Visit any local market and look in each aisle. It’s probably safe to say at least one will have and even feature the store’s very own natural or organic branded product. Though this may not seem like news, with $118 billion in sales for 2016, according to a recent Nielsen report, starting a private label brand may be a great strategy to raise profit margins and strengthen a store’s brand while increasing shoppers’ loyalty.
Taking the plunge and committing to start a private label can be a daunting and overwhelming venture for anyone who is first starting out. To help, WholeFoods asked private label experts what the most important points were to help dissect the private label process from start to finish.
Step 1: Finding a Product
With many different categories and unique products in the industry, it can be hard to know where to start when determining the type of product to sell. While it may be best to choose a product you are passionate about, Adam Stark, chief miscellaneous officer and second generation co-owner of Debra’s Natural Gourmet in Concord, MA, instead suggests going for the low-hanging fruit. “If you’re already selling 200 bottles of vitamin D a month, it’s no big deal to switch over half those sales to a house brand. But if you’ve never sold supplements before, it’s going to be a lot harder.”
For Ramona Billingslea, marketing manager of Betsy’s Health Foods in Houston, TX, starting a private label line also meant starting out with the company’s main strength — supplements. However, Billingslea notes the company was “also careful to not choose products that might detract from a category leader with a manufacturer whose numbers we needed to maintain.”
A disadvantage to offering private label in a retail store is the risk of not only reducing sales of a top performing brand needed to pull in the store’s revenue, but also jeopardizing relationships with popular branded companies that may feel “undercut by a private label product that mimics the item that the brand worked hard to create, market and educate the consumer [to recognize],” says Amy Lotker, owner/president of Better For You Foods LLC, a private label product manufacturer in Delray Beach, FL.
For retailers looking to simply freshen up their lines or who are interested in something other than supplements, Karl S. Halpert, president and CEO of Private Label Select Ltd. Co., Taos, NM, — a manufacturer of organic and natural personal care products — states his company regularly receives requests for, and the market continues to see a rising trend in SPF products. “Sunscreens that utilize the inorganic UVA/UVB blockers (zinc and titanium dioxide) currently outperform conventional sunscreens at retail levels,” says Halpert.
In addition, with regards to food, Lotker has seen a rise in request for USDA Certified Organic pizzas, gluten-free pizzas — made with ancient grain and others with sprouted grains — as well as bread bowl products with gourmet fillings such as dips, chilis, chowders and soups.
With a rise in certified and ‘clean’ products, it may be vital to also think about the type of ingredients that will lay the foundation for any new product.
But if you’re thinking of starting with a risky product, such as something brand new to the market, keep in mind, shoppers are known to be leery of trying a brand they’re unfamiliar with and ingredients they are unsure of.
Before starting a store brand, remember to research the demographic and use what you know about your customers, Lotker says. Retailers “know their consumers very well, including which products sell in which regions of the country.”
In addition, Stark suggests test driving everything first. “You do not want a cheap product with your name on it. We had a bunch of branded insulated soup mugs last year,” he says. “[It was] kind of embarrassing when they kept leaking.
Step 2: Picking a Partner
A potential partner can come in all sorts of ways, including an inquiry through a web search, meeting at a convention, seeing an advertisement in a publication, a referral from other store owners, encounter at a tradeshow (and like Stark’s mother who founded Debra’s Natural Gourmet) at lobbying days, such as those of the Natural Products Association (NPA).
A private label manufacturer may have already pursued you by phone or mail or have even walked into your store for a chat. No matter how you search to find a manufacturer, it’s important to note that a positive reputation and extensive experience as a quality contract manufacturer are what count.
When starting the process of contacting manufacturers, Billingslea suggests asking questions, such as:
• Where do you obtain raw materials and how do you assess them?
• How long have you been in the health food business
(cosmetics business, supplements business, etc)?
• Are you involved in NPA, INFRA (Independent Natural Food Retailers Association) etc.?
• How do you test finished product?
• What are your minimums (when ordering products)?
• What are your return policies?
Other pertinent factors may include facility size, freezer capacity, whether it’s a one-stop solution providing storage and distribution, and whether bakeries and labs are in-house or outsourced to a third party.
When doing your due diligence, quality standards and certifications should also be a prerequisite. Food manufacturers such as Lotker’s facility have a number of certifications, such as being Gluten Free Certified, USDA Certified Organic, BRC Certified and Audited with an “A” rating, CFIA Certified, Halal Certified, and more.
When looking to start a brand with a claim like free from nuts, free from soy or even having an organic claim, manufacturers must be certified by the U.S. Department of Agriculture (USDA) or a third-party. This claim is then translated as the manufacturer having sufficient “quality management systems to pass the many audits that these standards require [and] retailers can [then] comfortably pass these quality and compliance assurances on to consumers,” says Halpert.
Halpert also believes in complete transparency and listening to what the retailer is asking and wanting. “The manufacturer must be able to present a clear path from the conceptual conversation to the delivery of finished goods, in a concise and predictable manner,” he adds. “This will include product development, any necessary testing, compliance and certifications, through to delivery of finished goods. As necessary, the manufacturer should be well suited to the retailer’s supply chain management system. Any aspect of this that seems vague to the retailer should either be addressed or serve as a warning sign.”
Of course, when a list of your top private label manufacturers has been determined, it’s a good idea to tour each facility. This may help determine which company will align perfectly with your brand and make clear the capabilities and capacities of each manufacturer.
Step 3: Customization, Formulation and Labeling
Once a product category or type of product (beverage, food, supplement, cosmetic, etc.) has been chosen and a capable manufacturer aligned with your goals is in place, it’s time to select a formula, a label and package to manufacture as your own.
Keep in mind, says Paul Licata, president of Licata Enterprises, Huntington Beach, CA, a private label manufacturer means having “in-stock, ready to go formulas [for] retailers [to] buy in relatively small quantities, such as by the case.” The customization ,Licata adds, typically comes in the type of label design and a bit in the bottle/packaging designs offered. With a custom manufacturer, a retailer can completely customize the product by working with the manufacturer to develop a unique formula, as well as labels and bottle/packaging design.
Of course, much is dependent on the size of the retailer. For example, a “single store or a small regional chain whose volumes will be relatively low, will have fewer options than a larger chain due to the cost of customizing, and the availability of special packaging and custom colors,” says Halpert.
As a retailer, with the expertise and knowledge of shoppers’ buying habits, start studying what attracts shoppers to certain products. Is it a specific color that is eye-catching? Does it feature a certain image? When starting the design process, think about attributes such as:
• Customer appeal — images, colorful appearance, unique shape or profile that enables instant recognition (1).
• Ease of use — increasing customer convenience with ease of opening and closing, durability, reduced preparation time, and ready-to-eat (1).
• Freshness — Improving perishables, freshness appeal with improved sealing, re-sealable functions, and visible expiration dates (1).
• “Green” packaging — Reducing environmental impact by increasing percentage of recyclable material and slimming packages to allow for reduced waste (1).
• Packaging integrated with mobile device — Incorporating QR codes and app information on packaging, which will provide additional information (comparable prices, studies, etc.) on product innovations (1).
While it may seem easier to simply mirror a top-selling product, is it worth risking the relationship with a top-selling brand?
Step 4: Pricing
The price of a store-branded product is completely at the discretion of the retailer. Manufacturers typically do not tell a retailer what a product should be priced at, unless a suggestion is made during a discussion on a marketing plan. But since a private label manufacturer works with various brands, large and small, that perspective could help with your category’s growth.
“Because private label (as in our cases) is 15-25% lower than national brand pricing before our own volume discounts, your gross margin is strikingly higher,” says Licata. “In our case, a retailer can make a 70% gross margin or more (i.e. Retail $1, the cost 30 cents) if you price the private label at a comparable national brand price.” This allows several pricing strategies such as:
• Variable Pricing — To give an overall ‘low price’ perception one can heavily discount 20-30% on the most popular selling items and then charge closer to national brands on the others. [An example] is Vitamin C 1,000 mg [being] very price sensitive, but Pantothenic Acid is not.
• Low Price — Depending on the volume a retailer purchases from their private label manufacturer, you might be able to ‘discount’ your private label 50% off the national brand price and still make a 40% gross martin (Retail $1, you sell at 50 cents, the cost 30 cents).
• High Price/’Quality Feel’ — Some stores go the other way and position their private label as a premium line and sell at the full national brand and even higher.
Step 5: Marketing
While there will always be a brand that seems to sell itself without much effort, or a brand that has gained much attention due to a mention on a popular website and television program, with a store brand its success is completely up to you, especially if a small budget is involved. If not, a marketing and merchandising plan that was agreed upon during the product design phase can be enacted.
First and foremost, think about staff training. While this may not seem like a marketing plan, the more the staff gets to know and understand the store’s branded product, the easier it will be for them to recommend and sell it. Furthermore, with the ability to study everything on the product such as its claims, ingredient list and certifications, Halpert says, this strategy can instill trust within shoppers, confidence in the store and even repeat sales.
Since it is a store brand, retailers have a say in product placement. “For some, a strategy is to place the private label or store brand alongside its branded counterpart,” says Halpert. “The well-known brand draws the shopper to the shelf location and the price differential drives the sales to the private label product.”
Additional techniques that have helped Betsy’s Health Foods were to include “a product of the month that we post on our website and social media,” says Billingslea. “We run special sales that feature our private label. We offer the private label products to our employees at cost so that they are encouraged to use and experience the products.”
One great idea from Betsy’s Health Foods is to use a variety of media to offer information about the store brand, which can include electronic newsletters and monthly direct mailings with special offers. Billingslea says, “We share experiences (touring a private label manufacturing facility) with our customers through blog posts and a special four-page newsletter handout, [which] gives customers a complete overview of the value proposition of our private label products.”
Another interesting technique Billingslea’s store implemented was buying small bottles of vitamin C from the manufacturer to give away to customers. This allows shoppers to try a private label product and compare the effectiveness to a leading brand. It also can build trust and attention for the brand.
Step 6: Insurance
Retailers should check with their insurance company to ensure they can be covered for carrying a private label product, to see what kind of liability will be required and to obtain information on the additional cost. “Additionally, the retailer will want to be named specifically as an additional insurer on the manufacturer’s own insurance policy and know what the dollar amount of the coverage is,” says Halpert. Stark says as long as you’re sticking to a private label deal and not formulating and relabeling, a private label manufacturer will carry the insurance needed.
Lotker adds, “It’s unlikely that a retailer would be indemnified from responsibility if there’s a problem. Like any business venture, choose your vendors and partners carefully.”
Though a private label manufacturer can bear a greater exposure to lawsuits, retailers selling their own branded products can face a suit when their product infringes upon another company’s product trademark, patent rights, or any other intellectual property rights.
Recently, Kroger sued Lidl — a German-based discount supermarket chain that has now expanded to the US — on the grounds of trademark infringement. Kroger, a grocery retailer, claimed Lidl private label brand, Preferred Selection, has a similar name and appearance to Kroger’s own brand which is called Private Selection. While a judge in Richmond, VA, has denied Kroger’s request for an injunction to halt Lidl’s sales, a trial for the case has been set for January 11, 2018.WF
References1. L.E.K. Consulting LLC, “Generic No More: How Packaging Innovation Can Help Private Label Gain market Share,” Executive Insights Volume 15, Issue 23. http://www.lek.com/sites/default/files/L.E.K._How%20Packaging%20Innovation%20Can%20Help%20Private%20Label%20Gain%20Market%20Share.pdf
Published in WholeFoods Magazine October 2017