Value Creation Via Private Labelling In Consumer Retail and E-commerce
Private labels have the potential to develop into self-sustaining brands with a loyal consumer base and grow beyond the captive platform
In recent years, private labels have emerged as the rising stars of retail and e-commerce. Private labels, or in-house brands, typically offer shoppers value for money, while earning higher margins—around twice as much as external brands—for retailers and e-commerce players. Private labels have the potential to develop into self-sustaining brands with a loyal consumer base and grow beyond the captive platform.
Key Trends underlying private label growth
Category focused platforms were early entrants into private labels and have also benefitted the most.
- Category focused platfrms were relatively early to launch online private labels and currently have 25-40 per cent of sales contribution compared with approximately 5-10 per cent for multi-category platforms
- These category focused platforms recorded faster growth as compared to multi-category platforms largely driven by private labels growing at approximately 1.2x-2.5x relative to the platforms growth
Private label growth and their higher profitability translate to better valuations.
- Not only do private labels generate incremental revenue by growing at higher growth relative to the platforms' growth and improve profitability by generating nearly 2x margins vis-a-vis branded sales, but also enable business scalability by increasing consumer outreach and category presence
- This creates value accretion for platforms. Additionally, it also gives the platform greater control over the overall value chain thereby reducing value leakages
Online private labels foster customer retention leading to higher repeat purchases.
- Online private labels allow platforms to attract new consumers, improve consumer stickiness, and thereby increase market share
- Key e-commerce players across product categories attribute greater than 50 per cent of their private label sales to repeat purchases
Private label growth outperforms overall platform growth across categories
While private labels compete alongside well-established external brands, they are able to gain market share by developing differentiated products on parameters such as price, ease of use, specifications, etc.
Additionally, private labels are also instrumental in launching products that fill gaps in the platform's product portfolio. These factors have enabled private labels to grow faster than the platforms
Share of online private labels in overall sales mix
Some examples of e-commerce platforms using the private label strategy
- Beauty retailer Nykaa launched its private label for coloured cosmetics in 2017 in response to a gap in the variety of products available in the market. For Nykaa that sells beauty and wellness products both online and offline private labels are still in the 10-15 per cent of its sales
- Reliance Retail has started pushing its array of existing private brands with kiranas across metro and non-metro markets, offering high margins of 20 per cent as in-house label sales jump in online grocery
- Bigbasket, which had over 30 per cent of total sales from in-house brands before the pandemic, has seen huge traction for its brands from new customers. Private labels Fresho and BB Royal account for 38 per cent of its monthly sales
How private labels generate higher margins and help create much higher value
- Absence of intermediaries
- Higher control across the value chain
- Additionally, product differentiation can be created to suit the demographic/buying behavior/preferred price points through detailed consumer studies, especially in underserved and emerging categories
Margin Comparison of private labels v/s branded labels
We believe private labels across various consumer retail categories have been a good margin enhancer and value creator for several retail and e-commerce categories. We believe there is much more scope to grow the share of revenues from private labels across categories and can help them convert private labels into larger consumer brands.
In the next series, we would like to focus on how globally private labels have themselves become market leaders in their own category.