Private Labels in a Changing Marketplace

Private Labels in a Changing Marketplace

The following is an interview INSIDER conducted with severalexecutives from the private label and contract manufacturing industries. Readwhat they have to say about the differences between private label and contractmanufacturing, as well as the costs and issues involved in private label, howusing branded ingredients can affect value, and what the private labelmarketplace looks like today.

What is the difference between a contract manufacturer anda private labeler?

Balu Advani, president, ADH Health Products Inc.: Typically, a contractmanufacturer is someone who follows exact specifications from someone who isprimarily a marketing company and they know what theyre looking for. Theyprovide us with a formula and there is less product development work in it, asopposed to private labelers who are primarily retailers who would want to take aproduct in finished packaging and they expect us to develop a whole line-upprogram, give them the proper planogram and a whole range of product. They willgo and retail the private label in little health food stores or small to mediumchains, up to supermarkets, grocery stores and drug stores.

Robin Koon, vice president of sales and marketing, Best Formulations: Aprivate labeler is a company that deals directly with retailers. They provide acomplete finished good (an inclusive turn-key item) that is ready for retailsale. This product is labeled according to the retailers wishes. Normally itis the store brand, hence the term private label. These products aregenerally knock-offs of some branded products. This can be for a single product,or an entire linesuch as an entire vitamin line. Depending upon theextensiveness of what they are able to produce, the private labeler will oftenoutsource part or even all of the product(s) to contract manufacturers. Thereare several private labeler suppliers, though, that are also contractmanufacturers.

A contract manufacturer generally deals directly with sellers of productsthat have a brand name. There are a lot of marketing companies that do notproduce or manufacture any products themselvesthey outsource to contractmanufacturers. Many times, contract manufacturers will make products for othercontract manufacturers that are unable to make a particular item, such as asoftgel. Sometimes contract manufacturers will perform the packaging, but manytimes they only make the bulk product. There are several contract manufacturersthat sell private label products.

Paul Licata, president, Licata Enterprise: There is a world ofdifference. They are two different functions, although the same company mayperform both functions.

A contract manufacturer only makes products in large quantities to a customersorder. The products are usually custom formulas or may be faster movingproducts. For the vast majority of retailers, a contract manufacturer isoverkill for their needs. While a large retailer may have a few special formulasto be made by a contract manufacturer, most products do not sell fast enough tomaintain 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. Contractmanufacturers will make a product for anyone, including national brands. Whetheryou would call a product made for a national brand a private label becomes amatter of semantics.

Contract manufacturers may or may not provide services that a private labelcompany will, such as packaging and labeling. Many will make a product then farmthe packaging and/or labeling to another firm. Comparatively, private labelersare aware of labeling rules and regulations and can assist with or print thecustomers label for them.

A true private labeler is a company that has, at a minimum: 1) a line ofproducts, as opposed to just a few items; 2) in-stock merchandise, as opposed tomaking it to order; and 3) product availability for sale immediately in lowerquantitiesusually a few bottles to a few cases, where a product from acontract manufacturer could be a minimum of 80-plus cases.

Gene Nakagawa, director of corporate strategy, Anabolic Laboratories Inc.: Generallyspeaking, a contract manufacturer manufactures product and sells it in bulk. Aprivate label manufacturer is one that manufactures product, and packages andlabels that product for retailers (usually in the retailers name) whileholding that inventory in stock.

Greg St. Clair, director of sales and marketing, Arizona NutritionalSupplements: A contract manufacturer produces products for others on acontract basis, and usually does not offer its own line of products. A privatelabeler can be categorized two ways: 1) It has its own product line with its ownname, or 2) it produces and sells a line of products with a customers name.

What are the costs involved in creating a private labelproduct?

Advani: A lot. Depending on the range of products, the largest rangecould be a customer would tell us they need the entire range, 150 SKUs. So weactually develop specialized formulations for, say, bone development or formenopause. We really go through a lot of detailed dialogue with our customer andhelp them design the formula, which can take anywhere from two or three monthsto maybe eight or nine months to develop the whole program. We may incur theentire cost, including printing of the labels and providing them with marketingmaterials, and it may take us one to two years to recuperate those initialexpenses.

Koon: There are several extra costs associated in creating private labelproducts. The manufacturer or private label supplier will need to keep inventoryon-hand, ready to ship when it receives an order. Retailers will not wait fourto six weeks to get product. Many times large retailers require additionalsupport for the products being supplied, such as category management ormarketing support. This can sometimes entail ads, coupons, space management (planogramming),etc. This is especially true for a line of products. And then, price. It alwaysseems that the customer wants a lower price.

Licata: The costs will vary for the retailer buying a private label witheach private label supplier. Some will charge the customer for labels or havethe customer supply the label themselves. Others require purchasing severaldozen 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 orderpurchase 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, andin our experience, a fancier, four-color process label does not usually sellmore product. Some of our best customers only have a two-color label. For theaverage health food store, it is the store and employees that sell the product,not the label. In larger, supermarkettype stores, a label becomes more importantas there is usually less salesperson instruction.

Nakagawa: One of the costs of creating private label products is becausethe end consumer almost never sees the manufacturers name, and consumer brandequity is rarely built for the manufacturer. It is the ability of the privatelabel manufacturer to help its retailers build brand equity that will ultimatelylead to its success. This is why it is important for private label manufacturersto produce quality products and to really work closely with their retailpartners.

St. Clair: Cost will vary depending on how complex the product or productline is. It may also vary on how the company approaches the market and itsproducts demand or need. I have seen cost vary from as low as $2,000 to $3.5million, and I have heard of a cost being as high as $12 million. There are somebasic costs that will be incurred, such as R&D, clinical studies andsubstantiation, fulfillment, distribution, and marketing efforts. Also, dontforget about the hidden costs that always come up.

What, in addition to cost, are some factors to considerwhen making a private label product?

Advani: The most important thing is their customers needs. Are theircustomers looking for me too items, or are their customers very educatedand highly evolved, looking for a better product? We need to understand theretailers market as to what target customers they are getting and what pricepoints they want to sell it at. Once we know the customer, we help them designthe whole program. There might be customers who are very selective, who do notwant the full range but just want our top 20 products. Particularly in thehealth food market, they are looking for only specialized items. They dontwant something that is available in K-Mart and a supermarket. In that case, wedesign 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 labelcustomers, they need to have certain criteria for identifying their supplier,which is basically someone like us. Criteria should be based on the quality ofthe product, making sure the manufacturer follows all the current FDAregulations, which is basically the good manufacturing practices. Today, as weknow, there is a lot of leeway in quality difference from one manufacturer toanother manufacturer. Unlike prescription drugs, our industry is not asregulated, so the result is that every company has to maintain its ownregulations. A customer, before he goes and buys a product, should qualify hissupplier a lot more carefully. The company should have its own inhouse testinglaboratory, its own good manufacturing practices, a protocol for testing itsproducts, and adequate rules to not only have quality control but a qualityassurance program as well.

Koon: Private label requires a commitment and good communication on thepart 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 orinnovations.

Licata: From the private labelers view, one factor is whether theproduct will sell well enough or be around long enough to justify the highinvestment in label costs. When a national brand introduces a product, they mayspend a few hundred dollars to print labels for a new product. When a privatelabeler 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 theyare wrong. We have known of private label suppliers that have gone out ofbusiness mainly because they had such a large investment in labels thatcustomers stopped buying. I believe this is the reason you dont find manysports nutrition powders in private labelthe formulas change too often andthe labels are generally very large with a high investment.

Nakagawa: In making a private label product, it is important to considerwhat needs retailers have for their private label line, and how we can increasethe value of that line.

St. Clair: There are many important factors to consider in addition tocost that many companies tend to over look. I believe that any time a product isbeing developed for consumption or topical use, it should have some type ofsubstantiation and/or reference data. You should know your market and how tofulfill and distribute it as well. Always be ready for someone to knock-off yourproduct, and be flexible for changes.

Does the use of branded ingredients increase the value of aprivate label product?

Advani: It has been seen many times that if the branded ingredientsupplier supports its product with adequate marketing, then those help. But ahandful of them are doing it, while the majority of them are not supportingtheir branded ingredients. If we do use branded ingredients, we insist thosebranded ingredient raw materials people should help us in actually developingand creating the awareness of their ingredients to the consumers.

Koon: You bet. The advertising done by the brand will create awarenessfor the item. This will also expand the category, as a rule, and the sales ofany 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 oneven 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 whatbrand 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 genericingredient. This gives our customers a choice. The FloraGLO Lutein costs33-percent more than our standard product. We sell almost three times as muchgeneric as standard. So, both products have their place.

Nakagawa: It is always important to use the highest quality ingredientsin manufacturing private label products, as high quality is essential to thevalue proposition that private label can offer. Having said that, if the brandedingredient is also of the highest quality and/or that brand is recognizable tothe end consumer (i.e., an Intel chip as opposed to a no-name chip for aconsumer purchasing a computer), then yes, a branded ingredient can definitelyadd to the value of a private label line.

St. Clair: In most cases, yes, using branded ingredients increases theprice. Customers become familiar with or need a branded ingredient, thuscreating a demand for such material. When demand enters the playing field, costsare usually inherited.

How do private labeling companies work with manufacturersand suppliers to meet a customers needs?

Advani: Again, it is very important for private label customers tounderstand what their consumers needs are. Everybody has a core customer.Health food store chains have a very different type of customer than asupermarket like K-Mart or Wal-Mart. Those are the two extremes. Then there arehighly specialized private label companies that target their products to, say,sports nutrition or mens health. They actually tell us what the customersneeds are, and once we understand the needs, only then can we help them designthe products to actually satisfy those needs.

Koon: Primarily by ensuring that product is at the customers dock ontime. Most retailers have a problem with selling air (when there is anout-of-stock situation). Keeping everything on track is not as easy as itsounds. Keep a good relationship with your customerbe customer-focused andflexible.

Licata: Often, we have our customers request certain products. As part ofour review, we determine if we can offer a quality product, if we can beatnational brand pricing, and if we will sell enough to justify the investment.

Nakagawa: We meet customer needs by gaining a thorough understandingof the market trends and the latest in scientific research, and then producingproducts based on those trends and scientific findings. This leads totop-selling products that can provide savings to the end consumer withoutsacrificing quality. Private labelers can also meet needs by educating retailersand their staff through trainings, newsletters and technical support. Retailersand their staff can, in turn, help educate the consumer and assist the consumerin making the right purchase decision.

St. Clair: By working with each other and creating an alliance, they canreduce the cost by being able to purchase collectively in large quantities andpass the savings on to the customer. Also, they can form a business partnershipand use each others strengths to supply, produce and promote a long-termproduct line.

Are you seeing increased demand from retailers for privatelabel products, and how do you meet their needs?

Advani: Yes. As always, our customers who are more aggressive haveunderstood that in order to keep their customer base confined to them, they needto develop private labels. This way, once a customer comes to them, they getused to their product, they like their product, and they understand that productis not available anywhere but from those stores. They develop the loyalty, andas a result, more customers are actually having a private label program. So muchso 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. Thecompetition is fierce in the private label market. There are only so many chainretailers out there. There are already several large established private labelplayers (Leiner, Pharmavite, Perrigo, etc.) who dominate on the nutritionalside. However, they tend to go after the larger accounts. There is still isplenty of room for other participants.

Licata: A definite yes. We meet their needs by continuing to review ourproduct line and add new products. Every year, we add 10 to 20 new formulas. Weconstantly 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 onhow to better sell their private label. What frustrates us is how long itsometimes takes for current customers to add new products to their line.

More stores are recognizing the need to differentiate themselves from thecompetition, and private label is one of the easiest and quickest ways to dothat.

Nakagawa: We have been experiencing a solid increase in demand for ourprivate label products in the current year and continue to meet their needs bystaying on top of the supplement market, scientific community and naturalproducts industry as a whole.

St. Clair: Yes, we have seen an increase in demand for the last severalyears. So to meet the retailers needs, Arizona Nutritional Supplements hasrecently introduced a 180 SKU private label product line that will carry theretailers name on the label.