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Though some economies, such as those in the US and UK, are used to such competition, “ ... organized retailing in India is still at a nascent stage and private labels occupy less than 5 percent of the total Indian market,” says Nirmalya Kumar, director of the Aditya Birla India Centre at the London Business School.
In fact, organized retail currently accounts for only three to four percent of the retail market in India (US$ 350 billion), but this is set to rise by 20 to 25 percent by 2010, as stated in a KPMG report on Consumer Markets in India.
Traditionally, the Indian retail industry has been dominated by unorganized local players, with consumers shopping at mom-and-pop operations, roadside markets, and small grocery stores for their daily needs. While an estimated 85 percent of retail outlets continue to operate in these traditional formats, the last few years has seen a rise in modern retail formats such as hypermarkets, department stores, multi-storied malls, and specialty stores—particularly in urban and semi-urban areas.
Indian corporate behemoths like RPG Enterprises, Future Group, Bharti Group, K Raheja Corp. Group, and Tata Group are looking to tap into the growing potential of the organized retail market. They are slowly expanding their retail operations while experimenting with private label strategies. International retailers like Tesco and Carrefour are also keenly watching the Indian government’s policies, which presently only allow foreign retailers limited entry—either through franchising deals with local partners or joint venture partnerships with Indian companies.
“The highly fragmented nature of the Indian retail market has limited the growth of private labels in India,” observes Jan-Benedict Steenkamp, professor of marketing at University of North Carolina.
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“A key factor in the growth of private label brands in India will be retail consolidation,” says Kumar. “Developing a private label brand has huge fixed costs and to be able to absorb these costs, Indian retail chains will need to scale up.”
Developing the infrastructure to support such changes in organized retail and promote private labels is challenging. As Arvind Chaudhury, CEO of Food Bazaar (part of Future Group), which operates a chain of 108 supermarkets across India, explains, “we are continuously growing the number of stores across India, and managing the supply chain efficiently is an issue.”
Food Bazaar has had some success with its Tasty Treat line of privately labeled products (pickles, ketchup, jams, and papadums), which contributes five to ten percent to its overall sales. Chaudhary describes how private label brands have been able to tap demand gaps in the market. “When it comes to local tastes and preferences, private label brands have an advantage over national brands. For example, the mustard kasundi (sauce), which is very popular in east India, is not sold by any national manufacturer, but only through small regional players. We [identified this niche] and introduced our private label brand Tasty Treat Kasundi to customers looking for a quality offering which cannot be met by small regional players.”
 Despite Chaudhury’s observations, it is too early to gauge how newly targeted customers will react when powerhouse brands like Nestle’s Maggi or Hindustan Unilever’s Kissan enter such niche markets, like that of the previously described mustard kasundi. After all, having already created a strong and loyal consumer base via consistent advertising and sophisticated marketing, Maggi and Kissan are household names in many parts of India. But can they replicate their previous successes in these niche categories?
Modern retailing formats are relatively new to India, and many consumers remain loyal to neighborhood vendors, who offer more than just goods by connecting with their customers on a personal level. Neighborhood vendors are simply more familiar to locals and are recognized as part of the community; these vendors also extend credit to those in need and offer home delivery. In many areas of India, there are powerful bonds between neighborhood vendors and their loyal local customers. Often, the shop at the end of the lane is seen as indispensable.
In order for private label brands in India to achieve acceptance, it is imperative that they educate consumers about product value and they must also gain the customers' trust, says Steenkamp. Today most private label brands are being introduced via day-to-day item categories like grains, peas, beans, and lentils, which were otherwise bought in loose, less hygienic commodity packaging formats. “The value addition is the hygiene factor,” says Harish Bijoor, CEO of Harish Bijoor Consults.
Retailers like Food Bazaar use visual merchandising to educate customers regarding how their products are made and distributed. “For example,” Chaudhury says, “many Indians believe in the age old tradition of ‘chakki atta’ (making and using freshly ground wheat flour). Hence, in most of our stores we have a person grinding wheat in front of our customers to educate the shopper that the branded atta (wheat flour) we sell is also freshly ground, and packaged to retain its aroma.”
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 Spencers Retail, promoted by the RPG Group, is introducing private label brands to Indian consumers in niche demographics, but it is doing so with caution and realistic expectations. Samar Singh Sheikhawat, vice president of marketing at Spencers Retail, explains, “We are developing private labels in unbranded spaces, which are currently dominated by the unorganized market. Spencers Retail has a chain of 320 supermarkets across the country, and houses 25 private labels, which contributes to a quarter of the turnover.” But Sheikawat adds that, “Currently we are staying out of high involvement and high technology products as these require a high level of trust, and it will take a while before consumers accept [our] brands in these categories.”
 Echoing a similar concern is Ajit Joshi, CEO and managing director of Infiniti Retail, which promotes the Croma retail store. “We are waiting for infrastructure to develop in the after-sales service area,” says Joshi in an interview with the Indian news daily Hindu Business Line. Building equity for a consumer durables brand is based on after-sales service and Croma well realizes the importance of this service.
Rajan Malhotra, CEO of Big Bazaarr (part of Future Group), feels that “once customers develop trust in the store brand, the willingness to trust private labels follow.” In a similar vein, it remains to be seen whether or not India’s retail stores will evolve from the current one-stop-shop approach into a more defined market with chains specializing in a particular area (e.g. food, technology, household items), similar to Best Buy and Circuit City in the US or newcomers like Croma in India.
Nirmalya Kumar feels that while private label brands offer retailers a higher margin, it is essential that they don’t over exercise the private label option. Too much change, too fast, can backfire on private label brands. Says Kumar, “If they fall into the trap of using too many private labels, they will end up losing customers who may feel they have a lack of choice, since they did not find regular brands at the stores.”
Managing the psychology of customers and mitigating their resistance to new brands are just some of the challenges facing retail chains hoping to sell their private labels to Indian consumers. Supply chain efficiency, overcoming high initial fixed costs, and integrating technology throughout management operations are just some of the additional challenges that face the Indian retail industry. These factors, whether directly or indirectly, will play important roles in how retail chains promote themselves and their private label brands.
Nevertheless, with increasing power and resources, retail stores are becoming prominent touch points for millions and millions of Indian consumers. And with this increased presence in the Indian economy, private labels have the potential to change not just the consumer landscape of the nation, but the very communities those consumers live in. As other economies that have experienced similar transitions demonstrate, the mom-and-pop shops and community stores of India that once enjoyed unquestioned loyalty from local consumers may soon be fighting for their very survival.
Furthermore, it appears not even government policies limiting competition, fixed costs, or insufficient infrastructure can save them. After all, local establishments are not just competing with the threat of new shopping experiences and products, they’re competing with one of the most powerful forces known to mankind: change. [10-Dec-2007]
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Preeti Khicha currently lives in Mumbai, India. She graduated from the University of Bath, UK, with a master's degree in management, specializing in marketing. She holds an undergraduate degree in economics and psychology from the University of Virginia, USA.
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Enjoyed the article. Done excellently, own brand truly is a retailers' best strategy for creating a long-term competitive advantage. The "trap of using too many private labels" that Preeti refers to in the article can become a self-fulfilling prophecy that turns private label into just that, a second-class citizen in the FMCG world. That being said, if approached appropriately from a product development, branding, and marketing perspective, the Indian market and Indian consumer is ripe to be educated early on regarding the concept of own brand, eliminating any perceived ceilings to potential growth. Therefore the question is not whether private brand will become a dominant growth engine for Indian retailers, but rather which company will gain the first movers advantage by truly embracing the changing paradigm and aligning their growth strategy around it reaping the consumer loyalty enhancing, stock price bolstering, and of course profitability enhancing benefits it has to offer. 
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