Tuesday, August 28, 2007

Organized retail and diminishing power of brands?

Some time back when we were walking through a Big Bazzar "They have made all brands into commodities" was the comment made by the senior marketing professor who was with me. He said only differentiating point is the price. Which to a large extend is true in the large format retail stores which are coming up across the country. One would have read the news that reliance retail is going to sell or rather is selling jeans at 199/- but has anyone wondered which brand ???? or 199/- the price point itself is sufficient....

We are entering an era in which store / private brands would play a significant role. The Private/Store brands are brands owned and promoted by retail chains. And recent data shows that from 2003-2005 global private-label market share grew by a staggering 13%. Though the phenomena is yet to catch up in India with the low penetration of organized retail, but many companies are preparing for the inevitable. Amul has been opening it's own retail outlets so that they can offset the pressure from the organized retail in the long run, and they have taken a hard stand saying they will not compromise on the margins, but the question is how long will they be able to hold on.

In the latest issue of Harvard Business Review an article "If Brands are built over years, why are they managed over Quarters" speaks about the impact of promotions on long term brand image. There are two contrasting examples in the article on handling pressure from bigger organized retailers, In the first case Vlasic a 50 year old brand of Pickles in the US had to file for bankruptcy after it tied-up with Wal-Mart on a special deal which sold it's products at a very low cost, leading to cannibalization of it's sale in other channels, and subsequent decline in margins. Second is the case of Nike. Here when a major footwear retailer Foot Locker cut Nike's orders by $200 million to protest the terms Nike had placed on prices and selection, Nike reacted by cutting its allocation of shoes to Foot Locker by $400 million. Customers frustrated because they couldn’t find shoes they wanted stopped shopping at Foot Locker. Sales at a competitor, Finish Line, increased. In the end, Foot locker acceded to Nike's terms.

The authors say the difference between the two cases is in the strategic perspective that both the brands held. Vlasic used a short-term sales strategy, focusing on a single, large channel partner and discounting its products to attract consumer and in addition the company also reduced the advertisement budget. In contrast Nike positioned itself for the long term. It maintained a strong relationship with a variety of retailer’s and kept investing in brand equity setting its eyes on a distant horizon. It continued to own its customers and its brand, where as Vilasic ceded both to the channel.

These examples should provide leads on how Indian manufactures can tackle the organized retail when they become powerful......



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