Organised retail is on the threshold of a boom in India. But as companies line up to grab a bigger and bigger slice of the retail pie, another battle is likely to change the face of the industry -- the one between the manufacturer brands and the retail chains’ private label brands, which are far from being just cheap generics. Worldwide experience shows that as retailers become more powerful, they have increasingly focused on their own brands at the expense of manufacturer brands.

Nirmalya Kumar, Professor of Marketing and Director of the Aditya Birla India Centre, London Business School, and co-author of Private Label Strategy, speaks to Govindkrishna Seshan on the new strategies for private labels that retailers are using and the challenges brand manufacturers face to develop an effective response. Kumar says 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. Excerpts:

Q: What role do private labels have to play in Indian retail?

A: Retailing in India is still very primitive. At the moment, private labels almost do not exist in the country. They are less than 5 per cent of the retail business and still have a long way to go. But Indian retail is extremely hot and it offers a proposition that can’t be seen anywhere else in the world. Only in China and India can retail chains have as many stores as they have in the US. In no other country can one imagine companies having 5,000-6,000 stores of their own.

Here’s a little calculation: in a few years, most retail chains will have close to 5,000 stores in India. A profit of, say, Rs 5 lakh a store a month would mean a profit of Rs 250 crore. Ten such companies would mean profits of Rs 2,500 crore with their combined turnover being more than Rs 25,000 crore.

In the next 20 years, the richest Indian or one of the top three richest people in India will surely be a retailer. Private labels will have a huge role to play in this. As much as 50 per cent of Indian retail will be occupied by private labels. The question is not whether this will happen, but when? If the government opens up retail, we would see it happen within the next 10 or 15 years.

Q: How have private labels evolved in developed countries?

A: Private labels have come a long way over the last three decades. They started with retailers wanting to offer cheaper substitutes. This was for two reasons. One, having a private label meant that retailers could negotiate a better margin from the manufacturer. And the other, when they had private labels they had a differentiator. While every shop sold a Coca-Cola and Pepsi, a private label meant that the store now had something that other stores did not.

The biggest change in the last decade or so has been the entry of premium private labels. They are no longer saying “buy us because we are cheap”, instead today, they are saying “buy us because we are the best”. By offering high quality products, many private labels have started charging more than regular manufacturers.

Today, retailers have realised that by having top quality private labels they can differentiate themselves from other stores and be a destination store. For instance, Tesco in Europe has a range called the Tesco Finest line. It does have a Tesco Value line, which is cheaper, but the Finest line only sells premium products at premium prices. Tesco’s Finest chocolate, for instance, sells at 50 per cent premium over, say, Cadbury’s.

Similarly, its yogurt sells at more than 50 per cent premium over Danone and other yogurts. Retailers are now doing everything it takes to create premium brands. They advertise on television, take up brand-building exercises, and most importantly, they focus on developing a better product than the existing manufacturers’ brands.

Q: Is the same likely to happen in India as well?

Yes, the economics will remain the same. The share of private labels in any country depends on how consolidated the retail chains are. Developing a good quality brand has a high development and innovation cost attached to it. To be able to absorb such costs, Indian retail chains will need to scale up.

In India, the largest retail chain today has around 300-400 stores. Retail chains in developed nations on the other hand have around 3,000-5,000 stores each. So it will start with retailers reverse engineering manufacturers’ brands, and as organised retailers grow larger, their labels, too, will move up the value chain. However, the transition will be faster in India.

Q: What would be your advice to Indian retailers?

A: Indian retail is ranked 50th in the world, so there is a lot that retailers here can learn from the 49 countries ahead. My advice to them is don’t do cheap and nasty private labels. Private labels won’t work by just keeping the products cheap. Retailers must look at developing good quality and value-added products.

Also, they must make sure that they don’t over exercise the private label option. If they fall into the trap of using too many private labels, they will end up losing customers. It has been seen that when retail chains rely heavily on private labels, customers feel they lack choices.

Many retailers have suffered due to this; Sainsbury is a classic example. The UK-based retail chain was a mainline traditional retail chain, but when it used too many private labels, customers did not find regular brands at its stores, and as a result, sales dropped.

Q: Can private brands ever generate the type of consumer loyalty some of the iconic manufacturer brands such as Marlboro and Coca-Cola have?

A: Yes definitely. In most developed countries, private labels have managed to achieve that. Study after study has ranked Aldi in Germany as the nation’s number one brand. In a recent study, its brand name in terms of consumer trust was ranked ahead of even DaimlerChrysler.

Again, Tesco is among the top 10 brands in the UK. Similarly, French retailer Carrefour is one of the 10 most recognised and trusted brands in France. So good quality private labels definitely generate a very high level of loyalty amongst customers.

Q: How can manufacturers compete with private labels?

A: Innovate brilliantly, this is the first thing manufacturers need to do. They need to keep coming up with new products and new value additions continuously. By doing this, they ensure that they are a moving target and not a sitting duck.

We have seen that in industries where manufacturers have innovated and upgraded their products regularly, the share of private labels has been low. Gillette is an excellent example. Worldwide, Gillette has constantly innovated its product. It has launched new razors, new blades and upgraded its products regularly, hence the share of private labels in razors is very low.

Q: Considering that the private label phenomenon has not yet happened in India, what can Indian manufacturers do to prepare themselves for it?

A: Manufacturers here need to realise and respect the strength of the retailer. Today, most companies see retailers as the owners of small mom-and-pop stores and not as a social or intellectual equal. But they need to understand that retailers have equal weight and will soon wield a lot more power than them. Hence manufacturers must start partnering with retailers.

They must start working closely with them as soon they will have to work around them. In most developed nations like the US, the UK, South Africa and Australia, manufacturers work closely with retailers. Even in countries like Brazil, Mexico and Thailand one has witnessed this change.

Hence Indian companies can begin to build a partnership from now. Large FMCG companies such as P&G and Unilever have learnt to do this well. Consider this: Wal-Mart purchases $10 billion worth of products from P&G, and hence P&G has to organise itself to work around them.

The other thing that Indian manufacturers can do is to fight selectively. To do this, they must move out of categories where they are not the number one or two brand. As things move forward, it will make no sense to hold on to number three and four brands simply because a retailer would charge very high margins to stock these products. Retailers would only want to stock those brands which are at the top because they attract consumers.

Since they don’t benefit by stocking the rest, it is best to move out of such categories. Also, companies must move out of those categories where their products do not make a symbolic or emotional difference to consumers. In categories where additional benefits are not seen such as in bread, butter, milk or paper towels, private labels tend to sell more.

Q: What is the future of private labels?

A: Private retailers will occupy 50 per cent of the market the world over. At 50 per cent, they begin to saturate. If they try to occupy more than this, then consumers feel that there aren’t enough choices. In countries such as Switzerland and the UK, private labels have reached this limit and these markets have saturated. But they will continue grow in the other countries till they reach the same level. And this will happen very soon in India, too.