Could private labelling work inside an app?

Private labelling or developing a store brand is not a novel concept by any means. Walmart has been doing it since 1983, when they launched their first ever privately labelled dog food brand Ol’ Roy. However, as great a branding strategy as it may be for retailers, the trend did not take the global market by storm until the COVID-19 pandemic hit the world. All of a sudden packaged consumer goods vanished from the shelves as people bought everything in bulk to store away in case things got worse. 

Thanks to these hoarders, the ones left behind were forced to buy the store’s private labelled goods instead and it wasn’t long before they realised these products were not only much cheaper than branded goods, but also quite decent in quality. At least in the States. And that’s when retailers, having recently unlocked the potential of owning private labelled goods, wasted no time in jumping on this bandwagon.

According to McKinsey and Co., nearly 40% of US consumers have tried new products or brands since the onset of the COVID-19 outbreak and more than 45% said price was the primary reason. However, the second most cited reason was the lack of availability of their preferred national brands. So, from a retailer’s point of view, there was massive potential to be exploited. 

Private labels by grocery retailers are so common that Walmart, Target, Costco and others have their own private labelled brands. Even some local retailers like Imtiaz, Al Fatah and Jalal Sons saw the opportunity and launched goods under their brand name. 

Despite some local retailers tapping into the potential of having a brand identity through their private labels, the trend of private labelling is not as big among Pakistani retailers. Only the big organised chains have ventured into private labelling. A big chunk of Pakistan’s grocery retailers are small convenience stores that do not have enough financial muscle to launch their brands. 

 Krave Mart, which began its journey in 2021 competing with Pandamart and Airlift, thinks it has the financial muscle and channels to bring their private-label products to the market. The startup, one of the two remaining grocery delivery startups, has surprisingly been able to avoid closure. The startup has raised $12 million in two $6 million rounds. 

Now, it plans to venture into private labels, which not only gives it stability but also reduces operational challenges. A similar bet had earlier been made by Cheetay back in 2021, with the launch of their private-label brand called Sahar, under which the company sold dry fruits, spices, pulses, beans, honey and dairy. Cheetay didn’t see the light at the end of the tunnel and eventually decided earlier this year to wrap up all operations.

But Krave Mart on the other hand is focused on the bigger picture. Why not take these products and sell them on other digital platforms also? Why not also take these products to neighbourhood stores and sell them offline and compete directly with the likes of Unilever, Reckitt, Shan Foods? 

So what is Krave Mart up to? Let’s start with what they are currently offering.

Krave Mart’s portfolio of goods

In conversation with Krave Mart’s CCO Ahsan Kidwai, Profit sought to map out Krave Mart’s journey to launching their products under a private label.

Kidwai told Profit, “It’s been a little over two years since we launched Krave Mart. It was only six to eight months into our launch, when we introduced our private label. We initiated a few categories, eventually scaling to multiple categories and today we have a total of approximately 150 SKUs as a part of our private label portfolio.”

They first launched Kdaily, a Krave Mart brand under which they sold spices, rice and pulses. Then they launched Baydat Kabira (Big Egg), which as the name implies are eggs and Breadly, which is the brand name under which they sell bread. They also introduced frozen foods, with Breadly frozen parathas as the main product. Krave Mart’s Berrynoms and Choconoms are a snack the company launched. These breadsticks come with a chocolate or berry-flavoured dip on the side.

Apart from food, Krave Mart’s product portfolio includes Spencer & Cole hand wash, Turbo Scrub toilet cleaner, and Fine Print paper. 

Kidwai told Profit, “Another product we recently launched is farm fresh milk. This stems from the fact that Pakistan is a fresh milk consuming country, so 90% of the milk that’s consumed in Pakistan is fresh milk and the remaining 10% is branded milk, which comes from all your branded UHT and pasteurised milk providers. So, since it’s a massive market it has massive potential too.”

Now you may be wondering whether Krave Mart manufactures these products or simply white labels imported products under its brand name. 

Kidwai told us that it’s a mix between the two. “We are having to import a few of our Private Label products because naturally, Pakistan is not so renowned towards growing them, so some of the spices and lentils are imported. However, rice is grown, dehusked and polished locally. We are directly in touch with the growers and the mill owners, who supply us.”

He continued to explain that they have a manufacturing agreement with a factory in Pakistan for Krave Mart’s bread and parathas. 

“Returning to rice and pulses, although some are imported, others are locally sourced. What we do next is set up a small factory within one of our dark stores, where we package them into smaller pack sizes after acquiring them in bulk. The process of repackaging the products is quite straightforward since we obtain them pre-packaged in bulk.”

Coming onto eggs; Kidwai told us that Krave Mart has a contract with a poultry farm that supplies them with eggs that are then white labelled. Similarly, Krave Mart has a contract with a cattle farm, where the farmers milk their cattle daily. “Fresh milk is then supplied to us the very next day, which has a very short expiry of three days because naturally it hasn’t gone through the UHT nor pasteurisation process. So, it goes bad in three days, which is why we only carry a day’s stock cover.”  Kidwai elaborated. 

What’s interesting is that Krave Mart sells products such as toilet bowl cleaner under its private label but also sells the same product by renowned brands like Harpic and Domex. We asked Kidwai how that works.

“Our private label products receive premium visibility, though other options are available too; however, since most brands are partnering with us on the ancillary front, we offer visibility to our partners as well. Ultimately, it’s the customer’s choice. While competing with established brands like Harpic and Domex does present their own challenges,  our product, such as Turbo Scrub, is priced 35% lower, offering the same quality,” Kidwai explained. 

Other than competitive pricing, Kidwai highlighted that the quality of their products attracts customers, “Our commitment to providing top-quality products results in decent retention and repeat purchases. Our strategy is to hook customers with competitive prices and maintain their loyalty through consistent quality.”

Starting as a logistics and delivery business, why did Krave Mart get into private labelling? 

What is the appeal of private labelling for Krave Mart? Private labelling comes with better margins, which are crucial for sustainability these days for a startup that is delivering groceries. The nature of retail business is such that margins are thin in FMCG retail, going up to 20% on average at gross level and 3-5% on average as net margins. These margins are good if the customer walks up to a store and buys groceries. 

But if these groceries are to be delivered to a customer through a network of warehouses, the margins are not enough to meet the costs associated with maintaining such network and delivery operations. This results in a model that requires a lot of cash to be spent, making it unsustainable. But if a startup can launch its private label brands, the startup can essentially bag the margins of the middlemen in the FMCG supply chain, thereby improving its margins, and becoming more sustainable. 

At Krave, the private labelled goods help the business in two ways: firstly, they can attract more volumes because they can sell the private label goods at a cheaper rate compared to international brands. A low-priced good is likely to attract more customers in the current high-inflation environment that has squeezed the size of expenses on groceries. Being in the groceries delivery business, Krave Mart has the data of purchases by customers that it can analyse and map trends. In their words, big brands have been taking a hit because of rising inflation and moving towards cheaper alternatives. 

If the startup can provide cheaper alternatives, chances are customers will move towards those as well. Secondly, the cost benefits associated with this arrangement result in better margins for the company, leading towards profitability. 

“There is a significant cost impact. Our Turbo Scrub for instance is 35% cheaper than Harpic and Domex, yet we can make a 40% margin on that. We source it much cheaper and give competitive pricing to customers.” 

Perhaps this is why Kidwai claims that the company has had positive unit economics for the last 12 months, and is on track to achieve EBITDA-level profitability, and that too with stable GMV numbers. The sales of privately labelled goods at Krave Mart have picked up, forming 18-20% of the overall GMV, claims Ahsan. 

Besides, there have been other operational challenges that have led to Krave Mart venturing into private labels. These are the challenges associated with ensuring consistent supply and reducing price uncertainty. 

For instance, in certain commodities supply shortages can be frequent. A sudden shortage means reduced supply on the platform which affects conversion. On the other hand, shortages also lead to price fluctuations affecting demand. But if these goods are privately labelled, both supply shortages and price uncertainty can be reduced.  

“We are a platform that can not afford shortages because shortages directly affect our conversion rates. To cater for that, we went into the supply chain and ordered directly with wholesalers and importers and booked orders so that we could better prices and we ordered a sizable chunk with them for say the next three months.” 

“This also serves as a hedge against the dollar because certain commodities are imported and therefore dollar fluctuation impacts prices. Secondly, it also ensures that the demand is met,” Ahsan says.  

If executed properly and Krave Mart can create brand loyalty, customers would not only come for repeat purchases of these goods but also for purchases of products from other manufacturers that are listed on the platform. 

Even though Kidwai, several times during the conversation, stated that profitability has been the main focus of Krave Mart from the beginning, he also acknowledged that Krave Mart’s private label serves a purpose greater than just that – it allows Krave Mart to create a brand identity, which would later translate into brand recognition and eventually brand loyalty. 

But we imagine pricing must be a slippery slope for Krave Mart, competing with well-known household brands also sold at Krave Mart. Startups are known to offer subsidised products and services to inflate GMV numbers and achieve a higher valuation. But if Krave Mart does that, it is essentially subsidising branded products, making them cheaper. This means that their own private labelled products are competing with other branded products discounted by Krave Mart. 

Kidwai shuns the idea of discounts anymore saying that the current environment of building sustainable business models doesn’t allow giving discounts anymore, “We ensure that any discounts we offer to our customers are supported by the brands in the form of Consumer Promotions  rather than us having to bear them.”

He explained that these discounts typically stem from consumer promotions provided by the brands, which are then passed on to consumers by Krave Mart. This approach allows them to prioritise sustainability, while still providing value to customers.

“Private labels in itself are not discounted on the platform and we’re selling all our private SKUs at full price. That is because since we have gone back in the value chain for each of the products, they are anyways much more cost-effective than the competition,” Kidwai answered. 

“Today, 40%+ of our orders have at least one private label SKU and this contribution is fast growing,” he added.

Bleeding into the mainstream 

During our conversation with Kidwai, we discovered something unexpected about Krave Mart’s plans for their private label brands. 

They want to take it offline! 

That is to say, Krave Mart’s privately labelled products would be available at brick-and-mortar stores in your neighbourhood, just like other FMCG manufacturers. 

“Our vision for private labels goes beyond just selling them on the platform  In the medium to long-term, we aim to distribute our private label products beyond our platform, a concept unprecedented in Pakistan,” Kidwai expounded to our surprise. 

When inquired about their plans to sell Krave Mart’s products on other competitor e-commerce platforms, such as Pandamart, Kidwai said, “We are already available on quite a few platforms and in some cases, discussions are underway for listing. We are quite open to expanding our footprint further.” However, he did not specify which platforms in particular. 

While penetrating the e-tailer market might pose challenges due to scepticism, Krave Mart’s strategy entails expanding offline presence to various retail outlets nationwide. “We’re actively building a brand identity, evident through trademark and copyright registrations for each of our Private Label brands, and are in discussions with global distributors for potential export opportunities.”

According to Kidwai, the company’s long-term vision involves international expansion, leveraging healthy profit margins ranging from 35% to 45%. Even with distribution costs factored in, they anticipate a sustainable net margin of 15% to 18%, making it a viable venture. 

“This approach drives our commitment to diversifying our product range and introducing new categories, solidifying our dedication to the private label sector,” he exclaimed proudly. 

When asked whether Krave Mart would, as a retailer and not a brand, consider having an offline presence through brick-and-mortar stores, Kidwai replied with a nay. 

“Our presence will predominantly remain online due to our commitment to an asset-light model. Venturing into brick-and-mortar stores operated by us would require substantial capital expenditure, which contradicts our asset-light philosophy. Our dark stores adhere to the traditional concept, situated in warehouse-like environments away from main roads, devoid of flashy storefronts. Instead, we plan to distribute our private label products through distributors to various retail outlets. 

“Nielsen data indicates a vast network of retail outlets, with only a fraction being self-service establishments. Leveraging existing retail infrastructure minimises fixed costs associated with running and managing stores, such as electricity and rent. By placing our products in established outlets, we aim to facilitate trials and capitalise on quality to drive repeat purchases. This strategy not only aligns with our asset-light approach but also streamlines operations and reduces overhead expenses.”

In a previous interview with Profit, a spokesperson from Krave Mart mentioned plans to diversify into categories such as fashion, electronics, and beauty. Now that Krave Mart has multiple private labels of its own, we were curious whether their plans to diversify into any of the above categories had materialised or been completely abandoned. 

“I wouldn’t say we’ve abandoned the idea; it remains part of our plan, evolving on a case-by-case basis. For instance, we’ve recently intensified our focus on the beauty segment, expanding our offerings to include cosmetics and related products from various brands, though not yet under our private label,” Kidwai answered. 

He also informed us that the fashion category had been temporarily shelved because they wanted first to assess the optimal timing and product mix, considering options like unstitched and stitched garments. He shared that they are actively exploring new categories, such as pharmacy, with plans underway to finalise agreements for imminent launch.

“As for electronics, we’ve opted to concentrate on accessories like chargers and hands-free cables, steering clear of higher-value items such as phones and earbuds due to potential complications and thin profit margins,” Kidwai elaborated. 

He explained that even with margins averaging around 20%-25% for electronics, the added risks and low margins associated with mobile phones, typically ranging from four to seven per cent, make it an unattractive prospect for Krave Mart, at least shortly.

Kidwai concluded by stressing that,“Private labelling isn’t just about introducing products with good margins to boost profits. It’s about our vision to expand these products beyond our platform, both locally and internationally. Our goal is to create multiple brands within each category that become well-known names in households everywhere.”

While Krave Mart has secured substantial funding rounds totalling over $12 million, Kidwai emphasises that their focus remains on sustainable growth rather than blitz scaling. “I think right now is not the right time for any particular organisation or a tech company to blitz scale. Yes, probably a couple of years ago it was the right time to do so but the current climate is not one during which one should hyperscale,” Kidwai shared.

He continued, “We’ve prioritised profitability from day one, a stance that has garnered attention from investors, as well. In today’s uncertain economic climate, characterised by fluctuating currency values and rising fuel and electricity costs, a cautious approach to growth is prudent. While our monthly Gross Merchandise Value (GMV) continues to increase, we’re mindful of maintaining fiscal responsibility, avoiding rapid expansion that could strain financial resources.” This logic also explains why Krave Mart is hesitant to have an offline presence as a retailer and hasn’t tried to hyper-scale by expanding its operations all over the country. 

What else is Krave Mart up to? 

Well, Krave Mart is currently striving to strike a balance between sustainable growth and operational efficiency. 

How? 

By leveraging AI.

In the fast-paced world of grocery delivery startups that Krave Mart operates in, challenges like pilferages at distribution centres can pose significant operational hurdles. 

When asked what Krave Mart does to tackle operational challenges such as inventory management and the smooth functioning of daily business, Kidwai explained, “At Krave Mart, we’ve tackled this issue innovatively, leveraging AI technology integrated into our surveillance systems.”

He said that monitoring every employee, particularly pickers and packers, for suspicious behaviour presents logistical challenges and traditional security measures like metal barriers or manual checks by guards are insufficient. 

“We have AI-powered surveillance cameras that are equipped with advanced technology that can detect unusual movements or behaviours beyond normal parameters. For instance, if a picker fails to scan a licence plate before placing items in their cart or attempts to conceal merchandise and pocket it, the AI software immediately flags the activity. This triggers instant alerts to both the dark store manager and our head of retail, enabling swift intervention.”

This proactive approach to security enables them to identify and address potential incidents in real-time, rather than discovering them days later during routine inventory checks. By leveraging AI technology, Krave Mart can now monitor all their facilities round-the-clock without the need for extensive manual oversight. This not only enhances security but also streamlines operations, making everyone’s jobs easier and faster. 

Moreover, Profit was curious to learn whether Krave Mark’s USP of 10-minute delivery promise is still intact. 

Kidwai informed us that, “Initially, our plan was to offer a 10-minute delivery promise when we launched our operations over two years ago. We delivered on this promise, which was surprising for many. As much as 80% of our orders were delivered between 10-12 minutes of order placement,” Kidwai shared proudly. 

“However, after engaging in frequent customer focus group sessions, we discovered that customers were comfortable with a 30 to 45-minute delivery window. This shift occurred within the first few months of our journey. Additionally, we aimed to generate marketing buzz by introducing the 10-minute promise, successfully positioning ourselves among the top e-tailers in Pakistan. This strategic adjustment contributed to our growth and brand recognition within the market,” he concluded.