1. Treading with Caution

Treading with Caution

A private label placed along with the established brands in the same marketplace enables the e-tailer to leverage the adjacent brand for value with discerning buyers who are seeking products at a relatively lower cost

Published: December 2, 2014 12:47 AM

THE e-commerce industry has witnessed incredible growth in the last three to four years, touching $13 billion in 2013. It is expected to become a $30-40 billion industry by 2015-16. While travel has been the crown jewel, capturing the lion’s share (65-70%) of the e-commerce pie, online retailing or e-tailing is the fastest growing category. Electronics and apparel segments have been fueling the growth of e-tail. Favourable demographics, growing internet penetration, increasing disposable income and changing lifestyles have made India a promising market for the growth of e-tail. In addition, tier 2 and tier 3 cities are playing a major role in contributing to the increase in apparel sales, driven by factors such as high aspirations and increasing media exposure, apart from swelling incomes.

One of the sub-categories within e-tail with opportunities and challenges in equal measure is apparel. A growing trend with online retailers is the launch of private labels in apparel products. During the initial years of e-tail, many major players established a market for themselves by selling branded apparel at discounted prices. However, during the last couple of years, many e-tailers have been dabbling with in-house online-only private label apparels and have achieved varied degrees of success. Several compelling factors make a strong case for the introduction of private labels by these players. A private label placed along with the established brands in the same marketplace enables the e-tailer to leverage the adjacent brand for value with discerning buyers who are seeking products at a relatively lower cost. High-priced branded products tend to attract fewer people from ‘rurban’ areas; they generally have lower propensity to spend, but have the aspiration to wear trendy and fashionable clothing. Private label products, if designed well, can address this need at a pocket-friendly price thereby opening up a wider customer base for the e-tailer.

While it may seem that private labels are category fillers, they are launched as direct competition to established brands and are strategic initiatives for online retailers. Higher margins on such products (15-20% more compared to regular brands) also provide a financial breather to companies who are struggling to maintain positive cash flows. This contribution of private labels to overall sales is estimated to reach 30-40% in the near future.

In addition, the relatively lower costs due to lower marketing spend enables these labels to fight the spiraling discount war in the already competitive online market crowded with players selling branded apparel online.

The Indian market can stand testimony to successful business models for private labels. Irrespective of the route to the market, introduction of private labels is probably centered on the principle of offering a product with quality comparable to a branded product at an affordable price. E-tailers offering private labels have to pay attention to the fundamental aspects of the apparel value chain such as keeping strict vigil on quality and co-ordinated supply chains in an extended eco-system. Many e-tailers retain design processes and intellectual property in-house while outsourcing contract production/manufacturing of apparel to third parties; with strict checks and controls over the fabric, product quality and costs. This enables companies to focus on core aspects of design, merchandising and customer experience where feedback from customers can be incorporated to come up with relevant designs. Almost all major e-commerce players have specialised design teams with critical inputs taken from designers who have worked with leading global brands. Certain players have even gone to the extent of planning to set-up an international ecosystem in terms of product design, branding, merchandising and procurement as well as expansion to markets outside India.

Managing online private labels comes with its own share of challenges and there are certain fundamental issues that plague this category. Building a brand from scratch requires substantial investment and focus. With contract manufacturing being a preferred model in this industry, online players face the up-hill battle of managing robust supplier relationships and maintaining consistent quality with diverse and ever-increasing production batches. Any dissatisfaction can directly impact the brand image of the e-tailer. This can get much more magnified, considering the intensity and speed of extreme customer reaction through social media. Further, the current restrictions on foreign direct investment (FDI) for inventory-led e-commerce models can also prove to be challenging for companies who struggle to keep the product on their online shelves and yet do not maintain inventory of private label products.  Lastly, one of the biggest challenges is to build an aspirational quotient for garments which are displayed only on a computer screen as against established branded products that have been building these brands over years by offering them at retail stores.

Overcoming the challenges and ensuring long-term sustenance in private label market is seen to be dependent upon carefully planned strategies in areas such as branding, product design life cycle, cost control, merchandising and pricing-value equation. Constant optimisation of the private label portfolio could help ensure that the business focus and investments are aligned with the goal of maintaining a novel and differentiated brand. It would also be wise to learn from  brick-and-mortar retailers who have effectively managed shelf space by balancing the supply of private labels along with established brands.

It is imperative that online retailers offering private labels recognise that the organisational mindset required to take this to the next level is different. Such e-tailers would be required to evolve from being just another online player re-selling established brands into a design house managing product life cycle, and move forward with making strategic investments to achieve the brand vision.

The author is partner, e-commerce practice, KPMG in India. The views expressed here are personal

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