Food processors often ask me if they should enter the private label arena. As is the case with most questions about the food business, my answer is “it depends”.
If you are considering private label, here are some insights to help you in the decision-making process. These points are not necessarily specific to private label; many also apply to selling your own brand.
Let’s begin with a definition. “Private label” products are manufactured by one company for sale under the brand name of another company, often a retailer or wholesaler. Private label opportunities are not limited to supplying retailers; many brand owners use third party manufacturers to produce their goods.
There are several synonyms for “private label”; private brands, store brands, retailer brands, corporate brands, own brands, control brands and control label (a term used by Loblaw). Manufacturers of private label are called contract packers or manufactures, co-packers, co-manufacturers, suppliers or vendors.
Being a co-packer has some major advantages, assuming the private label products are successful.
- The revenue stream generated through private label can be used to offset some of the costs of growing your own brand. But, being a private label supplier does not help you promote your own brand because retailers do not allow you to advertise that you make their product.
- From an operational standpoint, if your manufacturing facility is not running at full capacity it is a drain on your finances. Increased production volume can use up excess plant capacity and cover your overhead costs. However, if not managed properly, one customer’s volume can eat up your entire capacity, putting the business at risk if the listing is lost.
- Keeping the cost of goods in check is an ongoing challenge for manufacturers. Incremental volume from private label can provide leverage to negotiate lower ingredient and packaging costs.
- If supplying major grocery retailers like Loblaw, Sobey’s and Walmart is one of your objectives, private label can get you on the shelf without having to pay listing fees. Since their portfolios are already well developed, they need products to fill in the gaps, unique items that are on trend or lower cost alternatives.
Depending on the retailer and category, it could also open up listing opportunities for your own brand. However, with innumerable brands fighting for limited shelf space, your products must deliver incremental sales to the category and not cannibalize private label sales.
- With respect to product formulations, retailers may accept a manufacturer’s formula or request the development of a proprietary formula to provide a point of difference versus their competitors. Having access to a retailer’s product development and quality assurance expertise is a learning opportunity that can be applied to improving other parts of your business.
- Major grocery retailers require their suppliers to be certified under a Global Food Safety Initiative (GFSI) scheme like BRC, SQF or FSSC 22000 to name a few. This investment can significantly reduce business risks such as recalls and protect your brand as well.
Here are some general guidelines to help you mitigate risks. Every retailer has different strategies, policies and processes, and requirements also differ by category.
- Major retailers have detailed supplier agreements, policies and SOP’s. As with any contract, always read the fine print to understand what you are getting into. Engage a lawyer experienced in the packaged foods industry.
- Ask questions to understand exactly what the retailer expects from your company. If a distributor or broker is representing you, ensure the lines of communication are open and participate in retailer meetings so you hear things first-hand.
- Before submitting costing, know the costs your business will incur. Retailers will likely not share all the costs of doing business with them. They are increasingly offsetting private label development costs by passing them on to suppliers. This can include packaging design and photography; project management; forecasting and inventory management; category management; focus groups; and packaging stewardship. Ask questions to reveal hidden incremental costs, liabilities and potential penalties. Even if the retailer asks for dead net costing, build in an allowance for marketing programs.
- The longevity of listings is not guaranteed. If a product does not meet the retailers’ sales target, it will be discontinued. Retailers may specify that you maintain a minimum packaging and finished goods inventory (e.g. 6 months). Unless you supply fast moving products, don’t be tempted to produce excess inventory or order large quantities of packaging to get a lower cost. You will be left holding the bag (literally) if the product is discontinued.
- Get it in writing. Even if a contractual agreement has been executed, don’t produce product until you have a purchase order.
In the end, pursuing private label is a strategic business decision based on your company’s goals, objectives and capabilities. Doing your homework and putting a plan, processes and safeguards in place can mitigate risks. Most importantly, don’t put all your eggs in one basket.
© Birgit Blain & Associates Inc.