In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury\u2019s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.<\/p>\n
If that reads like something you would find in a celebrity tabloid, you\u2019re probably right. The relationship between brands and large retailers is truly one of the \u201clove-hate\u201d kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo\u2019s FritoLay and GlaxoSmithKline in the past.<\/p>\n
I won\u2019t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn\u2019t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.<\/p>\n
There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There\u2019s more: special promotions, differential merchandising and delivery needs\u2026the list of demands seems endless.<\/p>\n
On the other side, retailers love brands for the footfall they bring. The brand typically creates a \u201cneed to buy\u201d on the consumer\u2019s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don\u2019t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product\u2019s price itself is multiples of a generic product\u2019s price.<\/p>\n
The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy\u2019s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.<\/p>\n
An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer\u2019s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.<\/p>\n
For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.<\/p>\n
However, economic shocks various times and the rise of low-cost imports raised questions in retailers\u2019 minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.<\/p>\n
Enter private label, the \u201cother\u201d in the love-hate triangle.<\/p>\n
Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label.\u00a0 The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.<\/p>\n
The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers\u2019 own labels are now serious brands in their own right even though they are restricted to only one retail chain.<\/p>\n
The difference between a \u201clabel\u201d and a \u201cbrand\u201d is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.<\/p>\n
However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer.\u00a0 Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting \u2013 in this case, replacement of the brand with an alternative or a retailer\u2019s own label is truly feasible.<\/p>\n
The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money.\u00a0 The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi\u2019s potato chip brand Lays. Retailers such as the Future Group, Shopper\u2019s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer\u2019s shelves are new to the market, and don\u2019t yet have a strong imprint on the consumer\u2019s mind.<\/p>\n
However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.<\/p>\n
There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won\u2019t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing \u201ckey account management\u201d functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.<\/p>\n
So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?<\/p>\n
As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.<\/p>\n
In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.<\/p>\n","protected":false},"excerpt":{"rendered":"
In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury\u2019s. About 2-3 weeks later the two were reportedly back together. The relationship between brands and large retailers is truly one of the \u201clove-hate\u201d kind. And this case is no different from many other such relationships in various markets around the world.
\nThere is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. On the other side, retailers love brands for the footfall they bring. However, what retailers don\u2019t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product\u2019s price itself is multiples of a generic product\u2019s price.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[25,27,389,212,215,33,60,36,62,37,43,44,46,48,1],"tags":[97,98,447,99,100,52,53,390,101,103,250,214,216,113,59,69,153,166,195,70,71,122,403,404,123,65,407,231,232,408],"class_list":["post-1863","post","type-post","status-publish","format-standard","hentry","category-apparel","category-branding","category-progressive-grocer","category-consumer","category-food-grocery","category-footwear","category-india","category-lifestyle-fashion","category-market-research","category-marketing","category-retail","category-soft-goods","category-strategy","category-textiles","category-uncategorized","tag-advertising","tag-advertizing","tag-asda","tag-brand","tag-brand-building","tag-branding","tag-brands","tag-column-progressive-grocer","tag-consumer-goods","tag-consumer-products","tag-fmcg","tag-food","tag-food-grocery","tag-growing-brands","tag-india","tag-indian-retail-sector","tag-marks-spencer","tag-modern-retail","tag-modern-retailing","tag-organised-retail","tag-organized-retail","tag-own-label","tag-pantaloon","tag-pantaloons","tag-private-label","tag-retail","tag-tesco","tag-uk","tag-usa","tag-wal-mart"],"yoast_head":"\n