Use private label brands to grow your wholesale business

Use private label brands to grow your wholesale business

Private label brands have been a trade practice for more than 40 years and many distribution companies have used them as a key element of their growth strategy. But many distributors remain focused on selling and positioning well-known brands. In this article, I will tell you what a private label is, the pros and cons of private labels, the potential threats to distributors, and how to start your private brand.

What is a private label?

Private label products are those manufactured by one company for sale under another company’s brand. They are used mainly by distribution companies and retailers. Private label brands managed solely by a retailer for sale in a specific chain of stores are called store brands. Supermarkets began using their own private label brands more than 40 years ago as a means of offering their customers more variety at lower prices and, in doing so, increasing customer retention and loyalty. Every major player in the grocery channels has its own brand: Walmart, Publix, Aldi, Costco, etc.

To give you an idea of the importance of this segment,  total US retail sales of private label brands reached $5.47 trillion in 2019 and are projected to hit $5.94 trillion in 2024, according to data from Statista.

Advantages and disadvantages of private label brands

Relying solely on third-party brands creates a dependency that might eventually affect your distribution operation. The brand could become “boring” or the manufacturer might decide to sell directly (see “How to overcome the Distribution challenges in this new age?”), or they could appoint more distributors.

At some point, each distributor needs to decide whether to commit to their own private label brands or to continue to sell only the brands of others. The promise of more sales and success that often follows private labeling is alluring, but jumping in too quickly can cause margins to drop. To figure out whether or not private labeling versus selling branded products is right for you, it’s essential to understand the benefits and drawbacks of private labels.

Advantages of having your own brand

• Increased gross profit: When buying in bulk the cost of the product is lower and that translates into a better margin. By having a better margin you can offer better prices and play with promotional events.
• Differentiate from your competitors: When you negotiate with a manufacturer for your private label brand you can specify the features you want in it. This puts you in a unique position to have a unique product fitted to satisfy specific market needs.
• Develop your own brand: A successful brand will enhance your reputation and image in the market, and every new product you introduce will contribute to boosting your image.
• More stable operation: You eliminate dependence on the manufacturer’s decision on how to market or change their products.

Disadvantages of having your own brand

• Investment level: In order to get the manufacturer to make your own brand, you need to commit to large quantities over a certain period (typically one year). Therefore, you need to have enough capital to fulfill these commitments while the market reacts to your new branded products.
• Time to develop the brand image: It takes a lot of time and energy to create a new brand name that resonates with consumers. This normally involves introductory prices, promotional events, and outstanding merchandising. This calls for additional working capital which adds to the purchase investment. The good thing is, after successfully introducing new products with your private label brands, subsequent ones will take much less time. You can mitigate this effect by starting to sell the manufacturer´s brand and, once it proves its acceptance in the market, move on to private label negotiation.
• Risk of failure: If at any point your logo, packaging, or product is not appealing to the end-user, your reputation can be harmed and that will affect the introduction of new products in the future. However, if you base the product specification on your experience in the market, this risk is minimized.
• Manufacturing dependency: there are two degrees to which your brand’s manufacturer can affect you.
  • Any failure on the part of the manufacturer in terms of quality or delivery will affect your brand and your image. The disruption of production during the first months of the pandemic is an example of outside events that can affect your brand.
  • If the manufacturer decides to go directly with his brand to retailers or end-users, your overall market strategy will suffer. You can reduce this risk by dealing with foreign manufacturers.

Store private label brand threats to distributors

The trend for retailers to push their own brands and go omnichannel poses a direct threat to distributors. Prices for private label stores cannot be matched. The only reason people keep buying established brands is because of loyalty and distrust in the quality of private brands. But this trend has changed since the COVID pandemic. These are some facts extracted from a study from McKinsey:

• Nearly 40% of consumers tried new products during the Covid pandemic.
• More than 45% of consumers who switched to private brands said that price was the primary reason and the lack of availability of their preferred national brand was the second.
• 19% of consumers who switched to a new product will buy it again.

How to start a private label product line

1. Choose the product including details and features
2. Design the logo and packaging
3. Choose potential manufacturers
4. Request samples
5. Test the samples
6. Negotiate with the selected supplier
7. Sign an OEM agreement

I hope this article has been helpful. I will continue to post information related to warehouse management, distribution practices and trends, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, subscribe to stay updated on future articles.

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