Having tasted early success with its private labels, online supermarket Grofers is now aggressively building its portfolio of in-house brands. The move, experts suggest, will be rewarding for the company.

On June 18, the Gurugram-based company entered the packaged milk category with a new brand, G-Fresh. “We expect revenue of Rs 30 crore per annum from the packaged milk business,” said Albinder Dhindsa, Chief Executive Officer of Grofers.

Milk is one of the largest daily consumption items in India and will give the startup frequent access to the consumers’ wallet. “Milk happens to be the most indispensable item in Indian households,” said Swati Nathani, co-founder of Mumbai-based brand and digital marketing firm Team Pumpkin. “Therefore, the strategy to debut with an in-house milk brand is smart, especially when the category fiercely competes on price points.”

Grofers’ move is in line with e-commerce majors such as Flipkart and Amazon and brick-and-mortar chains such as Big Bazaar and Shoppers Stop, who have all launched private labels in recent years. Besides, Grofers’ rival, BigBasket, also has a large portfolio of private label products across staples and home ingredients and the company is already preparing to strengthen its presence in the beauty segment.

The label lure

Private labels allow sellers to offer products at cheaper prices, which helps attract more customers. For instance, Grofers’ G-Fresh milk is priced about 12% lower than rival products.

“We make products in-house and sell it on our own app, so there are no commissions for middle-men. Hence, we are able to keep our product prices low,” Vivek Prasad, vice-president of private brands at Grofers, told Quartz. “Our core target group is two-wheeler riding consumer. This segment of buyers is very price-sensitive and is looking to save money wherever she can. So, the focus is on offering [the] best prices when it comes to buying staples and other essential household items.”

Some experts believe private labels are the only way for retailers like Grofers to succeed in the future as many of their earlier innovations that helped them gain competitive advantage – such as same-day delivery – have now become pretty commonplace.

“Operational efficiency of having a technology platform that optimises deliveries in terms of route planning and allocation is getting increasingly democratised,” said Umashankar Venkatesh, professor of marketing at Gurgaon’s Great Lakes Institute of Management. “Such abilities can no more be touted by a company as a competitive advantage.”

Besides milk, Grofers has private labels in categories such as staples and kitchen ingredients, food and snacks, personal hygiene, cleaning products, and furnishing items. It sells these products under eight brands, including Happy Day, Happy Home and Mothers Choice.

Grofers claims that 90% of the buyers on its online platform prefer its own brand products over other labels. In the financial year 2019, private labels accounted for nearly 40% of Grofers’ total sales of Rs 2,500 crore, according to the company.

Expansion plans

Now, Grofers is looking to expand its brand portfolio with launches in snacks and personal hygiene category over the next few months. The target is to expand offerings under its private labels from 800 products to 1,200 by the end of 2020, the company said.

By 2020, Grofers is looking to increase the share of its own brands from 40% to 60%, clocking sales worth Rs 5,000 crore.

The aim looks achievable given the current consumer purchase behaviour, experts said. “The demand for private label brands is on the rise as consumers see the value in getting the same quality products as mainstream brands at 40% to 50% lower prices,” said Venkatesh of Great Lakes Institute of Management.

Watch out for

While selling products under own brand at cheaper prices to attract more buyers seems like a simple strategy, there are pitfalls, warn experts.

Most importantly, managing the quality of products, especially perishable ones, is a challenge. In addition, there are buyers who equate lower pricing with inferior quality.

“The market is crowded with private labels now and trust factor, therefore, is an important determinant for consumers to choose a brand,” said Nathani of Team Pumpkin. “Therefore, apart from driving prices, the key challenge Grofers will face is establishing trust and loyalty in its products.”

This article first appeared on Quartz.