Private Label: An armour of organized retail

(Article written by self and my colleagues and published in RetailBiz)

A popular story within Food Bazaar as told to us by an employee mentions how Food Bazaar came up with the idea of their own Tasty Treat – the ready-to-eat snacks, a private label of Food Bazaar, when Pepsico’s Frito-Lay decided not to sell to Pantaloons Food Bazaar as they disagreed on terms of trade. And now Tasty Treat competes head on with market leaders like ITC’s Bingo and Pepsico’s Lays and Kurkure in a Rs 2000Cr snack market. Today Pantaloon Retail has more than 80 products comprising 350 SKUs with private labels in four main categories. Encouraged by the success of the private labels, the company is planning to launch more brands in various other categories. PRIL aims that, in the long run these brands will enjoy same trust that the best manufacturers brands enjoy today.
We wonder if this is some indication of how large organized retailers are now leveraging their power and position of being the only one, in entire value chain, in direct contact with the end consumers, in dictating their terms with manufacturers. We wonder how the manufactures are going to deal with this rising power and can both the manufacturers brand and private brands co-exist.

According to a Euromonitor study, the global private label market was estimated to be worth $1,411 billion in 2005, and is growing at 6% per annum. Organized retail currently forms only about 3.59% of total retail in India (graph 1), but its share will leap to 28 percent by 2017, according to a study by Technopak Analysis. And a 2007 study by Technopak says that overall, private labels already form 19 percent of the total market share in India

Why private label?
A private label is an industry jargon for the brands sold only by the retailers exclusively through their stores. Today’s private labels represent essence of stores image. It is no longer about few top brands that store carries. Instead it is about offering exclusive products that define the retailer’s image. It helps retailers to create value for consumers by providing them high or comparable quality products at a price lower than the major brand thus filling in the value gaps and thereby gaining customer’s loyalty.

Also, in the current Indian scenario only 20-30% products are branded. This makes it difficult to fill up the shop space. Private labels can accomplish this and may lead to an increase in the footfalls. But at the same time retailers must ensure that private labels have a strategic positioning rather than merely introducing a product.

WEAKNESS
ü High development & innovation cost
ü Inventory risk
ü Dependence on manufacturer of private label
STRENGTHS
ü Decrease reliance on national brands
ü Increased negotiating power
ü Allows differentiation from other retailers
ü Higher profitability and profit margins
ü Flexibility in controlling & managing shelves
ü Helps increase footfalls
ü Increased customer loyalty
ü Full control on pricing

Private labels give the retailers the ability to negotiate better terms with manufacturers. It also gives the retailers an opportunity to earn higher margins as it cuts down on middlemen and other non-value adding costs.

OPPORTUNITIES
ü Huge market potential
THREATS
ü Low hanging fruits is gone – enter more challenging categories
ü Manufacturers partnering with local kirana stores.
ü Negatively affect relationship with national brands.

In the apparels category there are players like Tata groups Trent with their Westside brands, Rajan Raheja-promoted Globus Stores pvt ltd with Globus brand, who have developed a business model purely on private labels. Stores like Hypercity Retail have dominated the apparel segment majorly through its private labels. There are others like Shoppers’ Stop which believe in capping the percentage of private labels in apparel in spite of being one of the pioneers in this concept as they believe that customers need choice of at - least 4-5 exclusive brand options which may not be possible with private labels only stores. The success depends on how the store is going to position themselves and create a value perception in the minds of consumers.

As mentioned in the annual report of Shoppers Stop Ltd, the contribution of the private label has increased to 21% of sales from 19% last year and private label sales have increased by 37%. Revenue of Vishal Retail Ltd grew to 15% in FY’08 from 9.8% in FY’07. The contribution of private label is expected to increase from 15% at present to 25% by FY’10 and 50% by FY’13.
The one major hurdle in using private labeled products is the high associated development and innovation cost. Therefore, before venturing in for private label products, retailers should have a clear long term strategy and should market the product to right customer in the right manner. It is intuitively evident that retailers should enter into that product category that has high profit margin, low entry barrier to labeling, and low switching cost to consumer, which may be either monetary or affective.

Factors affecting success of private labels:
The success of private label in a category is a consequence of differentiation between manufacturers brand and their store counterpart. If consumer perceives little difference in value and quality between the two kinds of offerings they have little incentive to choose the typically more expensive offering.
Trust gap between retailers and manufacturers brand, packaging, and advertising intensity of national brands are the three most crucial factors that cause differentiation in the minds of consumer and hence affects the success of private brands.

Private Label Manufacturers:
For products to be considered for private labels, they must have a large sales potential, because retailers are not usually interested in branding low-demand items. In addition, the manufacturer must be able to assure that the product quality is as good as or better than the leading brands.
The type of manufacturing process involved is another important product-related aspect of private labeling. In general, private labels are most appropriate for products that can be manufactured on a tight schedule while maintaining high quality standards. Private label manufacturers must be able to assure their retail clients of reliable, on-time delivery. In addition, they must be flexible enough to ramp up production quickly to meet increases in demand or to change the product's formulation according to the retailer's wishes.
Price is another important component of successful private label manufacturing. The price must compare favorably to competing name brands while also enabling both the manufacturer and the retailer to make money. In general, private label sales provide high volume but tight margins, so price calculations are crucial. Also the private label goods are usually priced 20 percent or more below the market leader. In addition, the retailer generally expects to see a profit margin on private label goods that is 8 to 10 percent higher than it receives with name brands. When calculating the final sales price for private label items, manufacturers must be sure to consider any costs that are incurred especially for the private label line. These may include tailoring the product to meet retailer specifications, or designing special packaging for each retailer.
The third factor in successful private label manufacturing is a strong marketing program. The marketing program for private label goods consists of two parts: contracting with retailers to become their supplier for a certain product, and assisting the retailer in marketing that product to the final consumer.

Overall, the private label manufacturing can present tremendous opportunities for small businesses, as well as significant challenges.

How national brand’s can fight back?
A knee jerk reaction to the competition from private labels is usually to slash prices which might adversely affect the profitability and the image of the brand.
Manufacturers now need to continuously innovate product and come up with value additions regularly and at affordable cost. For example, Gillete – has always came up with new razors, new blades and has upgraded its product regularly, hence the share of private labels is very low for this category.
Manufacturers now need to fight the selective battle. They need to move out from those categories where they are not the market leaders and focus on those brands which the consumer will definitely demand from retailers.
Last but not the least, manufacturers have to respect the strength of retailers and should start partnering with them to create a win-win situation from each other.

Conclusion:
Private labels are no more considered ‘cheap’ substitutes for branded brands. That they are cheaper and do not compromises on quality attract a lot of consumers. In the last couple of years, private labels have seen unprecedented growth with the entry of retailers such as Future Group, Shopper’s Stop, Reliance Retail, and Vishal Megamart. Worldwide experience shows that as retailers become more powerful, they have increasingly focused on their own brands at the expense of manufacturer brands. Experts believe that private label brands, which occupy less than 5 per cent of the market in India now, are likely to corner 50 per cent of the market as the retail space opens up and matures. The question is not whether this will happen, but when & how?

Bharti Walmart Tie up...

(From the article published in “Marketing Mastermind”, written by Doris Rajakumari John, Team Leader, ICFAI research centre)
About Wal-Mart: (Annexure 1)
1) Largest retailer in the world – net income for $11.2 Bn on sales of $316 bn for FY 2005-06
2) Operates in more than 13 countries & serves more than 176 million customers through more than 6100 stores.
3) Established in 1962 by SamWalton.
4) Customer oriented focus – “Sundown rule” & “ten feet rule”.
5) Everyday low price the USP of wal-mart.
6) Excellent SCM – pioneered the use of barcodes & RFID in retailing.
7) Wal-mart entered different countries through various routes like acquisition, JV, partnerships etc depending on market conditions & the expertise level in working in such market.
8) Wal-mart procures more than $2bn worth of goods from India and more than $18bn from china.

Retail scene in India:A detail report will be mailed on request (akshat1604@gmail.com), subject line: “Akshat’s retail blog: request for report on Indian Retail Industry”
1) Huge potential – total retail industry size of more than $350 Bn.
2) Increasing Organized retailing share in the market
3) Market dominated by unorganized sector
4) Favorable demographics, rising income level (DINK’s) & changing mindsets of Indian consumers – giving boost to consumerism
5) FDI was allowed between 1990 – 96 but due to protest from small retailers it was again restricted in 1997.
6) According to new regulations – “foreign retailers could set up wholly-owned subsidiaries in India for the purpose of trade, but they could only sell to wholesale buyers (ie to domestic retailers) and not to end customers. By definition, the rules described a wholesale buyer as the one who held a sales tax registration number. 100% FDI was thus permitted only in franchissee and/or cash-and-carry wholesale operations”
7) In 2006, the govt announced no. of reform in FDI policy. 51% FDI was allowed in retail trade of “single brand” products

The Deal with Bharti:
1) JV announced on Nov. 27th, 2006.
2) JV will manage procurement, inventories and logistics, while stores would be set up under franchise agreement with wal-mart.
3) The deal size was not disclosed but experts say it amounts to initial investment of $100mn by two firms each and increasing it to $1.46bn
4) The JV will help wal-mart to localize. Wal-mart has to pull back from Germany & south korea mainly because it was unable to cope up with localizations.
5) Areas of synergy (exhibit II)

Challenges:
1) Competition: (Detail report on completion available on request: (akshat1604@gmail.com), subject line: “Akshat’s retail blog: request for report on Indian Retail Industry”)
2) Talent sourcing & retention – According to RAI, while the total requirement for the fron end alone is about 1.25 million, the employee base in organized sector is 1 mn. The requirement is expected to go up to 3.25mn by 2008-09.
3) Poor infrastructure – cold chaisn, warehousing & logistics a big bottleneck
4) High & rising real estate prices – as pwer PwC, the current avg lease rentals across some of the top cities range from Rs 88 per sq ft to as high as Rs 120 per sq ft a month. On an avg, lease rentals take up 7-8% of the revenue and constitute 40-45% of the non-material cost for retailers.
5) Another key challenge will be to decide the kind of format to be used in a particular region.
6) Large no. of intermediaries & loss during transportation, the current wastage level of perishable items is as high as 40%.
7) Image of wal-mart is a problem – stifling policies with suppliers, forcing them to operate on very thin margins. The strategy seems to be like – “buyer wins, customer wins and somebody has to loose”
8) Approach to farm produce procurement – “the seed to shelf approach”
9) Managing diversity of Indian consumer (more than 6000 castes and sub-castes in 28 statees, and every community has its own nuances) – walmart faced huge challenge of localization in Germany, SouthKorea & South America (exhibit IV)

The key success factors in Indian retail industry will be customer loyalty apart from other factors such as location, value-added services, price, and the ability to read shifting trends (forecasting & analytics). How the retailers position themselves and how they are perceived will also be crucial factors for success. The evolution of the Indian retail scene continues to pose challenges to the various market players and it remains to be seen how each of them will grapple with them and who will emerge a winner….my guess is that Bharti-wal-mart will be a great success story creating lot of value for Indian consumers and for the suppliers as well though in short run they may face some problems!!.

Drop Shipping

One form of retailing that has become very popular with the advancement of e-commerce is drop-shipping. The process in which a retailer markets a product, collects payment from the customer and then orders the item from a supplier, to be shipped directly that customer. The retailer's profit is the difference between the amount collected and the amount spent. No inventory is held and the retailer is not involved in the shipping.
The biggest appeal of drop shipping for the retailer is that there is no inventory to stock. This frees up cash as it allows the retailer to collect the money before purchasing the wholesale product. Because it is the supplier's responsibility to ship the merchandise to the customer, the retailer is free from any transport headaches that may occur.
One issue retailers may find in working with a drop shipper is the lack of control. Drop shipping isn't risk free and when problems arise it can become frustrating to simply play middleman. Retailers may still be faced with back-orders, returns and customer refunds. Some drop shippers assess a drop shipping fee or even a membership fee to the orders which may erode profits.

Critical Success Factors for Retailers

1) Maintaining a low cost operations.
2) Investing in appropirate & cost effective technology.
3) Focusing on customer service and loyalty.
4) Building a reliable supplyc chain and logistics systems.
5) Making adequate capital investments.
6) Effective positioning of the retail outlets.
7) Efficient human resource training & retention.
8) Creating & nurturing private lable brands.
9) Reducing shrinkage & pilferage.

More on 3PL

In India, almost every other fleet operators calls themselves a 3PL service provider. This has led to lot of confusion and poor customer satisfaction. 3PL service provider other than providing the standard transportation services also provides necessary supporting services like cross-docking, reverse transportation, warehousing, inventory management, packaging etc. The clients benefits from the extensive experience & knowledge base of 3PL service provider.

The factors that should be considered before outsourcing to 3PL are:

1) Price of 3PL services.

2) Depth of knowledge & experience.

3) Range of available value added services.

4) cultural & strategic fit with 3PL provider.

5) Available information technologies and compatibilities.

Some of the problems being faced by the companies using the services of 3PL's are:

1) Service Level commitments not realized.

2) Lack of continuous, ongoing improvements and achievements in offerings.

3) Cost reduction has not been realized

4) Information technologies capabilities not sufficient.

5) Lack of project management skills.

6) Unsatisfactory transition during implementation stage.

7) Ineffective management of key Performance Indicators (KPI)

8) Lack of global capabilities.

For successful implementation of 3PL services it is imperative to:

1) understnad the goals & objectives.

2) Clear communication between the parties involved.

3) Trust & commitment of top mangement

4) Have shared decision making & ability o reach consensus on matters of importance.

5) Have effective process meassurement & management (KPI)

The contract or agreement with the 3PL provider generally addresses the following issues:

1) Rates & compensation details.

2) Service standards and performance requirement.

3) Process of termination

4) Terms for renewal of agreement

5) Penalties for non-performance.

6) KPI's (like on time delivery, order picking accuracy, on time shippring, loss or damange during in the process etc.) to determine compensation and penalties.

7) Information technologies mandates.

KPI's establish customer's expectations in terms of performance, provide an incentive for the service provider, offers an objective way to assess performance, helps compare peformance vis-a-vis other service provider, identify cause of failure and avoid disputes.

Supply Chain at Marico

The company with 6 factories & about 1000 employeers, currently has 9 brnads, produces 125 SKU's with its 15 subcontracting manufactuers, selling through 3500 distributors to 1.6 million retail outlets. Thus it becomes crucial for the company to have an efficient supply chain management. With the increase in competition & product mix the company faced tremendous challenge in mainting the same service levels which resulted in stock out, rising inventory, inaccurate forecast, delays in response to market requirement causing dissattisfied customers. To overcome this the company implemented my sap SCM across all locations in a big bang way. The implemention started in 1999 and was completed in 2 years time. The result was improved forecasting, reduced forecast cycle from 30 days to 15 days, enhanced decision making, decreased stock outs, reduced lost sales, low inventory and improved customer satisfaction. In future the comany plans to implement my SAP VMI (vendor managed inventory) which will link the distributors to companies system thus further reducing the forecasting cycle to 10 days leading to further boost to Maricos top & bottomline

3PL

3PL
What is 3PL?
Also known as contract logistics, 3PL or 3rd party logistics is the supply chain practice where one or more logistics functions of a firm are outsourced to a 3PL provider. Typical outsourced logistics functions are: inbound freight, customs & freight consolidation, distribution, and management of outbound freight to the client’s customers. Other value added services can be provided, such as: repacking, assembling and return logistics. The 3PL provider manages and executes these particular logistics function using its own assets and resources, on behalf of the client company.
The benefits include lean organization (without owning much assets), focus on core competencies and reduced operational costs.
3PL is gradually evolving into 4PL wherein the supply chain service provider that searches the best logistical solutions for its client, typically without using own assets and resources. Relatively new is the term 5PL or even 7PL, indicating total supply chain management.
Four categories of 3PL provider
Standard 3PL provider: This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.
Service developer: This type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks.
The customer adapter: This type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company’s logistics activities. The 3PL provider improves the logistics dramatically, but do not develop a new service. The customer base for this type of 3PL provider is typically quite small.
The customer developer: This is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.

Collaboration the key to success:
Supply chain collaboration between a 3PL and a customer occurs when both organizations work toward a common set of goals and objectives, and when there is a meaningful exchange of information relating to planning, management, execution, and performance measurement. Collaborative relationships thrive on the dedication of both parties to share responsibilities of people, process and technology, in order to drive change and improvement in the overall business relationship. To be effective, the collaboration process should involve not only 3PL and their customers, but customers-customers, suppliers and other key stakeholders. In reality, 3PL’s are in a great position to facilitate collaboration between customer organizations and its trading partners.
Benefits of collaboration
1) A seamless, 360 degree view of supply chain (upstream to suppliers and downstream to customers)
2) Access to 3PL’s experience and expertise.
3) Improved customer service at lower cost
4) Reduced inventory and stockouts as a result of collaborative forecasting activities.
In general, the executives believe that benefits of 3PL outweighs cost.

The logistics providers in India includes:
www.neccgroup.com www.ktcgroup.com www.lakshmicargo.com
www.namakkaltransport.com www.omlogistics.co.in www.indiatrans.in
www.nyklogistics.com www.indoarya.com www.exlindia.com
www.dtdc.com www.sgtpl.com www.groupinland.com
www.diliproadlines.com www.psts.in www.tcil.com
www.hexcargo.com www.tvslogisticsservices.com, www.tvslogistics.com
www.vrllogistics.com www.patel-india.com www.afl.co.in
www.reliancelogistics.com www.safeexpress.com www.Aramex.com
www.Bluedart.com www.Capricornlogistics.com www.Kailashshipping.com
www.sical.in www.secl.net www.serl.com www.tll.co.in www.totallogistics.in