New Delhi: Online retailers in India are steadily building their private labels, a push that will help them improve profitability at a time when the focus for the country’s top online players has moved to improving their bottom line. Findings of a report released by KPMG in India and Retailers Association of India on Wednesday estimated that between 2019-22, online private labels are expected to grow 1.3 to 1.6 times faster than the growth of e-commerce platforms and will continue to generate 1.8 to 2 times higher margins than external brands sold by these online retailers.

The growth of online private labels will help online retailers attract repeat shoppers, improve margins, and valuations, the report said.

Moreover, private labels are also instrumental in launching goods that fill gaps in the platform’s product portfolio.

“Online private labels are expected to continue to be a driver for profitable growth for e-commerce marketplaces," KPMG said after surveying over two dozen online and offline retailers with a pan-India presence across seven product categories.

KPMG added that for some platforms that are focussed on selling fewer categories such as apparel, and accessories and beauty and personal care products, private labels contribute to a significant 25% to 40% of sales; while for large online retailers focus on private labels is still small, contributing to 5% to 10% of their sales.

That’s because online retailers selling limited categories were relatively early to launch online private labels.

Beauty retailer Nykaa launched its private label for coloured cosmetics roughly three years ago in response to a gap in the variety of products available in the market. Moreover, the company, said Anchit Nayar, CEO, retail, Nykaa.com, has faster access to the latest trends in the market and what people are buying, “so we are quick to respond with the latest products." For Nykaa that sells beauty and wellness products both online and offline private labels are still in the 10% to 15%of its sales. But the company hopes to increase their share gradually.

“If you are a single and dual category online player you will have higher stronger private label play, as you try and expand your package of offerings, and are eager to showcase a wider portfolio of products on your platform, however if you are a multi-category player your level of penetration and interest is lower because you already have a width of goods you sell," said Harsha Razdan, partner, head, consumer markets, Life sciences and Internet business at KPMG told Mint.

Razdan added that private labels have the potential to offer higher margins on account of supply chain efficiencies and better control over operations. Further, this could also lead to higher consumer stickiness, thus becoming a critical element of the overall business strategy.

Walmart-backed Flipkart launched its private label in 2016; today the private labels cover 150 verticals spanning categories such as groceries, furniture, home furnishing, electronics etc. The company’s choice of private labels depends on categories where product choices are limited or those that are priced highly, Shivani Suri, Senior Director, private brands at Flipkart, said in a company blogpost.

To be sure, globally as well as in India private labels—that are essentially brands that are owned and sold by the retailer but largely made by a third-party contract manufacturers—draw a significant chunk of sales.

They also help retailers manage costs better since they are sourced at scale directly from the manufacturer thereby reducing another branded player in the process.

By 2022, KPMG expects that for some apparel online players contribution of sales from private labels could go up to 40% up from 25% in 2019; while for select grocery retailers it could go up to 45% up from the current 40%

For large Indian departmental stores and supermarkets spanning grocery to apparel retailers, private label play has helped them expand sales over the last two decades. For offline retailers, the share of private labels to sales could range up to 90% for fashion; while for food it could lend to 15% to 20% of sales and 8% to 10% in general merchandise.

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