The share of modern trade in the Indian retail market might be sizeable but due to its omnichannel presence it is gaining traction faster than ever. Currently, the Indian retail market is the fifth-largest in the world, where unorganised retail retains approximately 75% share. In the past two years, modern retail has grown three-fold in size, from Rs 87,100 crore to Rs 171,800 crore. The concept of organised or modern retail started evolving in India mainly due to the change in foreign direct investment (FDI) policies, technological advancements and the changing socio-economic landscape.
Unorganised retail typically consists of local grocery shops, owner-managed retail stores, convenience stores, mom and pop stores, etc. These stores have a larger reach and deeper penetration in the remotest corners. However, these stores don’t have an online presence and are largely successful in Tier II and III cities. In order to compete in the world of omnichannel retailing, traditional players will have to find newer ways to scale their business. So, what strategy can they use to maximise profits and become agile?
The answer is ‘private labels’, also referred to by many as ‘store brands’. Traditional retailers can start their line of private labels in the fast-selling consumer goods category. Due to the low-risk factor, these goods tend to get picked off the shelves faster. The word private label has become quite the buzzword in retail space. But how did it become the global phenomenon that it is today? Private labels were first introduced as low-cost alternatives to high-priced commodities manufactured by big brands.
Cut to the present: the low-price strategy model is only one of the contributing factors for retailers wanting to sell private labels. When retailers directly procure goods from manufacturers, they eliminate the distribution cost. Additionally, this direct channel ensures that procured goods remain of high quality. Private brands are highly customisable and scalable; and perhaps this is one of the reasons why modern retail is thriving today. According to market research, private brand sales increased nearly six times the growth of national brands last year.
Countries like the US, UK, Netherlands, Belgium, Norway and Germany have already adopted private labels as a part of their modern retail strategy. Interestingly enough, modern trade penetration in these countries is also extensively deep. The US retail industry has the biggest share of modern retail sales, at 85%. This is followed by the UK, Germany and France, where the share of modern retail is 80%. India is relatively new to the world of organised retail. When it comes to private labels, only a few big-box retailers and e-commerce giants have embraced it.
Players like Amazon, Flipkart, Grofers, BigBasket and Udaan have already launched their labels across different categories. Only last year, BigBasket revealed that private labels accounted for 35-40% of their profit. Amazon is expecting more than USD 25 billion worth of business from its private label sales in the coming year. Modern retail is expected to double its size in the year 2020 and it will continue to grow due to a deeper connect with the consumers. This growth will change the face of the Indian retail industry.
Big-box retailers and e-commerce have already adopted to modern trade practices. Traditional retailers will be posed with the challenge of adapting to this sudden transformation. To carve a niche for themselves, traditional players will certainly venture into modern retail. This is given the fact that private label is a win-win formula for both the consumers and retailers. Retailers would not miss out on the opportunity to scale their operations; instead, it will be interesting to see how these new players create a strategy to embrace private labels.