Is e-commerce killing the fundamentals of its establishment?

With change in strategy, looking beyond discounts and offers becoming the need of the hour, many brands are introducing their private labels to tap their consumer base.
Private labels a threat to brands

What’s with e-commerce these days you may ask? Apart from rolling out massive discounts or attractive offers every other month, tens of hundreds of unknown brands are making inroads in the e-commerce space leaving buyers spoilt for choice. With the battle between e-commerce players getting fiercer day by day, a change in strategy, i.e. looking beyond discounts and offers have become the need of the hour. That’s how e-commerce firms came up with the idea of launching private labels to offer customers an umbrella of products under one platform. Large e-commerce players with huge funding had earlier capitalized on small-and-big scale businesses and their inventories to build a strong customer base. The e-commerce players made brands believe that technology adoption and use of devices such as smartphones and tablets along with improved internet connectivity have made customers shift their shopping preferences online. While brands that are over a decade old have established its brand value and positioning, e-commerce players portrayed themselves as a platform to extend their reach digitally. In fear of losing out in the market, brands embraced e-commerce to drive sales and to make customers avail their products online as well as offline. However, that is not the story anymore!

E-commerce firms are now looking beyond brands to launch their own private labels and are pushing them to their ever-growing customer base. By offering competitive pricing or selling subsidized products, conducting aggressive promotions, offering superior quality products and more, several e-commerce companies are stepping into the market with their own private labels. Top players like Amazon, Flipkart and Myntra have already launched their in-house brands to outsmart their competitors, make their brand names stronger and enjoy larger margin structures. These companies have intensified their push on private labels by tying up with manufacturers as well. The question here is will these private labels emerge as a threat to the existing big and small brands

Private labels versus brands
While the purpose of e-commerce firms was to cater to the customers by offering a wide array of categories ranging from fashion, electronics, beauty, furniture, etc at various price points as per the quality of brands, a lot of gaps existed in the e-commerce space, especially with respect to price range, aesthetics, looks and feel. E-commerce platforms felt the need to bridge certain gaps existing in the market, but in a direct competition with the brands they sell. The e-commerce firms are already at an advantage as they are able to generate a massive amount of data regarding the hottest selling products, the latest trends, consumers’ buying behaviour, etc. With these humongous data, the e-commerce firms are now able to identify the existing gaps, find out consumer trends, such as best selling fashion and categories beyond what brands can see themselves.

E-retailers are utilising the existing data to develop their own private label brands and compete with brands they partnered with in the first place. After making their presence felt online, these platforms are working in favour of their own brands by giving them more visibility through favourable product placements as well as top rankings on internal search result pages. By understanding the market potential, they are now making use of the traffic coming to their sites to promote their in-house brands. E-commerce firms which are launching in-house brands are looking at satisfying the customers by providing almost a similar kind of value proposition as that of brands but, at a lower price. Price promotions often tend to hurt the brand, as consumers become conditioned to buy products only during the offer period. They focus more on price over quality and are likely to switch between brands in case of higher discounts. A brand is forced to continuously sell its product at a lower price and offer steeper discounts to gain back consumers from the competition. The continued discounting has a tendency to eat into the margins and eventually bring down the shareholder value. While there are companies that set a minimum benchmark value to their product below to which the product cannot be sold, not all the fashion brands are able to abide by the same set of rules. In a survey conducted by Lab42, it was seen that 7 out of 10 respondents shop online to avail promotional offers while 2 out of 3 respondents shopped online because of low prices on goods. While customers have an eye for quality, they turn price-conscious during the offer period. For brands, price promotions are essential to drive short-term sales, to overlook the long-term negative impact to the brand’s value and bring back the financial returns to the firm.

Clearly, private labels are grabbing the market share, especially when it comes to apparel and footwear categories. The price differential with respect to in-house brands is in the range of 20 to 25 percent. Private labels are able to make a good proposition for an already captive audience and boost sales. However,this monopolistic behaviour is not just disputably against The Competition Act, 2002 but against the fundamentals of the establishment of an e-commerce industry as well. If taken together, all these trends may seem intimidating to manufacturers of brands. This development is inching towards a closed loop, where large e-commerce players are killing other small players with deep discounting and low price points, in a way making the customers eventually stick to private labels, as the other options will soon cease to exist due to lack of profits. While private labels might seem like the way forward for sustainable e-commerce in India, what is required of brands is to build on a dedicated management to thrive. Brands need to take a stand in maintaining their price regulations and build their offline market simultaneously. To sustain in the long run, brands should look for solutions that integrate well with their offline and online space, instead of venturing out as separate entities.

This article has been authored by Harsh Shah, Co-Founder, Fynd


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