Most of the pasta sold in India comes out of gunny bags, not packets. Households with a monthly income under ₹60,000 love pasta just as much as their affluent cousins, but they buy it from wholesale markets because they can’t afford branded pasta.
Now they have another option. Large grocery retailers, both offline supermarkets and online marketplaces, are selling a slew of products under their own labels at lower prices than the regular brands. Both large chain stores and supermarkets as well as online marketplaces are creating their own low-cost alternatives to popular products across a range of categories.
At first, these were mostly food staples and basic household items such as toilet cleaners. But now you also get budget pasta. Online grocer Grofers is currently selling its Happy Day Penne Pasta for ₹72 a kilo, while the lowest price of branded pasta on Amazon is ₹200. “We were reacting to customer need," says Grofers chief executive officer (CEO) and co-founder Albinder Dhindsa, explaining how the private label strategy evolved.
A private label can give better margins by cutting out the marketing and distribution costs of fast-moving consumer goods (FMCG) brands. But online retailers don’t think of it as a profit centre; the idea is to meet the needs of mass market consumers, they say.
“It doesn’t make us that much more money than branded products, but it fills gaps in the market," says Dhindsa.
Interestingly, some of Gurugram-based Grofers’ private label products are manufactured by FMCG brands themselves when the behemoths don’t find it viable to enter a lower-end segment.
There’s no denying that FMCG companies will feel the heat as supermarkets and online grocers increase their market share, which is currently less than 5% in India, according to Euromonitor. But the private label horse has already left the stable.
“Grofers has been laser-focused on providing the best value for the mass market Indian consumer, and that shows up in every choice it makes," says Abheek Anand, principal at Sequoia Capital India, Grofers’ first institutional investor.
Private labels are a cornerstone of that strategy by offering wholesale price points and currently account for 45% of its sales.
This ties in with the other part of its strategy which limits SKUs (stock-keeping units) to mass market products. “Other players still focus on the upper segment of the consumer market. We don’t compete for that segment because we believe the mass market has much larger potential," says Anand.
Grofers’ main rival Bengaluru-headquartered BigBasket has a significantly different model with a wide range of products, including perishables, at different price points.
“We see range as a differentiator," says Hari Menon, CEO and co-founder of BigBasket.
Where the two meet is in the push toward private labels, which constitutes one-third of what BigBasket sells today. It has leveraged its backward integration with farmers to create in-house brands such as BB and Fresho for staples, fruits and vegetables. But it hasn’t stopped there. “We are creating private labels in places where we see gaps," says Menon.
BigBasket’s strategy is multi-pronged, targeting a range of consumer needs. For example, its GoodDiet label caters to emerging health nuts who want millet-based snacks, nutrition bars or organic ghee.
Then there’s general household merchandise like tissue paper where consumers don’t have strong preferences for particular brands. BigBasket’s Alibaba backing also helps in finding the right channels to source such products cost-effectively from China.
The most common private label strategy is to find a top seller in a category and offer a lower cost alternative. Amazon is a past master at it, like its Presto toilet cleaner which looks and feels like Harpic but costs 40% less.
It’s not only the online players who’re in this game. Around a fifth of the grocery products in Future Group’s Big Bazaar chain are private labels.
It’s a complicated relationship between the FMCG companies and large retailers. The brands need the reach of these outlets, so they have to swallow the conflict with private labels. The retailers too need the brands to pull in consumers, while pursuing their value-for-money agenda. “There’s no conflict if you have an open dialogue," says Dhindsa.
At the end of the day, it’s a good option for consumers if the private label business grows sustainably. After discounts and festival sales, they can explore the new labels in the market.
Malavika Velayanikal is a contributing editor with Mint. Write to her at firstname.lastname@example.org