Private Labels

Store Brands Life Cycle: A Profitable Evolution

Store Brand’s Life Cycle

A Profitable Evolution
C S V Ratna

Store brands or private labels, as they are also called, have been
slowly but steadily becoming a major part of the retail strategy.
Their higher margin contributions and the ability to render a
differentiating factor have made them an indispensable tool to boost
the bottom line and get an edge over the competition. But, the
store brand strategy is not devoid of problems. Customers are still
brand loyal and those opting for planned purchases do have a lower
inclination for store brands. Also, only some commodities, are
showing the promise of sustenance of the strategy. The store brand’s
life cycle shows that there ought to be a distinct stratagy at each
stage of the store brand’s life. This article discusses the store brand
concept as existing in India vis-à-vis the American and European
markets and explores the issues in adopting a store brand strategy
and maintaining it.

S
tore brands or private labels have been in existence since the 1960s, but only now have they
become a real strategic option and a competitive tool. Store brands give manufacturers the
much-needed margins that have been elusive since the retail boom and the changing lifestyles
of consumers worldwide. These brands are highly profitable to the retailers as the margins on them are
far more than the manufacturer brands (also called national brands) even though they are cheaper by
20-25% than the offerings by organized FMCG majors in the market place. But, various studies and
observations have shown that store brands typically flourish in segments where no manufacturer brand
exists and if present, it is not national/established or difficult to obtain. In food groceries, for instance,
there is no manufacturer branded atta, maida, etc. and there are no manufacturer products (let alone
brands) like rice flour, jaggery, etc. Interestingly, in these product categories, the store brands do well.
Similarly, in the apparel industry, customized sizes, wide variety dictate the popularity of store brands
largely because a designer or national brand falls short of meeting customer expectations on those
fronts. And then, apparel store brands provide a cheaper alternative to exorbitantly priced designer
labels.
Store Brands – Not a New Concept
It is not that store brands are new; they have been in existence right from the early 1960s, albeit in a
different form. Over the years, the retail brand wave that started as a low-cost high-margin ‘me-too’
business, has evolved into a full-fledged matching quality product alternative. In the 1960s, 1970s and
the early 1980s, the retailer brand product ranges were largely ‘me-too’ versions of leading products of
manufacturers. But gradually after that, when price no longer served as a prime competing factor and

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 Store Brands Life Cycle: A Profitable Evolution

as channel conflicts gave way to a collaborative relationship between the buyer and supplier, retail
brands transitioned into innovative products that were same or better in quality and look
vis-à-vis the manufacturers’ product. As Professors Steve Burt and Shiona Davis say in their paper,
“Follow My Leader? Look-alike Retailer Brands in Non-manufacturer Dominated Product Markets in
the UK”, published in The International Review of Retail, Distribution and Consumer Research
(April 1999), “The retailer brand clearly evolved from its position as a product alternative (perceived
as a different quality/price option) for consumers, to that of a brand alternative (perceived as equal to/
better than manufacturer brands).”
In another instance, Steve Burt says in his article, “The Strategic Role of Retail Brands in British
Grocery Retailing”, published in European Journal of Marketing, Vol. 34, No. 8, 2000, that it is now
accepted that an evolutionary sequence of retail brand development may exist. He cites the example
of the research conducted by Wileman and Jary (1997) that suggests five stages of retail brands—
generics; cheap; reengineered low-cost; par quality; and leadership—which roughly correspond to
the maturity of the brand concept.
Starting from the mid-1980s, retailer brands began moving up-market with innovative,
high-quality, competitively priced products. They became brands by themselves. Retailers, who started
off with the ‘plain-vanilla’ stuff, called private label, which was devoid of any fancy packaging and
innovation; found a means of differentiating themselves from competition and profiting by means of
resorting to innovative products and packaging. This trend was more prevalent in the grocery segment.
Thus, plain bottles or packs with just ‘honey’, ‘jam’, or ‘cheese’ labeled on them gave way to logos of
Kirkland from the US discount retailer Costco, Harvest Moon from the grocery chain H-E-B and
several others from many other stores.
With the evolution of private label to store brands, the packaging became the most critical
communication tool. Gone are the days when the package design of private labels usually aped that of
the leading manufacturer brands. Today, the packaging reflects the image of the store; it is more
dynamic and differentiates the product from similar ones of the manufacturers and distinguishes
retailers from competition. Thus, major retailers like JC Penney have used color and graphics to reflect
the value for money proposition that many store brands are professing. In fact, Wal-Mart has a creative
team for designing logos and writing marketing copy. And, other retailers like France’s Carrefour,
UK’s Tesco are charting out branding programs to accentuate quality, image, and innovation rather
than the price proposition.
Laaksonen and Reynolds (1994) give four generations of products in retail. Here is a brief outline
of their findings:
Consumer
Types of
Strategy Objective Price Motivation to
Brand
Buy
Generics 20% or
1st No name Higher margins less than Price is the main
Generics
Generation Brand Free choice in price brand criteria
Unbranded leader
Higher margins
10-20%
nd “Quasi- Lower manufacturer
2 Cheapest below Price is still
brand” power by selling
Generation price brand important
Own label entry price better
leader
value
Contd...
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 Store Brands Life Cycle: A Profitable Evolution
Contd...
Consumer
Types of
Strategy Objective Price Motivation to
Brand
Buy

They also found that the price differential between generic brands and other, both private label
and name brands, is large enough to cause brand switching. Granzin and Scjelderup(1980) reported
that regular generic purchasers are store-oriented rather than product-oriented and are more likely to
buy store than national brands, and younger in age. Cagley, Neidell and Boone (1980) have indicated
that the generic user is not inclined to stick to well-known brands and is more concerned with
nutrition than the non-user.
Retail Brand Generations
Infancy Growth Maturity Decline

Higher margins 5-10%

Both quality and
3rd Expand product below
Own brand Me-too price – value for
Generation assortment brand
4th generation/extended or segmented own money
brands
Build retailer image leader
Extended Increase client base
own brand Higher margins
4th
Value- rd Equal or Better and unique
i.e., 3 generation/own brands
Enhance brand
Generation added higher product
segmented image
own brands Differentiation
2nd generation/quasi-brands

1st generation/generics

Retail Life Cycle

The Rising
Store brands provide retailers with a differentiation factor. While manufacturer brands are stocked
commonly in all the retailers, with flexibility in negotiating margins, limited store brands give consumers
something exclusive—something unique to the retailer and, thereby, contribute to retailer
differentiation; and, thus, contribute to retailer branding. Take the case of St. Michael brand and
Marks & Spencers. The store brand has added to the retailer branding in that case.
But, then again, a larger limitation for retailer brands is that, only customers who frequent the store
would know about its store brands because they are not advertised. Those who are not their customers

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 Store Brands Life Cycle: A Profitable Evolution

would remain ignorant of their store brands. It is widely held that brand loyalty for the manufacturer
brands is hard to kill because the pull created by manufacturer’ brands is still very strong. The penetration
rates of store brands are rather low despite their popularity. Many researchers are of the view that because
manufacturers spend a lot on advertising to create mass awareness and appeal, the demand may continue
for them. For retailers though, their exclusivity might be their most impeding factor. So, the demand or
potential customer base is directly proportional to the number of people visiting the store. As a result, the
sales, of store brands, are a function of the popularity of the retail store and its brand equity.
The growth in private labels has traditionally been attributed to two major causes. First, retailers
advertise the national brands (which attract people to the store) and sell private labels (which typically
have lower variable cost and, therefore, potentially higher margins) to the price-sensitive segment.
In other words, retailers use private labels to compete profitably in the price-sensitive segment. Second,
these products enable retailers to get better deals from manufacturers in the form of lower wholesale
prices on national brands.
It is commonly believed that when the economy picks up, consumers go back to buying national
brands. During recession, recent trends show that private label sales are growing faster than national
brands. Another important trend relates to the emphasis on the quality of store brands. A survey of
retailers that carry store brands concludes that retailers must develop high-quality store brands, not just
low-priced brands. Without a combination of low price and high quality, store brands are not successful.
More recently, according to Private Label Manufacturing Association in conjunction with the Gallup
Organization says: 50% of those polled said that their supermarket offers premium private labels and
86% believe that premium private labels are better than or equal to national brands. Although, it is
difficult to obtain precise estimates for the market shares of such quality store brands, more retailers are
advertising their store labels in the media.
Though many other services minimize store differentiation when they are imitated by competing
retailers, it is better for all retailers if quality store brands are carried by competing retailers than if only
one of them has a quality store brand.
Profitable Proposition
Retailers can improve their profitability by introducing a store brand in the quality-conscious segment
because of the presence of inertia in brand switching. High-income and quality-sensitive consumers,
who can be characterized by this inertia, prefer to buy the same brand they bought on the previous
purchase occasion, even though they might perceive other brands to provide the same price/quality
benefits, because of their psychological commitment to prior choices and their desire to minimize their
cost of thinking and/or loss aversion. Low values of inertia capture consumers who are willing to switch
brands for small differences in prices (adjusted for differences in quality), whereas, high values of
inertia capture consumers whose purchase decisions are heavily influenced by habit, that is, by the
brand purchased on a previous occasion.
In the price-sensitive segment, if consumers are driven only by lower prices, brand choices can be
characterized as if consumers have very low or, in the extreme, no brand-switching inertia.
Inertia refers to the consumers’ reluctance to switch away from the brand purchase on the previous
purchase occasion, all other things being equal. Conventional wisdom says that if consumers are
satisfied with a certain brand, they are unlikely to discontinue the brand choice unless the price
differential covers the thinking costs.

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The following literature is based on a study conducted in Chennai. FoodWorld gets nearly 30% margins from
store brands. It is the most aggressive player following the strategy. Its strategy differs from region to region.
It had a more prominent display and a wider range in the Spencers store than in the Adyar, Alwarpet,
T Nagar and Royapettah.
Both FoodWorld and Nilgiris observational study differs in their Store Brand Strategy. The price differential
from manufacturer brands and retailer brands is very high and competitive.
FoodWorld brands are present in the following products:
Household products Food Others
Dishwashing concentrate, Ketchups, Jams, Pickles, Noodles, Socks
toilet and floor cleaners Salt,Tea, Honey, Atta

Price Differential (Rs.)

Product FoodWorld Others Quantity
Pickles 14.50 19 (Mother’s Recipe) 200g (pouch)
31 35 (Ruchi) 36 (Mother’s Recipe) 300g (Bottle)
Socks 114(slashed 125 (Buy two get 1 free) (VIP)
from 134)
(3pairs)
Honey 47.50 50 (Dev Bhumi) 200g
Jam 47 54 (Kissan)
Ketchup 62 82 (Kissan) Maggi (89 for 1.2 kg) 1kg
Dish Wash 45 50 (Vim, Pril) 500g
Toilet and 39 45 (Brisk, Domex, Lizol)
Floor Cleaner
Atta 34.50 43 (Nature Fresh, Annapoorna) 44 (Pillsbury) 2 kg
Noodles 14 15 (Haka Noodles)
Salt 6 7.50 (Tata, Nature Fresh),8 (Annapoorna), 12 (Saffola)

Percentage differential (By how much are

Product Quantity
FoodWorld prices less than branded products)
23% (against Mother’s Recipe) Pickles 200g (pouch)
11.4% (against Ruchi) 13.8% (against Mother’s Recipe) 300g (Bottle)
5% (against Dev Bhumi) Honey 200g
12.9% (against Kissan) Jam
10% (against Vim, Pril) Dish Wash 500g
13% (against Brisk, Domex, Lizol) Toilet and Floor Cleaner 500ml
19.7% (against Nature Fresh, Annapoorna) Atta 2 kg
21.5% (against Pillsbury)
6% (against Haka Noodles) Noodles
20% (against Tata, Nature Fresh) Salt
25% (against Annapoorna) 30% (against Saffola)

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Nilgiris
Product Nilgiris Others Quantity
Pickles 17 Not available 200g (pouch)
34 42 (Mother’s Recipe) 300g (bottle)
Ketchup 78 Not available 1 kg
51 49 (Kissan) 500g
Basmati Rice 40.70 55 (Daawat) 1kg
Coffee 15 14 (Green Label) 100g
Price differential (By how much are
Product Quantity
Nilgiris’ prices less than branded products)
19% (against Mother’s Recipe) Pickles 300g (bottle)
26% (against Daawat) Basmati Rice 1kg
Price differential (By how much are
Product Quantity
Nilgiris’ prices more than branded products)
3.9% (against Kissan) Ketchup 500g
6.6% (against Green Label) Coffee 100g

In FoodWorld most of its store brands carry colors and packaging similar to the top national brand. So, in
effect, the store brands there are not exactly store brands, in fact they are me-too brands and have to evolve
one more stage to become store brands. Products like atta, sugar are still in the generic stage; whereas,
chips, snack food have attained the private label status. Nilgiris on the other hand is still in the private label
stage but for some products it charges a premium on the proposition of the Nilgiris—farm products, fresh
products—image.
Product placement: FoodWorld brands were placed in the POP as well as next to the national brands. A
large amount of shelf-space was devoted to FoodWorld brands. In Nilgiris, though, shelf-space allocated to
its own brands was minimal. Like in FoodWorld, here also the Nilgiris brands were kept next to the
prominent national brands.

Private label quality has to be very good otherwise people will stop coming to the store. If they are
unsatisfied with a manufacturer brand they will still come to the retailer because he is not responsible
for the quality of the manufacturer brand. But in case of private labels—a double-edged sword— it
will lose the loyalty if the private label brand is of low quality.
While store brands keep growing, their growth is limited by the growth in the concept of retailing.
As long as departmental stores and supermarkets primarily continue to be in urban and semi-urban
areas, store brands growth is also crippled. But, Nirma’s retailing venture and ITC’s retailing venture as
part of its e-choupal strategy are getting the retail revolution a new wing. With the rise in such store in
the rural areas also, the store brands will fully take wing. Like in the western markets, store brands will
undergo a full life cycle. AE
C S V Ratna
Former Faculty Associate,
IBS, Chennai.

Reference # 18M-2005-05-13-01

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