Thanks to the favourable characteristics of the branded flour market, organised retailers can accelerate the category’s growth through their ability to lower prices and raise customer awareness.
• An increasing number of Indian consumers are favouring branded flour over taking wheat to their local chakki due to its convenience
• Historically dominated by FMCG companies, significant opportunities are now emerging for modern retailers to establish their private label flour brands
• Due to their pricing power and desire to attract new customers, retailers will have both the ability and the incentive to lower prices and capture market share
Branded flour (or Atta) has emerged as a significant contributor to India’s booming FMCG industry. Since 2002, sales in this relatively young product category have grown around eight-fold from under 600 crore ($100m) to over 4,500 crore ($800m) today. This growth has been driven by Indian consumers seeking greater convenience than the traditional but time-consuming process of taking wheat to their local chakki (mill) and wanting a guarantee of better quality than that provided by unbranded flour. Until now, demand from those seeking convenience and quality has largely been taken up by leading FMCG players like Hindustan Unilever (Annapurna), ITC (Aashirvaad) and General Mills (Pillsbury), along with fast-growing regional players like Shakti Bhog.
However, the growth of modern or organised retail is shifting the playing field for this nascent product category. While FMCG firms were able to develop the market for branded flour through the traditional channel of unorganised retailers - which played to their strengths in distribution, modern retailers are capturing an increasing share of sales and will be crucial in accelerating the category’s future growth.
A favourable category for retailer-led growth
At present around 8% of packaged Atta is sold through the modern retail channel. While this may appear small it is in fact very significant given the relatively low penetration of organised retail, which currently accounts for only 5-6% of total retail sales. This figure of 8% is also well above the 5% average for FMCG products as a whole. Only refined edible oils generate a higher percentage of their sales (9%) through modern retail. Furthermore, in larger cities, where the penetration of organised retail is greater, the percentage of branded flour sales going through this channel is much higher. Here some 25% of FMCG sales go through modern retailers, lifting their share of the sales of branded flour to around 40%.
There are two key features of the branded flour market in India that make it well suited to retailer-led growth. Firstly, as a commodity-type product, flour is an easier category in which to develop private labels. Secondly, with existing FMCG players less well established in this relatively new category, there is greater scope for retailer initiative.
There are fewer barriers to private label growth
Private labels are developed by retailers as a means of capturing more value. However thanks to their lower cost model they can also keep prices down and thus grow a category by offering more affordable options to consumers. Usually, private labels begin by imitating established brands in mature product categories with a lower priced alternative. In the branded flour market this process can occur much more quickly due to the commodity-type nature of the product and the behaviour of consumers toward such purchases.
Firstly, flour is a commodity-type product because the input material (wheat) is broadly uniform and there is a low level of value addition. This means that the process is easy to replicate by rival firms and therefore margins are competed away. These characteristics have seen a number of leading multinationals struggle against lower cost local competition. Cargill (Nature Fresh) and Con Agra (Healthy World) both exited the branded flour market in the 2000’s after a few unprofitable years. Although the low level of value addition in the category is a major challenge for the margins of FMCG brands, it is an advantage for retailers as they can develop private label products of a comparable quality with relative ease.
Secondly, consumers buying behaviour towards branded flour is shaped by the fact that it is a basic staple in the Indian diet - particularly in north India. As such, flour is a purely needs-based purchase, where above a minimum level of quality the buying decision will be subject to a declining level of customer involvement over time. This means that value-conscious Indian shoppers will be less inclined to pay a premium over private labels for brand name alone. As a result, retailers can attract customers to private labels by simply offering lower prices. These low switching costs in branded flour have helped push it into the top 5 private label categories in India. At Future Group an impressive 42% of packaged Atta sales are generated by private labels while at Bharti Retail the figure is a very strong 35%.
FMCG players are less well entrenched
One of the biggest challenges to launching private labels in India is overcoming the head-start FMCG brands had over modern retail in building recognition and trust. In many cases, brands like Horlicks in malted drinks or Lux in soap helped define the product category long before modern retailers were first conceived. However branded flour is a comparatively new category, with the leading brands just over a decade old. This means brand loyalty is less ingrained. Furthermore, with the majority of India’s consumers yet to have even sampled branded flour, there are a huge number of potential customers with little or no allegiance to existing brands.
With organised retailers assuming a prime position relatively early in the life of the branded flour market, the strategies they pursue will be central to the category’s growth going forward.
Retailers will drive category growth by lowering prices and raising awareness
Whilst branded flour has the significant benefit of greater convenience, the biggest barriers to adoption among Indian consumers are cost and quality or taste (both actual and perceived). Many Indian housewives (who are the key decision-makers for this product category) are skeptical that packaged flour can match chakki-milled flour for freshness and economy. Although leading brands like ITC’s Aashirvaad have been able to lower costs through supply chain innovations like e-choupal and communicate freshness through a focus on packaging. Modern retailers now have the potential to affect change in consumer attitudes on both these fronts.
The increasing scale of modern retailers will allow them to expand their range of private label flours at a lower cost. In addition, thanks to their pricing power and their desire to attract new customers, retailers will have both the ability and the incentive to lower the final price tag.
Retailers can drive down input costs
Firstly, retailers can drive down the input costs of private label flour by going directly to the manufacturers - which in this case are the flour mills. This eliminates the margin captured by FMCG brands. In fact, large retailers can go even further by procuring the raw material (grains), which further eliminates the margin otherwise absorbed by multiple traders and warehousing costs. This is a particular advantage in market-traded commodities like wheat, where large buyers can hedge prices when they are low, with minimal transaction costs. At present Big Bazaar is developing such a strategy of vertical integration through its Future Agrovet subsidiary.
With access to low-cost grain, retailers can enter into agreements with flour millers on more favourable terms. Their position relative to the flour millers is strong due to the excess capacity in the industry. Currently, the average flour mill in India is operating at less than 50% capacity. Furthermore, the fragmented nature of the milling industry in India - characterised by a large number of small mills - puts large retailers in an even stronger bargaining position.
Retailers can achieve lower overheads
The high footfall and turnover of organised retailers mean that they can shift product more quickly and therefore run lower inventories than FMCG brands, reducing warehousing costs and leakage through stock spoilage. Retailers can also use their proprietary customer data to manage their inventories even better. With up-to-the-minute insights regarding customer demand, retailers can pull supply in from the manufacturers on a just-in-time basis. Furthermore, by utilising the spare capacity in the flour milling industry, retailers can avoid the capital-intensive activity of building and maintaining their own milling operations.
Retailers can manage with a lower marketing budget
The large floor space occupied by modern retailers represents a vast canvas of owned advertising that they can use to communicate information about a product or brand. This is an effective and targeted form of marketing with none of the expense of broadcast advertising that FMCG brands must engage in. On average the typical Indian FMCG brand spends around 13% of its total revenues on advertising. This saving gives further headroom to retailers to reduce the price of their private label flour relative to existing flour brands.
Retailers can keep the final price low
Even where FMCG brands can achieve lower costs through efficiency gains or direct sourcing - as ITC has done - they are still subject to the pricing power of large retailers. Retailers can demand higher margins to stock FMCG brands, which in turn gives them the room to pass on a lower price to the consumer. As a result, the price of FMCG branded flour is often cheaper in organised retailers than in local kiranas.
Retailers also have the power to ensure their private label offerings are cheaper than the FMCG companies’ alternatives. For example, in the Big Bazaar stores we visited, their private label ‘Food Bazaar’ flour is under 100 Rupees for a 5kg pack. This is priced lower than all the other FMCG branded alternatives they stock which started at 125 Rupees.
What is more, as flour is a habitual purchase, both private label and FMCG branded flours are prime targets for loss-leading pricing by retailers. In such product categories, retailers are inclined to set the price below cost in order to drive traffic into the stores. This is because consumers are most conscious of the price of regular low-involvement purchases. Therefore the price of these staples is a major factor in determining customer loyalty in the retail sector. As competition heats up between organised retailers, the price of basic staples will be a key battleground, putting further downward pressure on prices.
While the retailers’ objectives may be to drive footfall and grow private label sales, the outcome for consumers will be lower priced branded flour, which will, in turn, drive volume growth in the category.
Modern retailers will grow the category by raising awareness
Not only can organised retailers lower the barrier of cost, but they are also best placed to overcome consumers’ concerns around quality. This is due to their unparalleled access to a large number of customers and their control over the shopping environment.
Having a large number of stores generating high footfall, organised retailers can put a product in front of a huge number of people. They can also display messages to a captive audience of shoppers who are already inclined towards making a grocery purchase. All of these advantages can be deployed in innovative ways to overcome customer concerns about branded flour. For example, retailers could use the ‘live kitchen’ concept for in-store demonstrations of the use of branded flour in everyday dishes like rotis. This would highlight the convenience aspect as well as addressing concerns about the ‘rollability’ of branded flour. Furthermore, by offering the finished item to customers for sampling, it can also address concerns over taste. Getting promotions closer to the point of purchase in this way has been shown to be the most effective means of influencing customer behaviour.
With their vast number of stock keeping units, organised retailers are also well placed to promote the branded flour category through cross-selling. Retailers could sell flour in discounted combination packs with relevant utensils like rolling pins and boards (chakla and belan) or with complementary ingredients like ghee. Thus increasing awareness among customers who are already thinking about flour related purchases.
In addition, the vast troves of customer data collected by modern retailers offer the latest insights into consumer trends. This data can be effectively used to track customer behaviour in relation to flour purchases, allowing retailers to adjust prices and offers accordingly. It could also identify customers that have tried branded products in other commodities like rice or salt but are yet to purchase branded flour. Retailers could use their Customer Relationship Management (CRM) systems to send them targeted messages about branded flour to raise awareness of its benefits, price, and availability.
With their unique ability to lower costs and increase awareness, modern retailers look set to play a defining role in the growth of branded flour in India. But they will need to be careful not to overplay their hand. Alongside cost, choice is a key factor in a consumer’s preference of retailer. Therefore retaining a good range of FMCG branded flours will not only offer customers a useful point of comparison for private label products, but it will also help maintain the variety that modern shoppers crave.