Private Labels in a Changing Marketplace
The following is an interview INSIDER conducted with several executives from the private label and contract manufacturing industries. Read what they have to say about the differences between private label and contract manufacturing, as well as the costs and issues involved in private label, how using branded ingredients can affect value, and what the private label marketplace looks like today.
What is the difference between a contract manufacturer and a private labeler?
Balu Advani, president, ADH Health Products Inc.: Typically, a contract manufacturer is someone who follows exact specifications from someone who is primarily a marketing company and they know what theyre looking for. They provide us with a formula and there is less product development work in it, as opposed to private labelers who are primarily retailers who would want to take a product in finished packaging and they expect us to develop a whole line-up program, give them the proper planogram and a whole range of product. They will go and retail the private label in little health food stores or small to medium chains, up to supermarkets, grocery stores and drug stores.
Robin Koon, vice president of sales and marketing, Best Formulations: A private labeler is a company that deals directly with retailers. They provide a complete finished good (an inclusive turn-key item) that is ready for retail sale. This product is labeled according to the retailers wishes. Normally it is the store brand, hence the term private label. These products are generally knock-offs of some branded products. This can be for a single product, or an entire linesuch as an entire vitamin line. Depending upon the extensiveness of what they are able to produce, the private labeler will often outsource part or even all of the product(s) to contract manufacturers. There are several private labeler suppliers, though, that are also contract manufacturers.
A contract manufacturer generally deals directly with sellers of products that have a brand name. There are a lot of marketing companies that do not produce or manufacture any products themselvesthey outsource to contract manufacturers. Many times, contract manufacturers will make products for other contract manufacturers that are unable to make a particular item, such as a softgel. Sometimes contract manufacturers will perform the packaging, but many times they only make the bulk product. There are several contract manufacturers that sell private label products.
Paul Licata, president, Licata Enterprise: There is a world of difference. They are two different functions, although the same company may perform both functions.
A contract manufacturer only makes products in large quantities to a customers order. The products are usually custom formulas or may be faster moving products. For the vast majority of retailers, a contract manufacturer is overkill for their needs. While a large retailer may have a few special formulas to be made by a contract manufacturer, most products do not sell fast enough to maintain such a large inventory.
Contract manufacturers generally do not have their own line of products, unless, in the few instances, they are also private labelers. Contract manufacturers will make a product for anyone, including national brands. Whether you would call a product made for a national brand a private label becomes a matter of semantics.
Contract manufacturers may or may not provide services that a private label company will, such as packaging and labeling. Many will make a product then farm the packaging and/or labeling to another firm. Comparatively, private labelers are aware of labeling rules and regulations and can assist with or print the customers label for them.
A true private labeler is a company that has, at a minimum: 1) a line of products, as opposed to just a few items; 2) in-stock merchandise, as opposed to making it to order; and 3) product availability for sale immediately in lower quantitiesusually a few bottles to a few cases, where a product from a contract manufacturer could be a minimum of 80-plus cases.
Gene Nakagawa, director of corporate strategy, Anabolic Laboratories Inc.: Generally speaking, a contract manufacturer manufactures product and sells it in bulk. A private label manufacturer is one that manufactures product, and packages and labels that product for retailers (usually in the retailers name) while holding that inventory in stock.
Greg St. Clair, director of sales and marketing, Arizona Nutritional Supplements: A contract manufacturer produces products for others on a contract basis, and usually does not offer its own line of products. A private labeler can be categorized two ways: 1) It has its own product line with its own name, or 2) it produces and sells a line of products with a customers name.
What are the costs involved in creating a private label product?
Advani: A lot. Depending on the range of products, the largest range could be a customer would tell us they need the entire range, 150 SKUs. So we actually develop specialized formulations for, say, bone development or for menopause. We really go through a lot of detailed dialogue with our customer and help them design the formula, which can take anywhere from two or three months to maybe eight or nine months to develop the whole program. We may incur the entire cost, including printing of the labels and providing them with marketing materials, and it may take us one to two years to recuperate those initial expenses.
Koon: There are several extra costs associated in creating private label products. The manufacturer or private label supplier will need to keep inventory on-hand, ready to ship when it receives an order. Retailers will not wait four to six weeks to get product. Many times large retailers require additional support for the products being supplied, such as category management or marketing support. This can sometimes entail ads, coupons, space management (planogramming), etc. This is especially true for a line of products. And then, price. It always seems that the customer wants a lower price.
Licata: The costs will vary for the retailer buying a private label with each private label supplier. Some will charge the customer for labels or have the customer supply the label themselves. Others require purchasing several dozen bottles of each product and then making the customer pay for the labels. Others do not charge for labels; we only require a one-time opening order purchase of merchandise.
A store should have a logo or design on its labelthe simpler and cleaner, the better. We have been involved with private label for more than 40 years, and in our experience, a fancier, four-color process label does not usually sell more product. Some of our best customers only have a two-color label. For the average health food store, it is the store and employees that sell the product, not the label. In larger, supermarkettype stores, a label becomes more important as there is usually less salesperson instruction.
Nakagawa: One of the costs of creating private label products is because the end consumer almost never sees the manufacturers name, and consumer brand equity is rarely built for the manufacturer. It is the ability of the private label manufacturer to help its retailers build brand equity that will ultimately lead to its success. This is why it is important for private label manufacturers to produce quality products and to really work closely with their retail partners.
St. Clair: Cost will vary depending on how complex the product or product line is. It may also vary on how the company approaches the market and its products demand or need. I have seen cost vary from as low as $2,000 to $3.5 million, and I have heard of a cost being as high as $12 million. There are some basic costs that will be incurred, such as R&D, clinical studies and substantiation, fulfillment, distribution, and marketing efforts. Also, dont forget about the hidden costs that always come up.
What, in addition to cost, are some factors to consider when making a private label product?
Advani: The most important thing is their customers needs. Are their customers looking for me too items, or are their customers very educated and highly evolved, looking for a better product? We need to understand the retailers market as to what target customers they are getting and what price points they want to sell it at. Once we know the customer, we help them design the whole program. There might be customers who are very selective, who do not want the full range but just want our top 20 products. Particularly in the health food market, they are looking for only specialized items. They dont want something that is available in K-Mart and a supermarket. In that case, we design some very specialized itemsthese days particularly for menopause, sports nutrition and for joint. Joint products are the No. 1 item today.
The most important thing I would like to add is that for private label customers, they need to have certain criteria for identifying their supplier, which is basically someone like us. Criteria should be based on the quality of the product, making sure the manufacturer follows all the current FDA regulations, which is basically the good manufacturing practices. Today, as we know, there is a lot of leeway in quality difference from one manufacturer to another manufacturer. Unlike prescription drugs, our industry is not as regulated, so the result is that every company has to maintain its own regulations. A customer, before he goes and buys a product, should qualify his supplier a lot more carefully. The company should have its own inhouse testing laboratory, its own good manufacturing practices, a protocol for testing its products, and adequate rules to not only have quality control but a quality assurance program as well.
Koon: Private label requires a commitment and good communication on the part of both parties. Most retailers do not have any manufacturing experience. This can sometimes cause an issue. (What?! I have to wait four weeks?) Retailers also like suppliers that are constantly showing them new products or innovations.
Licata: From the private labelers view, one factor is whether the product will sell well enough or be around long enough to justify the high investment in label costs. When a national brand introduces a product, they may spend a few hundred dollars to print labels for a new product. When a private labeler does the same, we will spend several thousand dollars to print labels.
Printing labels and maintaining label stock is an extremely large investment. Many retailers assume there is little to no cost in labels. This is where they are wrong. We have known of private label suppliers that have gone out of business mainly because they had such a large investment in labels that customers stopped buying. I believe this is the reason you dont find many sports nutrition powders in private labelthe formulas change too often and the labels are generally very large with a high investment.
Nakagawa: In making a private label product, it is important to consider what needs retailers have for their private label line, and how we can increase the value of that line.
St. Clair: There are many important factors to consider in addition to cost that many companies tend to over look. I believe that any time a product is being developed for consumption or topical use, it should have some type of substantiation and/or reference data. You should know your market and how to fulfill and distribute it as well. Always be ready for someone to knock-off your product, and be flexible for changes.
Does the use of branded ingredients increase the value of a private label product?
Advani: It has been seen many times that if the branded ingredient supplier supports its product with adequate marketing, then those help. But a handful of them are doing it, while the majority of them are not supporting their branded ingredients. If we do use branded ingredients, we insist those branded ingredient raw materials people should help us in actually developing and creating the awareness of their ingredients to the consumers.
Koon: You bet. The advertising done by the brand will create awareness for the item. This will also expand the category, as a rule, and the sales of any private label product.
Licata: Yes and no. To some customers, a branded ingredient is important. It makes the product more closely resemble some national brands and puts you on even footing. There are only a few ingredients where this becomes an issue. These are normally specialty products. I have yet to have a customer ask what brand of vitamin C we use. Consumer recognize that USP vitamin C is vitamin C.
As an example, we offer both the FloraGLO brand lutein as well as a generic ingredient. This gives our customers a choice. The FloraGLO Lutein costs 33-percent more than our standard product. We sell almost three times as much generic as standard. So, both products have their place.
Nakagawa: It is always important to use the highest quality ingredients in manufacturing private label products, as high quality is essential to the value proposition that private label can offer. Having said that, if the branded ingredient is also of the highest quality and/or that brand is recognizable to the end consumer (i.e., an Intel chip as opposed to a no-name chip for a consumer purchasing a computer), then yes, a branded ingredient can definitely add to the value of a private label line.
St. Clair: In most cases, yes, using branded ingredients increases the price. Customers become familiar with or need a branded ingredient, thus creating a demand for such material. When demand enters the playing field, costs are usually inherited.
How do private labeling companies work with manufacturers and suppliers to meet a customers needs?
Advani: Again, it is very important for private label customers to understand what their consumers needs are. Everybody has a core customer. Health food store chains have a very different type of customer than a supermarket like K-Mart or Wal-Mart. Those are the two extremes. Then there are highly specialized private label companies that target their products to, say, sports nutrition or mens health. They actually tell us what the customers needs are, and once we understand the needs, only then can we help them design the products to actually satisfy those needs.
Koon: Primarily by ensuring that product is at the customers dock on time. Most retailers have a problem with selling air (when there is an out-of-stock situation). Keeping everything on track is not as easy as it sounds. Keep a good relationship with your customerbe customer-focused and flexible.
Licata: Often, we have our customers request certain products. As part of our review, we determine if we can offer a quality product, if we can beat national brand pricing, and if we will sell enough to justify the investment.
Nakagawa: We meet customer needs by gaining a thorough understanding of the market trends and the latest in scientific research, and then producing products based on those trends and scientific findings. This leads to top-selling products that can provide savings to the end consumer without sacrificing quality. Private labelers can also meet needs by educating retailers and their staff through trainings, newsletters and technical support. Retailers and their staff can, in turn, help educate the consumer and assist the consumer in making the right purchase decision.
St. Clair: By working with each other and creating an alliance, they can reduce the cost by being able to purchase collectively in large quantities and pass the savings on to the customer. Also, they can form a business partnership and use each others strengths to supply, produce and promote a long-term product line.
Are you seeing increased demand from retailers for private label products, and how do you meet their needs?
Advani: Yes. As always, our customers who are more aggressive have understood that in order to keep their customer base confined to them, they need to develop private labels. This way, once a customer comes to them, they get used to their product, they like their product, and they understand that product is not available anywhere but from those stores. They develop the loyalty, and as a result, more customers are actually having a private label program. So much so that smaller and smaller stores are desirous, not that they can afford it, but they look forward to getting a private label program.
Koon: There is always a demand from retailers for products. The competition is fierce in the private label market. There are only so many chain retailers out there. There are already several large established private label players (Leiner, Pharmavite, Perrigo, etc.) who dominate on the nutritional side. However, they tend to go after the larger accounts. There is still is plenty of room for other participants.
Licata: A definite yes. We meet their needs by continuing to review our product line and add new products. Every year, we add 10 to 20 new formulas. We constantly keep our purchasing up to date to keep our pricing very competitive, which keeps our customers competitive.
We talk to our customers to find out what is selling. We offer suggestions on how to better sell their private label. What frustrates us is how long it sometimes takes for current customers to add new products to their line.
More stores are recognizing the need to differentiate themselves from the competition, and private label is one of the easiest and quickest ways to do that.
Nakagawa: We have been experiencing a solid increase in demand for our private label products in the current year and continue to meet their needs by staying on top of the supplement market, scientific community and natural products industry as a whole.
St. Clair: Yes, we have seen an increase in demand for the last several years. So to meet the retailers needs, Arizona Nutritional Supplements has recently introduced a 180 SKU private label product line that will carry the retailers name on the label.