The Private Label Play

Private label is the quickest way to increase gross margin for any e-commerce player

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The launch of private labels, by e-commerce players is nothing new. Flipkart launched its first private label, Smart Buy, in 2016. Today it has Perfect Homes, MarQ, Billion, Ann Springs, Miss Chief, among many others. It has private label brands across more than 300 product categories. Amazon too has successful private label brands like Echo, AmazonBasics, Myx and others. Myntra, BigBasket, Blinkit (earlier Grofers) are some of the other players focusing on private labels.

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Fashion, food and beverage, personal care are some of the key categories where private labels have been more common for some years. "In the third quarter of 2020, private label companies grew by 31 per cent in India. As compared to larger manufacturers, private labels show significant growth, while other manufacturers experienced declines of up to -20 percent in Q3 2020," says Statista data.

These platforms have, however, often been accused of manipulating search results to help their own products enjoy better visibility. According to a Reuters report last year, in 2016, Amazon's India business indicates that the company had systematically targeted some of the most popular Indian brands in apparel, kitchen products and other categories to give its private label brands, Solimo, Symbol, Xessentia among others, a boost.

These platforms have also been accused of leveraging the consumer data gathered over the years to fill in demand-supply gaps in the product portfolio of external brands through their private labels. "A conflict of interest situation is said to exist since e-commerce players have consumer data and shopping trends and thus have the ability to push their private labels to a specific user base. Globally, there have been several complaints against Amazon about the preferential treatment towards "own brands' over other independent sellers on the platform," said Sumir Verma, founder and managing director, Merisis Advisors.

He added that Amazon has always said that when it makes and sells its "own' products, it does not use the data/information collected from individual third-party sellers, but news reports say otherwise. "There have been claims that private labels of these marketplaces are enjoying better ratings and visibility over other brands," he said. Despite many such allegations, the focus on private labels continues.

The Reasons

The topmost reason is that despite being around for many years, it is only after the pandemic that online shopping platforms have taken off. So, to improve the bottom line, these platforms cannot be depending on third-party brands alone as the gross margins from many brands is low. Additionally, they also have to bear high logistics costs and customer acquisition costs.

"Private label is the quickest way to increase gross margin. It's very straight-forward, they know what's selling on the marketplace, so they can launch their own brand where the gross margins can be upwards of 60 per cent as compared to the take rate of 10-30 per cent for other brands," said Rohit Krishna, General Partner, WEH Ventures.

Verma shares two reasons behind e-commerce players increasing their basket of private label offerings. "One, a higher value for money to customer - e-commerce private labels are typically priced lower than the external brands. Two, higher margins for e-commerce players - almost double the margins as compared to external brands selling on the platform," he said.

Is Private-Label The Future?

"I don't think Amazon or Big Basket want to be private label only. And even if a few brands pull out, there are many others who might take their place. I could draw an analogy to music streaming here, when Tidal was launched they had few artists who pulled out of other streaming platforms, but in the end, the platform with the largest number of users win. Eventually, all those artists went back to listing on Spotify," said Rohit Krishna, General Partner, WEH Ventures.

Krishna also believes that social commerce players may also start betting on private labels soon. "Some of these platforms could even incubate or buy stake in brands instead of creating new brands from scratch," he said.

Additionally, private labels by retailers is nothing new. Historically, offline retailers such as Future Group, Aditya Birla Group, have continued to bet on private labels. "All successful global retailers have a large and sustainable set of private labels across categories including fashion, grocery, personal care, furnishings, electronics among others," said Verma.

But, he added that while private labels have the potential to become brands with a loyal consumer base, they are one of the key drivers of profitability for e-commerce players. Going ahead, private labels are only expected to become a highly significant part of online retailers' revenue.