In this context, to my mind, each store needs to be made as productive as it can be. There needs to be fairly sharp focus on store performance and category performance data.

However, in the last 18-months or so, conversations with Indian and international brands and retailers operating in the Indian market, showed that topline (sales) growth and new store openings were the focus for most retailers (even till a few weeks ago).  Most branded suppliers have also shown unprecedented sales growth on the back of new store openings – their own exclusive stores, as well as new sites being added by department store chains carrying their brand.

For instance, in March 2007, one (new) brand said that their business plan called for 50 stores by the end of 2007, and 100 by the end of 2008.

When sales growth can be achieved just by opening more new boxes (stores), productivity and efficiency don’t appear to be important.

I believe 2008 will see a change in management priorities. I don’t think the unnamed brand above will open its 100 stores. It is very likely that they will want their already opened stores to work harder.

Productivity is obviously linked to store operations (people, process, technology) – when the merchandise and the customer are both in the store, you need to make sure the two are matched quickly and effectively, and that there is a focus on conversion, average transaction values and efficient inventory management. But that is only one part of the story.

Support functions, such as marketing, supply chain, buying and merchandising have a huge role to play as well.

Category management, efficient and responsive supply chains, optimising store-footprint and catchment to ensure maximum walk-ins … these are some of the issues I believe top management needs to look at carefully in the coming 24 months.

If you are in a senior management position in a retail business, what are your priorities this year?