Executive Interviews: Interview with Nirmalya Kumar on Private Labels
April 2008 - By Dr. Nagendra V Chowdary

Nirmalya Kumar
Professor of marketing,
Faculty Director for Executive Education,
Director of Centre for Marketing,
Co-Director of Aditya Birla India Centre at London Business School.

come very quickly to retailers. While retailers have these two costs fixed and theymay not have same scale as a manufacturer brands, for the sales. So in a sense they have to recoup their R&D and their advertisements over a smaller volume than the manufacturer brands, in general. But there are lots of costs that they don't have to incur which manufacturer brands have to incur like wasting fee, trade margins, etc. Failure fee for example. They don't copy the products that fail. They only copy products that succeed. 90% of the product fails and they are copying only the 10%. So the manufacturer brands have to take 9 for the product failure before they get one hit, and the one hit has to pay for the 9 product failures. Whereas for the retailers most of them are always hits because they only copy the hits and they don't copy the failures. So that is why the economy is bit different from private labels and that's why with lower volume they can make more profits than amanufacturer brand.What I am trying to explain is that the retailer's economics is different from a manufacturer brand economics, so they don't need the same scale to make money.

• What happens to incentives for innovation?
  In fact, everything we know, as private label share increases in a category, innovation increases, because the manufacturer brands are force to innovate to compete against private labels. So the best thing that happens for innovation is more private label share because when the private label share goes up, the manufacturer brands going to compete have to innovate more. Whereas, when they don't have any private label threat they can be quite lazy.

• When will the private labels break the circuit of manufacturer brands, in terms of quality and when will they reach the stage of a typical brand as they are actually functioning only out of physical space at the moment and they may not have that aura as a normal brand do?
  It depends, if you look atHarrods it's a brand. If you look at Body Shop, it's a brand and these guys don'thave to sell only in their stores. In fact lot of their brands, private labels are starting to say, ifwe are so strong we can sell our brands outside our stores too. It started, and that is the last final step.

  The first step is, I compete with price; second step is, I compete with quality; third step is. I compete on innovation and the last step is, I become a brand and I don't need to sell in my stores, I can sell it in other people's stores too.

  So you see, Starbucks coffee now sold in supermarkets is an example for classic private label sold in supermarkets.

• Do you see this phenomenon getting more mileage and more visibility. At some point there will be some clash of interest between these private labels and let's say the other brands sold by the retailers?
  As the retailer brands are born through the steps that we just discussed, manufacturer's brands are also evolved. Today, sophisticated manufacturer brands don't sell the competing with retailer's brands, but compliment it. It is not a subdued role. It's a very aggressive but is complimentary. They say anything that a private label can do, we should never try to do. We should try to do things that are different, so that the retailers see there are things that I can dowithmy private labels and there are things that manufacturer brands can do, which I can never do it as private label, that is the complimentary strategy.

  When you look at company like Nestle, they don't talk about competing with private labels. They say we compete with private labels and we also compliment them. There are certain things that a retailer can never dowith private label and that is wheremanufacturer's brand come in. So, great retailers should have good private label programs and also good manufacturer programs.

  Now that leads to the questions of which manufacturer brands can compliment private labels? and the answers is, if you are number one or number two in the category, or if you are a premium rich ones, those are the brands that compliments. If you are a mainstream of third, fourth, fifth players you won't really have anything to add beyond the private label. So that is what you have seen in my book an entire chapter is on brand rationalization. There is a very good argument for the retailer to stock up number one brand.

  Number two, it is somewhat weak but you can make it. When you are at number three, four or five, unless it's a premium rich brand, which has high price, you can hardly make an argumentwhythe retailers shouldstock you, except you tell the retailer that you would give a huge amount ofmargin.

1. Private Labels Case Study
2. ICMR Case Collection
3. Case Study Volumes