IMB 415

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K. J. JEESON, AVADHOOT JATHAR AND U DINESH KUMAR

CONSUMER CHOICE BETWEEN HOUSE BRANDS AND NATIONAL

BRANDS IN DETERGENT PURCHASES AT RELIANCE RETAIL
Parul Khanna was General Manager and Head of house brands (private labels) for food and grocery at Reliance

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Retail, RQHRI,QGLDVODUJHVWUHWDLOFKDLQV$V a General Manager, Parul was responsible for sourcing, forecasting,
and buying/selling activities, and for setting discounts and markdowns IRUWKH 5HOLDQFH 5HWDLOV food and grocery
house brands. Reliance Retail sold a house brand called 6XG] in the laundry detergents category. Parul said:

Sudz was envisioned as a cost-effective detergent, giving comparable wash results as some of the
costly, established brands in the market. Along with other store brands at Reliance Retail, it was
looked upon as a value proposition for shopping at Reliance Retail. Customers get incredible value
at relatively lower price.

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The questions nagging Parul in the summer of 2012 were: Could customers who had been habitually purchasing a
certain brand for many years really consider a house brand and make that switch? Is there a need to interfere in the
market and generate a FDWDO\VWHIIHFW by creating a strong incentive for consumers to buy the house brand? What
she really wanted was an answer to the age-old marketing question in relation to price promotions, To promote or
QRWWRSURPRWH"

The idea was simple, reflected Parul:

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You create a house brand, offering superior or comparable product quality to the competition, and
sell it at much lower price than your competition. You can keep the cost down by optimizing on
supply chain, and by doing away with advertising and intermediaries. For all you know, if you
create great value by creating many such house-brand offerings in many categories, it could mean
a great reason for customers WR NHHS FRPLQJ EDFN WR 5HOLDQFH 5HWDLO VLQFH WKH\ FDQW JHW these
house brands any place else.
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Parul knew that to create the kind of value that she and her colleagues envisioned for Sudz, she would have to make
people try out Sudz.

Our job was simple: we had to convince our customers that Sudz was the SHUFHLYHGDOWHUQDWLYH
to their regular brand. And to that end, we had to make customers try out Sudz. One of the
methods to achieve that was through promotions.
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Promotions could be of various types: introductory low price for the stock keeping units (SKUs), special display and
feature advertisements, smaller SKUs to induce a trial, bundling an SKU with an existing brand of parent marketer
and so on. Price promotions could be of various types: temporary price reduction (TPR), promotional packaging (for
example, extra 25% detergent included in the same pack), multi-item promotion (buy three, get one free), etc. Parul
planned on using price promotions (TPR model). This strategy made sense because the value proposition for Sudz
arose from the fact that at a relatively lower price, Sudz provided comparable quality. In fact, during blind testing,
customers ranked Sudz higher than national brands in many product features (Exhibit 6).

However, Parul was aware that price promotions and understanding their exact impact were not that simple. Much
research had been conducted on the effects of promotions. Broadly speaking, price cut could have the following
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effects. (1) Brand switching: Sales of the promoted brand could increase when customers switch over to the

K. J. Jeeson, Avadhoot Jathar and U. Dinesh Kumar, Professor of Quantitative Methods and Information Systems, Indian Institute of
Management Bangalore prepared this case for class discussion. This case is not intended to serve as an endorsement, source of primary data, or to
show effective or inefficient handling of decision or business processes.

Copyright 2013 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or transmitted in any form or
by any meanselectronic, mechanical, photocopying, recording, or otherwise (including the Internet)without the permission of Indian Institute
of Management Bangalore.

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 2 of 10

promoted brand from their previous brand seeing value at a new lower price level. (2) Adverse impact on perceived

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quality: Sales of the promoted brand could decrease if the customer perceived the price reduction as a reflection of

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its poor quality and associated risk with the purchase. (3) Purchase acceleration: Customers would be induced to
move their purchases ahead in time, stocking up on supplies until further promotions, increasing price sensitivity
and causing financial losses as customers would refrain from purchasing the product(s) when regular prices are
restored. (4) New customers: Customers who previously were not patrons of this store or users of this product
variant might start purchasing the product. For example, customers who probably purchased laundry bar soaps might
consider buying a TPR-promoted detergent powder.

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Parul had enough reason to tread carefully; it was clear that she could not afford any of the adverse impacts of price
promotions such as: (1) Quality of house brand is perceived as poor/inferior and (2) Price discount may not achieve
the desired volume of sales resulting in potential decrease in revenue. She decided to test the waters. Promotions
were run at short intervals on Sudz to induce people to tryout Sudz, but not long enough that they got used to the
price points. Promotions were not announced or advertised beforehand, so as not to let people plan their purchases in
advance. The discount offered was as high as 25%. Parul patiently collected data to understand the effect of such
promotions and decide on the way forward.

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RELIANCE RETAIL
Reliance Retail Limited was a subsidiary company of Reliance Industries. Founded in 2006 and based in Mumbai, it
has been one of the largest retailers in India. Its various retail formats offered everything from food and groceries to
apparel and footwear; from lifestyle and home improvement products to HOHFWURQLF JRRGV 7KH FRPSDQ\V RXWOHWV
also sold vegetables and fruits. It was safe to say that Reliance Retail was trying to become the one-stop shop for
any and every purchase in the Indian market.
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Reliance Retail was a multi-format retailer that operated the following stores in 2013.

x 5HOLDQFH)UHVK a neighborhood store concept

x "Reliance 6XSHU a super mart concept
x 5HOLDQFH0DUW a hyper market concept
x 5HOLDQFH0DUNHW a concept for local traders and small businesses
x 'HOLJKW a non-vegetarian offering
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x 5HOLDQFH'LJLWDO a consumer durables and information technology concept

x "L6WRUHE\5HOLDQFH'LJLWDO an Apple specialty store concept
x 5HOLDQFH7UHQGV an apparel specialty concept
x 5HOLDQFH)RRWSULQW a footwear concept
x 5HOLDQFH-HZHOV a jewelry concept
x "Reliance TimeOut a books, music & entertainment concept
x "RHOLDQFH/LYLQJ a Furniture, Furnishing, Homeware and Home kitchen concept
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x 5HOLDQFH$XWR=RQH an automotive specialty concept

Keeping in line with its commitment of providing customers with best quality products, Reliance Retail forged
strategic partnerships with world-class companies such as Marks and Spencer (apparel and accessories), Pearle
Europe (optical products) and Hamleys (toys). It also partnered with internationally revered brands ranging from
affordable to niche super luxury brands such as Diesel, Paul & Shark, Ermenegildo Zegna, Brooks Brothers,
Kenneth Cole, Steve Madden, etc.

In 2012, it was estimated that Reliance Retail served over 2.5 million customers every week. Its loyalty program,
Reliance One, enjoyed the patronage of more than 6.75 million customers. Its wide applicability in various Reliance
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Retail stores and Reliance Retail partners made Reliance One a very viable loyalty program for many shoppers. In
turn, Reliance Retail was able to use this customer loyalty information to analyze new customer footfall and to
identify the most frequent and most profitable customers and retain them. This data could also be used to understand
brand switching and the effects of various promotional activities. Parul would rely on this incredibly valuable data
to resolve her predicament. A Reliance One card issued at one outlet could be used at any other outlet during
purchases. The customer benefited by accumulating reward points; Reliance Retail benefited by accumulating data
pertaining to all the purchases of a customer at various Reliance outlets.

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 3 of 10

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LAUNDRY DETERGENT MARKET IN INDIA

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In 2010, the Indian detergent market was estimated to be around INR 12000 crores (USD 2.5 billion), with as many
as 1,000 brands available in the market.1 However, the per capita consumption of laundry detergent in India was
only around 2.7 kg per year, whereas in countries such as the Philippines and Malaysia, the per capita consumption
was 3.7 kg; in the United States, it was around 10 kg.2 This was partly because only about 18% RI ,QGLDV WRWDO
population (around 1.2 billion) owned a washing machine.3 The rest of the population washed clothes by hand,
consuming far less detergent or soap than what was required for machine washing. Laundry detergent still had low

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penetration in rural India, but this was changing fast. With the increase in income levels, a washing machine was no
longer considered a luxury. The washing machine segment grew by about 24% in FY 2011 and 38% the previous
year.4 It was predicted that this growth would create a huge demand for detergents as people would reduce hand
washing when they had machines and they would switch over to detergent from soap. At the national level,
detergent consumption was expected to grow at 79% per year in terms of volume.5

Hindustan Unilever Limited (HUL) was the major laundry detergent marketer in India. It accounted for around 35%
market share nationally, with products branded as Rin, Wheel, and Surf. Proctor and Gamble (P&G) was a distant
second, with about 10% market share.6 The rest of the market was occupied by other players, many of which were

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local brands. They competed with the national and major brands largely by word-of-mouth marketing and lower
prices. With the major brands, it was a battleground where price wars were commonone brand opting for
promotion usually meant that others followed so as not to lose their bit of the market share turf. Most of the HUL
and P&G brands had national presence, but they had higher penetration in urban settings. Some even paid for
preferential placement or in-store advertisements in addition to the millions they spent on advertising in popular
media.

Parul Khanna was responsible for private labels of food and grocery of Reliance Retail and based at Mumbai, known
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DV ,QGLDV financial capital, a cosmopolitan city with large malls and multiplexes. Its citizens preferred shopping
with retailers such as Reliance Retail in their Reliance Mart & Reliance Super stores primarily, since almost
everything they required was sold under the same roof. Reliance Retail could not afford to not sell the popular
national brands nor could it afford to keep brands that were not preferred by the shoppers on display and waste floor
space. At the time, Reliance sold Ariel and Tide from P&G; Rin, Surf, and Wheel from HUL; Henko from Henkel,
and Sudz, its store brand at the retail stores.
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BRAND SWITCHING
A brand switch might occur because of a conscious decision by a customer to replace the previous brand with a
different one, or owing to the factor known simply as WKHvariety-seekingWHQGHQF\. Generally, this would involve
customers who were fairly satisfied with their previous products, but had not developed a strong relationship with
the product or service, which would, therefore, not prevent them from trying something new. They might be
switching brands simply for a change, or to find something better, or perhaps even to convince themselves that their
previous brands were in fact still the better ones. Whatever be their reason to seek variety, if they liked the change,
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there is a higher probability that they would inform a few more people about the positives of their change and
influence others to change or switch brands as well. Marketers tend to introduce variants of the product in the same
category in order to capture variety-seeking needs of customers. Brand-switching, therefore, is an integral part of
marketing science. It helps fair competition and continual innovation among products, and consumers are benefitted
in the long run.

1
Singh, N., Detergent prices may rise on duty fears, theeconomictimes.indiatimes.com [online], October 7, 2010,
http://articles.economictimes.indiatimes.com/keyword/detergent%3E (last accessed on November 12, 2012).
2
Maps of India, 2011, Detergent markets, http://business.mapsofindia.com/fmcg/detergent.html (last accessed on October 18, 2012).
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3
Standard Chartered Global Research, 2011, India in a super-cycle, standardchartered.com [online] May 25, 2011,
http://www.standardchartered.com/en/resources/global-en/pdf/press-releases/india-expected-to-emerge-as-a-winner-in-the-third-global-super-
cycle.pdf (last accessed on November 12, 2012).
4
Adi-Media Publication, 2012, With changing demographics, consumers in tier ii and tier iii towns are warming up to the idea of machines
washing clothes, adi-media.com [online] April 2012, http://www.adi-media.com/PDF/TVJ/annual_issue/008-Washing-Machines.pdf (last
accessed on October 18, 2012).
5
Maps of India, 2011.
6
6KDUPD 6 3DUHQWV QHZ SODQ FRXOG HQHUJLVH ORFDO SURFWHU dnaindia.com [online], July 3, 2012,
http://www.dnaindia.com/money/report_parents-new-plan-could-energise-local-procter_1709718 (last accessed on October 18, 2012).

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 4 of 10

In the past, understanding or even gauging brand switching was very difficult. It usually involved surveying

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techniques where subjects were asked to answer several questions and the responses were analyzed by a statistician.

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In other instances, it involved focus groups who were sampled and recruited to reveal their shopping lists, which
could then be analyzed. However, with advancements in computing and data collection, these techniques were fast
becoming obsolete.

All the information that could identify a customer such as his/her phone number, the address given for grocery
delivery, loyalty program cards, coupons filled for a discount, and online shopping could be used to generate a
unique customer identification. When the customer shops again, chances are that some of the information revealed

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could be tagged back to the unique customer id, making it possible for retailers to attach that purchase to the unique
identification. Retailers had the ability to do something they could not even dream of beforethe ability to store and
analyze unimaginably large sets of data in relatively less time. It was relatively easy to obtain an accurate picture of
brand switching as and when it happened and at an individual customer level, if needed.

DATA ANALYSIS
Arun Dhall, the head of analytics at Reliance Retail, suggested that Parul use the Markov chain model to determine

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the brand switching behavior of the customer under promotions and no promotion. Arun believed that the point-of-
sale data could be analyzed using the Markov chain model to understand the purchase behavior of the customers.
Parul was able to use the Reliance One Loyalty Card program data and tag each purchase to a unique customer. This
helped to identify brand switching DV3DUXONQHZZKDWWKHFXVWRPHUVSrevious choices were. Parul considered only
those customers who had been identified accurately and had made five or more purchases between December 2010
and December 2011 in the store in order to create a transition probability matrix between brands.

Parul transformed the transactional panel data into purchases sorted by time of purchase for each customer and
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numbered each purchase in ascending order. She then proceeded to create a one-step transition probability matrix for
each transition, that is, from Purchase 1 to Purchase 2, from Purchase 2 to Purchase 3, and so on when Sudz was
under no promotion. She then calculated the ratio of customers who moved to different brands from a specific
brand across the periods to form the final transition matrix. The procedure used for the construction of transition
probability matrix is described in Appendix 1. Parul repeated the procedure when Sudz was under promotion,
creating the transition matrix for the store brand when it was under promotion.
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Exhibit 1 presents the brand transitions during the no-promotion period; the row headers denote the previous
period purchase and the column headers denote the next period purchase. Exhibit 2 shows the brand transitions
during the promotional period, which lasted for approximately 45 days. Exhibits 3 and 4 show the initial
distribution of number of purchases for different brands before the no-promotion experiment and the promotion
experiment, respectively. Parul created them by simply computing the percentage number of customers buying each
brand at the beginning of the promotion and non-promotion period. This was used simply as a reference starting
point, to understand where the system was during the start and where it would be after n periods of time. The
average quantity of Sudz purchased per customer during the no-promotion period was 3,000 grams, whereas the
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corresponding quantity during the promotion period was 3,400 grams. The average price per gram of different
brands in 20102011 is shown in Exhibit 5. Results of the blind test conducted on the brands are presented in
Exhibit 6. The house brand sold by Reliance had various product variants (bar, powder, and washing machine load
powder) catering to different laundry needs; these are shown in Exhibit 7.

Parul wanted to know whether the promotions were improving the market share of Sudz, and she wanted to
understand the impact of promotions in the long run. She was also wondering whether the promotion helped
Reliance Retail to retain more customers for Sudz. When she approached Arun with her finding, she had some rather
good news for him Sudz is able to retain approximately 40% of its customers without any promotions at all
between successive purchase occasions. This was evident from the transition probability matrix shown in
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Exhibit 2.

Arun was confident about retention/stickiness of customers by Sudz; he recalled the results of the blind test that was
conducted earlier that year by an agency. The blind test was conducted on a sample size of 50 customers, where the
customers were given pre-mixed solutions of all 7 brands, without revealing their brand names. Subjects were then
asked to rate each brand on the following attributes: fragrance, lather, and hardness on fabric/hands (higher the

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 5 of 10

ranking for hardness on fabric/hands, lower is the negative effects on fabric/hands). The result of the blind test is

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given in Exhibit 6. Arun said:

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Once customers tried Sudz, they were more likely to buy Sudz again. They are beginning to see
value at the price point! Look at the transition from Ariel to Sudz during no-promotion period and
promotion period; there is a drastic jump! Also from Surf to Sudz! Does it mean that people are
transitioning from a premier brands such as Ariel and Surf to a mid-segment brand like Sudz?

Parul had a different opinion. She said:

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Customers have varying utility with different products. They might use a premium brand for their
expensive clothes, but use a mid-segment brand for their regular clothes. Or perhaps, they may use
a particular brand for their machines and a particular brand for hand washing. If you look closely
at the transition from Ariel, we can see that transition to Rin and Tide decreases by approximately
4.5% each, when Sudz went on promotion versus when it was not on promotion. This could mean
that those Ariel customers, who were moving/supplementing Rin or Tide when Sudz was NOT on
promotion, are moving to Sudz when Sudz was on promotions.

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Arun said:

Interesting! What if when Sudz was on promotion, another competing brand also went on
promotions?

Parul answered:
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It is quite normal that competing brands go on promotions at the same time. For example, under
promotion, the switch from Sudz to Rin is 17.66% compared to 16.34% under no promotion. This
is counter-intuitive; one possible explanation is that probably Rin was also under promotion
during this period. Also, we do not advertise in popular media at the national level, probably we
should come up with an advertising strategy for Sudz.

Parul continued:
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Since we want to maintain this product as a house EUDQG ZH FDQt think about national level
advertising. However, we could introduce local advertising; featured advertising in newspapers
where we advertise all discounts in the store from time to time. After all, there has been some
research into the effects on sales from a product shelf-placement. We could look at eye level or
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waist-level shelf-placement.
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7
http://articles.economictimes.indiatimes.com/2010-01-20/news/27572872_1_shelf-space-product-shelves

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 6 of 10

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STUDY QUESTIONS

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1. Can the brand-switching problem described in the case be analyzed using Markov chain model? What
assumptions are made in the analysis?
2. What inference can be obtained from Exhibits 1 and 2 regarding switching between Sudz and other
brands?
3. What will be the market share of brands after three periods under promotion? What percentage of Sudz
customers remain as Sudz customers after three periods?

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4. What is the long-run market share of Sudz under promotion and under no-promotion? What are the
important assumptions made in this calculation? There was an error in estimation of initial market share
before promotion period, the correct initial market share is given below. Calculate the long-run market
share of Sudz using the initial market share given below:

Ariel Henko Rin Sudz Surf Tide Wheel

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6.84% 5.42% 20.79% 6.27% 33.90% 18.23% 8.55%

5. If a customer is currently buying Sudz, what is the probability that he/she will be retained three periods
from the current period under promotion and under no-promotion?
6. Which brand has more loyal customers? What is the steady-state retention rate of each of the brands sold at
Reliance Retail?
7. Every period, about 800 shoppers purchase detergent powder from the Reliance Mart where the data was
collected for the construction of transition matrices. The store manager is interested in finding the customer
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lifetime value (CLV) of the revenue for Sudz under promotion (10% discount on price) and under no-
promotion for four periods. Use the price per gram provided in Exhibit 5. Assume a discount factor of
0.9999 per period.
8. If Parul decides to advertise Sudz during promotion periods, what should be the maximum budget that she
can allocate for advertising? Use the CLV calculation from the previous questions to answer and assume
that the profit is 20% of the revenue.
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No
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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 7 of 10

Exhibit 1

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Transition probability matrix during no-promotion period

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No-promotion Period Ariel Henko Rin Sudz Surf Tide Wheel
Ariel 43.51% 0.32% 13.16% 1.47% 22.25% 13.08% 6.21%
Henko 1.71% 42.03% 5.42% 1.99% 10.88% 12.40% 25.57%
Rin 5.64% 0.91% 59.41% 4.91% 15.04% 7.21% 6.88%

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Sudz 1.49% 0.85% 16.34% 40.34% 21.85% 13.14% 5.99%
Surf 6.13% 0.92% 10.45% 3.95% 62.35% 9.75% 6.45%
Tide 7.37% 2.01% 8.57% 1.87% 16.93% 52.47% 10.78%
Wheel 5.53% 6.38% 14.01% 3.23% 24.24% 17.39% 29.22%

Exhibit 2

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Transition probability matrix during promotion of Sudz
Promotional Period Ariel Henko Rin Sudz Surf Tide Wheel
Ariel 42.18% 0.00% 8.89% 10.62% 22.69% 8.12% 7.50%
Henko 0.00% 52.78% 16.67% 0.00% 16.67% 8.33% 5.55%
Rin 3.75% 1.67% 61.89% 6.10% 13.35% 5.42% 7.82%
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Sudz 1.02% 0.70% 17.66% 47.86% 20.58% 6.93% 5.25%
Surf 5.01% 2.16% 6.71% 7.19% 59.13% 9.80% 10.00%
Tide 7.37% 0.52% 7.64% 2.60% 19.77% 47.10% 15.00%
Wheel 7.34% 5.15% 15.49% 3.67% 21.69% 16.84% 29.82%
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Exhibit 3
Initial distribution of customers before no-promotion experiment (volume of purchases are
ignored)

Ariel Henko Rin Sudz Surf Tide Wheel

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8.42% 3.50% 20.85% 5.31% 29.79% 23.32% 8.81%

Exhibit 4
Initial state before promotion experiment8

Ariel Henko Rin Sudz Surf Tide Wheel

6.84% 3.42% 22.79% 6.27% 33.90% 18.23% 8.55%
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8
This is different from Exhibit 3 since the estimation is carried out for a different period.

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 8 of 10

Exhibit 5

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Average price of detergent powders under no promotion (20102011)

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Brand Ariel Henko Rin Sudz Surf Tide Wheel
Price per
0.1666 0.1227 0.0610 0.0550 0.1404 0.0765 0.0371
gram (INR)

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Exhibit 6
Average rankings for various product attributes (20102011)

Brand Mean Mean Mean HARD ON Overall All Ranking (Mean

FRAGRANCE LATHER HANDS/FABRIC Fragrance * Mean Lather *
Mean Hardness)

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HENKO 5.4 5.1 5.8 159.73
TIDE 5.3 4.8 5.5 139.92
ARIEL 4 5.6 5.6 125.44
SUDZ 4.5 4.1 5.5 101.48
WHEEL 4.3 4.1 5 88.15
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SURF 3.1 4.9 5.3 80.51
RIN 3.2 3.4 4.5 48.96

Exhibit 7
Laundry detergent variants of house label Sudz
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Sudz Detergent Powder Sudz Detergent Bar

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 9 of 10

Exhibit 7 (Contd.)

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Sudzmatic Detergent Powder
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Sudz Whitening Bleach Sudz Gentle Care

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 Consumer Choice between House Brands and National Brands in Detergent Purchases at Reliance Retail Page 10 of 10

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Appendix 1

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The Markov transition matrix described in Exhibits 1 and 2 were constructed using maximum likelihood estimation
procedure. Each brand (Ariel, Henko, Rin, Sudz, Surf, Tide, and Wheel) in the case is a state, the maximum
likelihood estimate for the transition probability value from brand j (for example Ariel) to brand k (for example
Henko) is given by:

n jk

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p jk 7
,
n
k 1
jk

Where njk is the number of customers who purchased brand j in period N and purchased brand k in period N+1. The
process was repeated when there was promotion activity for Sudz detergent. Calculations were based on the
purchase of a specific brand and the volume of purchase was not part of the transition probability matrix

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construction.
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