This article has been written by Smita Asawa, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.
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Marketing channels are the ways through which goods and services are made available to consumers for their use. All goods undergo through channels of distribution and the distribution channel from manufacturer to retailer to consumer, is mainly discussed below. We must have heard the term private label or private labeling for retail at some time, but we are never sure what this term is all about, so this article mainly describes different products available in the market and different ways to sell your product to the retailers. The one-way manufacturer can sell its product directly to retailers is by directly selling them where the product is having their own brand name, having their product name, packaging and the whole entire product created by them which will be kept at the retailer store just like the national brand products are displayed on retailers store like in Reliance Retail, D-Mart, Shoppers Stop, Infiniti Retail Ltd, etc. National brand products are available everywhere in India.
There is another way also to sell your product that is through a private label channel which is widely used worldwide. There is no specific governing law for the private labels in India but it can be derived from legal metrology laws which state the mandatory labels on the packaged product. The purpose of this article is to know about the private label and some private brands in the retail sector in India, the growth potential of private brands, and the prerequisites required to make the private label enter into the market.
What is a private label?
The Private Label Manufacturers Association (PLMA), founded in 1979 in the US, states that “Private labels products encompass all merchandise sold under a retailer’s brand. That brand can be the retailer’s own name or a name created exclusively by that retailer. In some cases, a retailer may belong to a wholesale group that owns the brands that are available to only the members of the group”.
Dhar and Hoch (1997) define private labels are those products owned, controlled, and sold exclusively by a retailer in his own store or chain of stores and for what the retailers must accept all responsibility from developing, sourcing, warehousing, and merchandising to marketing such as branding, packaging, promoting and even advertising. Nielsen A.C. (2003) defines private label as follows: “any brand that is sold exclusively by a specific retailer or chain”. In simpler ways, products having private labels are produced/manufactured by entering into an agreement or by a third-party manufacturer and sold under the brand name of the retailer. These definitions bring out two main usages of private labels. First, the retailer is the one who owns and manages the brand whereas this was the actual part of the producer. Second, the retailer has rights to its own product.
According to retailers, what works with private labels is that people buy goods from a chosen grocer or storekeeper from where they buy biscuits, rice, cooking oil, and other staples because of the assurance of getting a product at the right price and it will be of good quality. The roots of the private label lie in this trust and assurance, where retailers can sell the product with its own brand name knowing that different retailers do not sell identical private labels. Private label brands are also referred to as store brands or own brands that are typically those manufactured by one company to offer under the name of another company’s brand. Private labels are widely used in all product categories, be it apparel, beauty, cosmetics, food and health, workout equipment, Travel accessories, Bottles, LED Lights, and the list goes on. Such brands are less expensive in comparison to national brands because there is no requirement of advertisement as retailers can decide the production cost, warehouse cost, labour, etc. in order to meet the consumer demand.
Within a decade, private labels have seen a huge increment with the entry of retailers such as Bharti-Walmart, Future Group, Tata Group, Reliance, Tata, Shoppers Stop, Spencers, and Vishal Megamart in India. In doing so, retailers are heading towards the position of being a distribution channel solely and becoming a direct competitor to the manufacturers. Thinking in another way, the retailers are making themselves from pure customers to the manufacturers of national brands to direct competitors of the manufacturers.
Some organised retailers with private label brands in India
- Wal-Mart India: Some private labels by Wal-Mart in India are: George Apparel, Equate, Home Trends (home furnishing), Great Value line of food (flour, dry fruits, spices, cereal, and tea), Mainstays (plastic containers, kitchen accessories), Kid Connection (toys, clothing), Astitva, a line for Indian ethnic wear, Athletic Works (athletic shoes, equipment), Faded Glory (footwear).
- Aditya Birla Group: Feasters brand (fruit squash, biscuits, fruit syrup, Instant Fruit Mix Powder, Noodles), Paradise (Room Air Fresheners), 110 Percent (toilet cleaners, detergents, soaps), AU79 (Deodorant), Fresh-O-Dent toothpaste, and toothbrushes are some private label brands by Aditya Birla.
- Shoppers Stop: Shoppers Stop provides Haute Curry, Kashish, EllizaDonate, and Vettorio Fratini private labels in its product offerings. ‘Life’ T-shirts for men, while ‘Stop’ as ladies western wear.
- Vishal Megamart: Vishal Megamart offers salt and toothbrush under its `Vneed’ brand.
- Pantaloon Retail India Limited: Pantaloon Retail India Limited offers Fresh n Pure, Cleanmate, Tasty Treat, Caremate, Sach brands in food and FMCG; Tasty Treat in food segment and in the baby diapers segment; DJ&C, Knighthood, John Miller brands in men’s apparel; Care Mate is its private labels.
- Along with this in Electronic Bazaar offers washing machines, refrigerators, air conditioners, fans, toasters, and mixers as the brand named KORYO.
Advantages of private labeling
Private Labeling makes retailers do something distinct with their customers’ purchase patterns. National brands are widely available everywhere and customers have many choices to opt for them from various stores. By offering complete exclusivity through a reliable price on products and building a trustworthy image of private label, the retailer can draw the attention of new customers and build customer loyalty as they will become more reliable due to the exclusive offerings. It is an excellent way to separate retailers from their brand competitors. With private branding, one can create their reputation and have their own identity which will promote stronger customer recognition and loyalty.
A loyal customer base works as a major factor to make a retail business successful and with private-label branding, retailers can gain trust and loyalty by offering high-quality products with limited production of goods as per the research of the consumption of the product.
3. Improved quality
Retailers can have complete control over the sourcing, development, warehousing, merchandising, and marketing of their own brand. Retailers can alter and improve the quality of a product on the basis of consumer buying habits and preferences.
4. Wholesale income
Private label branding can allow retailers to be a wholesaler of their own brand. Being a wholesaler, they will restrict other retailers who are willing to pay premium costs to gain rights to sell their brand in their specific location. Income generation is more while selling to other retailers and there will be good exposure of the product in the market. Retailers can determine the product price and profit margin.
Private label branding helps retailers to create their unique image, which in return gains more customer recognition. Manufacturers who offer private label branding must be able to manage the packaging and labels the way the owner specifies it in agreement and as also as per the statute rules and regulations. As per the law, the product includes the product name, description, company’s logo, and contact information and address of the manufacturer which will make customers more relaxed and helps to gain the customer faith in the product. For better sales opportunities retailers must provide authentic details of the quality of the product and make private labels successful.
6. Increased revenue and better margins
Lastly, private label brands give more profit margin when compared to resale products because there are no middlemen in the chain. It is because the cost incurred for making the product is usually much lower and it is given that the lower their expenses at production, the higher margin of profit can be achieved. For example, supermarkets mostly use private labels to attain high-profit margins which top industry brands fail to do so.
Private label agreements
Private label agreements are legally binding on the manufacturer and the retail business owner under which a manufacturer agrees to produce their own recipe and formula that will be marketed under the branding of the retail business owner. Private labeling is completely legal as long as both parties have agreed on their own terms and conditions. Well-defined and structured private label agreement contains clauses such as payment terms, product orders, indemnification, and more where the terms need to be negotiated and agreed upon by both parties without infringing the intellectual property rights of each other and the third party.
Before a product can be sold in the market there are certification requirements to be fulfilled by retailers. One of the requirements is to fill the private label application to confirm the product’s authenticity. The main reason for certification requirements is to verify private label products since they are identical to original versions already out in the market today. The certification will confirm the products are authentic under a private label and not simply fake versions of the originals. Various requirements are needed to be acquired to make the product available for the end-user. Private label products are sold online now after the outbreak of COVID-19. Example on Amazon nowadays.
Private labels have come a long way in the last two decades and they became the most effective strategy for retailers. Private-label goods and services are available in a wide range in India. They are considered as lower-cost alternatives when looking at regional, national or international brands. Researchers observed the growth of private labels which are going to give tough competition to the national brands if and only if the retailer sticks to the quality of the private label and adds features to its own product.
Recently some private label brands have been named as “premium” brands to compete against existing “name” brands due to increasing sales. Already existing branded companies desire to take their brand to a higher level by making their product line to be marketed through “Private Label.” One can find that many well-known supermarkets, franchises, and large store chains stock and collect private label product lines from other companies to sell in their own store.
Today, private-label products possess a much higher quality which was not earlier where consumers considered it as a cheap quality of the product. In India, 38% of consumers tried new products or brands during the COVID-19 outbreak, 58% of the shift in brand choices was driven by preferred brands being unavailable. 21% of consumers switched because the alternative options offered better value. 40% of the customers who switched brands will continue to purchase the new brand. COVID-19 has driven almost 20% of consumers to buy more private label products. As more consumers turn to private labels to bridge the gap between quality and affordability, retailers continue to rapidly introduce new products and lines to elevate their own-brand ranges.
In supermarkets, it is found that out of one of every four products are of the private label giving tough national-brand competition, just as in D-Mart having Maida or balsamic vinegar or chocolate-coated raisins of its own brand. The popularity is just because they are less expensive and affordable to the layman because they cost 18 % to 38 % percent less than name-brand products, stated an industry expert. Some of the store brands give products cheaper than 30 percent which is lucrative for the customers leading them into purchasing it.
Even though the private label is increasing, the retailer must not make all the products of private label that will make them lose the customer. More research is needed to analyse the interest and shopping habits of customers so that products can be modified and made better, making customers wonder “what is the difference between these two products of the same characteristics?”
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