Is private label right for your business?
This week we had a few media calls about private label products. Retailers are saying private label sales are growing as consumers look for options to reduce their grocery bill. With the media interested, we thought you might be too.
There are 4 terms you might hear out there:
- Private label
- Control label
- Store brands
- Own brands
These are all the same thing. A brand owned by the retailer, with products developed by or for the retailer. These products are usually produced by a food producer or processor, although some retailers do get involved in manufacturing. In western Canada Safeway did manufacture a lot of their own products, prior to being purchased by Sobeys. The popularity of these products was under estimated by Sobeys as they transitioned the shelf to Compliments products, produced by other manufacturers.
Example of private label products would be:
- No Name, President’s Choice and President’s Choice Black label at Loblaw
- Best Buy, Compliments and Panache at Sobeys
- Selection and Irrestibles at Metro
- Kirkland Signature at Costco
- Great Value and Sam’s Choice at Walmart
Many retailers also have private label products in perishable departments with different brands. Examples would be Farmer’s Market at Loblaw and Your Fresh Market at Walmart. We also see private label in specific departments or categories. Ol’ Roy pet food in Walmart and Life Brand in health and beauty at Loblaw and Shoppers Drug Mart.
Why retailers have private label
There are four key reasons for private label, one more obvious than the other.
Most private label products deliver better margin for the retailer. The theory is the supplier will strip out sales and marketing costs to deliver a lower dead net price. It is true the expenses will be lower and you should not have to invest in retail coverage to see what is happening with your brands. We would question if the margin advantage is as great as retailers think it is. It is expensive to have a really good private label program. There are costs such as product development, signage, advertising and other expenses to operate a private label brand. There is also the opportunity cost of listing fees and other revenue they might have generated from national brands for this shelf space.
The second reason retailers offer private label products is price image. They can merchandise value offerings like No Name to reinforce price image. There is a lot of yellow in a No Frills store.
The third reason is not discussed as much, but perhaps most powerful. Loyalty is cherished in the food industry and private label products can influence consumers to shop one store over another, more than other attributes. A cheap price on a national brand might bring them in once. If they are hooked on Panache turmeric and black pepper dressing, they have to go to Sobeys to get it.
A fourth reason, retailers don’t like to discuss, is private label gives retailers leverage. If they are frustrated with a national brand (perhaps they offered a low ad price to a competitor), they can promote the private label more often. It also helps retailers in cost of goods negotiations with the large consumer packaged goods companies. If the private label suppliers are looking for a 5% cost increase and the national brands, in the same category want 9%, retailers will question if the 9% increase is legitimate.
A question we get asked often
When we work with brands one question that comes up often is:
Should we produce and supply private label products?
There is no one size fits all answer to this question. In true consulting fashion we like to ask a question back…
What is your business?
If you are in business to build a brand and maximizing your share in your categories, then you probably should focus on that. If you believe this is the best path to build value in your business, then you have to focus on it. You need to be committed to sales and all of the components of investing to build your brands.
If you are in business to be a manufacturer of products and are not as concerned what the label is on the package, then private label might be an option for your company. If you prefer the making over the selling private label could be an important component of your sales mix.
Considerations for producing private label
Food safety requirements are usually higher for private label suppliers. This is the risk management retailers. The retailer is not there all the time, so they need to be confident the products are being produced as safely as possible. Third party audits and other protocols give retailers peace of mind with ‘their’ products.
Sales and marketing in retail is expensive. Trade spend and marketing spend is required throughout the year and expectations continue to get higher. These are much lower if you are producing private label. They are not zero because your customers will expect you to participate in events and if they know your volume is healthy, they might expect some participation in temporary price reductions.
Private label suppliers are ‘closer’ to the retailer. You are producing products for them, not competing with their products. It is difficult to put a dollar figure on this, but it does mean something.
You get instant distribution and merchandising execution at store level. Even when your brand is in the plan o gram, you have to fight for space and execution. Retailers will give stores direction about private label and it usually gets implemented.
Retailers with real commitment to private label, make the investment in product developers to work with suppliers. These can be very knowledgeable people and your employees might learn a lot from them. The learnings can be applied to your products after they leave.
Recipes and formulations for the retailer’s private label products are theirs. They will take them to other suppliers to get the product costed. This is more likely to happen if they believe they are being charged too much or frustrated with something like service level.
Private label packaging can be contentious. Forecasts are done and packaging is purchased by producers and processors. If the product does not sell as well as planned, it can be a problem. Neither business wants to absorb the loss or financing charges to maintain inventory.
There are many stories out there for private label. Some good and some bad. It is not a guaranteed ticket to prosperity. It needs to be managed, just like branded products. Your business controls less but do not assume the retailer will do everything correctly to make it all work.
Peter
SKUFood Recipes for Success Podcast
The response to our SKUFood Recipe for Success podcast has been great. We want to thank everyone who has been with us as a guest. So many interesting conversations about our industry.
In this episode, we're thrilled to feature Ameen Fadel, Cofounder and President of Cedar Valley, a Canadian food manufacturer known for its authentic style pita chips made with better-for-you ingredients.
Ameen's entrepreneurial journey began at just 16 years old as a high school project. Together with his mother, he has transformed Cedar Valley into a fast-growing business, employing 16 people at their 5000 sq ft facility in Windsor, Ontario. The company has gained national recognition, appearing on CBC’s Dragons’ Den and earning accolades from TELUS Business, Desjardins, and the Food Network.
Recently named to Forbes 30 Under 30, Class of 2024, Ameen continues to drive Cedar Valley's success. Join us as Ameen shares his inspiring story, insights into building a successful food brand, and strategies for navigating the challenges of the industry. Whether you're an aspiring entrepreneur or a seasoned business owner, this episode is packed with valuable lessons and inspiration for achieving success in the food sector.
Private label in the news
As I said earlier, we had a few calls from media this week about private label. I can remember when I was working in the store in the 80’s and President’s Choice Decadent Chocolate cookies showed up. It was new then. People talked about those cookies a lot. I believe they are still the leading packaged cookie in Canada. That is quite something, considering they are only available in less than 40% of stores.
I would say the commitment to quality and being unique has waned over the years. A private label program costs a lot of money and you need a champion. Loblaw had that in Dave Nichol in the 80’s and early 90’s. It is also difficult to keep developing winners.
I do have travel coming up to Calgary, Saskatoon, Winnipeg, Vancouver and Lethbridge so if you want to connect or have an even in any of these locations give me a call or send me an email.
