By Janet Poveromo
The Private Label Manufacturers Association (PLMA) reported on its website: “Store brands now account for one of every five items sold in US supermarkets, drug chains and mass merchandisers. They represent more than $65 billion of current business at retail and are achieving new levels of growth every year.” With such staggering statistics, it’s no wonder there are so many companies entering the market.
Those in the industry list a number of reasons for this success. Robin C. Koon, senior vice-president of Best Formulations (City of Industry, CA), said the benefits for the retailer are several. “First of all, there is normally a lower sales price point for the consumer, which usually translates to more units being sold. Secondly, the cost of the item for the retailer is normally below the national brand, meaning that retailers can many times obtain a better sales margin with the private label (PL) brand than that of the national brand. A lower price point with better margin is a win-win for consumer and retailer.”
Ron Udell, president of Soft Gel Technologies, Inc. (SGTI, Los Angeles, CA), agreed. “Overall, private labels are used to provide products with a lower price,” he said. “Typically, retailers receive substantially higher margins than brand name products. Since PL products are only available from the specific retailer, it helps build customer loyalty.”
In addition to value, consumer trust in PL is emerging to an all-time high, said Tom Tierney, president of Vita-Tech International (Tustin, CA), a manufacturer of PL nutraceuticals. “Distinctive branding has new credibility since the environment where PL is hosted is usually fresher, connotes significant capital investment and is embedded with a service-orientation that was lacking in some other retail arenas. Quite simply, the merchandising circus in many venues has been replaced with a focus on trust, integrity and security. For the first time in recent history, PL enjoys strength in both perceptions of value as well as a consumer desire to personally differentiate between choices,” said Tierney.
Retail “Cocoon of Influence”
Sunil Kohli, vice president, Health Plus, Inc., pointed out that PL is also a marketing tool for self-promotion. “Retailers who are well entrenched in their communities, as well as new retailers, and retailers that may feel they are losing footing to competitors, can all take advantage of a vanity brand,” Kohli said. “Private label is an investment in image and it forges a more immediate bond between the consumer and the retailer—if done correctly and wisely.”
Tierney also stressed the unique impact on image a retailer can obtain from PL. “Stand back and look at the visual noise of mass market brands,” he said. “When backed up with advertising, national brands are attractive, there’s no question about that. However, once inside a store’s cocoon of influence, the store’s unique time and place identity is securely established as being ‘home’ when its own brand is embedded. PL then becomes culture-specific for each store environment. It’s like warm milk and cookies—a trip back to security, again.”
Private label is highly desirable in establishing relationships, Tierney added. These relationships have positive reinforcement when the store environment in which PL is sold connotes trust, value and security. The elements attach to the label when it is transported home. Every time the product or label is viewed, the customer senses a good outcome. The net result is the consumer wants more.
Jayson Kroner, NOW Foods’ (Bloomingdale, IL) health and fitness editor, pointed out that PL provides a unique opportunity for retailers to brand their store’s image in store as well as online. “This is an excellent way to gain long-term business. Once the consumer becomes comfortable and accustomed to using a particular store brand, their loyalty tends to steadily improve over time. With the exception of quality customer service, there really isn’t a better way to keep the customers coming back,” Kroner said.
Depending on how well developed and presented a store’s line is, many customers may never even know that they are using a supplement that has been privately labeled, Kroner added. Additionally, retailers are not just limited to selling their brand at the retail level. The internet has made it possible for storeowners to sell their brand on a national, even international scope. Having a private label brand, as many retailers have found out, can be very profitable.
Third-Party Vendors
Often, branded companies turn to private labelers to create their products rather than do it themselves. Often, retailers are not set up to make PL products themselves; it’s not their core business, explained Best Formulations’ Koon. There are so many products to choose from that are made by PL manufacturers, no one manufacturer can make them all. Sometimes the company making and selling the branded item also manufactures and distributes the PL item—selling the same item into both channels. This is normally done when some kind of proprietary or patents are involved, doing this, of course, expands their sales. Other times, the PL manufacturing costs are lower, so the branded company will actually purchase some or all of their units (outsourced), according to Koon.
Manufacturers, especially the much larger organizations who deal exclusively in registered and trademarked ingredients, tend to focus their energies on the research, development and testing needed to bring their products to the distribution level, Kroner pointed out. As a result, some of these companies may not be equipped with the resources and equipment needed to get their product into the hands of mainstream consumers. The items they manufacture and sell are often marketed within trade markets and packaged in bulk containers, as opposed to small bottles, packets, etc. Private labeling allows major manufactures, should they so desire, to sell directly to consumers. This is one of the key services offered by private labeling companies.
Vita-Tech’s Tierney said that “big is not always better,” explaining that consumers are astute and know that large product companies must concentrate on the SKU’s, which have significant shelf velocity. “This reaches back into capitalization and commitment of marketing resources necessary to keep costs in order. PL, especially when created and managed by qualified third-party vendors, simplifies the acquisition process and frees up the host businesses’ creative resources. No capital equipment is needed for production. This is a significant observation in today’s problematic economic times. The focus now shifts to logistics and vendor qualification. This is where ‘strategic partnership’ takes on new importance and sense of accountability for each participant. To make private label work, the vendor relationship must be nurtured so a performing vendor is treated as ‘one of the family.’”
Production ease by companies set up to do the specific job also comes into play, Health Plus’ Kohli noted. “The private labelers have all the necessary equipment, processes, certifications and quality sources of materials already firmly in place. Since we are a niche company with 25 years of brand equity and leadership in the psyllium-based internal cleansing market, we can offer brand marketers the benefit of true quality of product.
“The wider scope here is the consumer: if a company went to a lesser source—say a non-GMP certified company using inferior ingredients—the resulting product itself will not live up to label claims, or be deemed worthless in the mind of the consumer,” Kohli added. “This then, may feed into a broad-sweeping misperception that all dietary supplements are a waste.”
There is a school of thought that a manufacturer such as Health Plus may be cannibalizing its own sales in the market, but this is not true, Kohli said. With PL manufacturing companies’ own products out there under a different name, they are keeping the category vibrant and exciting. Again, product integrity and quality are crucial for the health of the category. This goes for all niche products and companies that have stewarded those categories into prominence with superior quality resources and production.
Bad Reputation?
Private labelers have had to overcome the “no frills” store brand product stigma that denotes a lack of quality. PL manufacturers say one way to get past that roadblock is with quality packaging and excellent product information on labels.
“There will always be concern on behalf of the customer when it comes to trusting what’s in the bottle—regardless of whose product may happen to inside,” said NOW Foods’ Kroner. “The important thing to remember is that the product line must be presented in a manner that allows customers to make an educated, genuinely comparative purchase. For example, NOW Foods provides full disclosure on its own labels and extends the same service to the labels that we help our customers create for their own lines. Working with a company who employs experts in graphic design, writing, nutrition and food science will ultimately allow a store brand to rival the quality perception and brand recognition of an industry-leading manufacturer.”
Balram Advani, president of ADH Health Products Inc. (Congers, NY), said “better prices and actual product quality more than offsets any previously held negative images of private labels, since products should be manufactured at Food and Drug Administration registered facilities that follow strict GMP compliance.”
For the consumer, private label represents the choice and opportunity to regularly purchase quality products at a cost savings compared to manufacturer brands, without waiting for promotional pricing, Udell said. Private label items consist of the same or better ingredients than the manufacturer brands, and because the retailer’s name or symbol is on the package, the consumer is assured that the product meets the retailer’s quality standards and specifications.
“Although we do not have market reports and first-hand focus group data to support this, we absolutely believe that the old ‘no frills store brands equals junk perception’ has long been vanquished,” Kohli said. “Nearly anything and everything can be private labeled.
Yes, the continuing and increasing level of sales of PL products bear this out, and the quality of PL products continues to improve. The only negatives I’ve heard is in the area of generic OTC drugs. Some consumers seem to still feel that generic drugs are inferior, despite the FDA regulatory requirements.”
Another suggestion to help manufacturers and industry members counteract this negative idea is to continue to improve and add new products, offered Koon. Some of the industry trade groups have occasionally advertised directly to consumers, he said. PL products themselves are not advertised, like a branded item would be. However, many times the retailer will include PL items in their advertisements when promoting sales.
Manufacturers, if they are making products for their own retail lines, can promote their materials as being equal or superior to other name brands by marketing their usage of quality raw materials and unique formulations.
Contract manufacturers, such as SGTI, do not have any direct connection with retailers, and as such, have to rely on its private label customers to redirect any negative outlook its lines may have, Udell said. “Keep in mind that although we may supply to private labelers, we also supply to the name brands.”
It all comes down to quality. “This cannot be overemphasized,” Kohli added. “Health Plus Inc. has always strived to maintain a very high level of quality. With that in mind, we started manufacturing our products back in 1988, and chose to go through the rigors of obtaining a drug-manufacturing license from the state of California and also register with the US Food and Drug Administration as a Drug Handling Facility. We have kept these since 1988. Although these are only needed for our psyllium OTC products, we use the same protocols for all products manufactured at our plant, including our companion-animal products, which are manufactured to human-grade protocols. We manufacture dry herbal products, in powder or capsule forms. We have grinding, blending, encapsulation and bottle filling capabilities. Of course, products with psyllium are our specialty, either by themselves or in combination with other herbs.”
Slow Economy = Increased Opportunity
In a downward market, it may make more sense than ever for retailers to choose private labelers.
“Economics have to be recognized as reality when they hit you over the head,” said Tierney. “There is no avoiding documented cost escalation trends for food, as an example (not to mention gasoline). Overhead (general and administrative) for private label can be lower, simply because the prime supplier of PL can be laser-focused on a narrow field of commodities with attendant lower risks and overhead. A very good chance exists that the smaller vendor (relative in size to a big box store or grocery chain) can do the high-quality job at less expense. With this as background, the PL brand champion can create a transparent and truthful story about why the PL line makes sense.”
Koon agreed: If the economy continues to take a downward turn, PL sales will go up as a response. “Consumers will be looking for less expensive alternatives when buying. As such, I would expect that many PL products sales would continue to grow, which will require some kind of expansion on the manufacturer’s part. Business has not slowed down in the PL segment,” said Koon.
Kohli also agreed, adding that now is actually the perfect time to engage in a private label program. “With the steadily climbing success of private labels, manufacturers don’t feel that the current economic climate is hampering their business. Savvy retailers and brand marketers know that product launches stimulate purchase and provide a sense of optimism.”
Even new businesses can expect excellent return from PL, said Kroner. “The private label business is constantly expanding, and has established itself as an excellent way for many businesses, even start-ups, to become very successful,” he said.
For example, NOW offers low minimum purchase requirements, backed by professional design services and support. This allows retailers to develop a very professional looking line without having to invest enormous sums of money. Starting small allows retailers the opportunity to start slow, test the waters and grow their line over time. Additionally, private labeling allows retailers to maintain complete control over the contents and look of the line. A retailer may have groups of customers who are looking for very specific formulas. One of the many advantages of private labeling is that they now have the opportunity to provide custom formulas, with a look and message that is truly their own.
“Now, more than ever, economic challenges reinforce the consumer search for security and wise economic choices,” Tierney added. “Development of educational communications that reinforce cost-wise choices makes good sense,” he said. “Even further, corporate policy about sourcing criteria—such as suppliers fully conforming to both state and federal licensure, equal opportunity practices and a strong, written code of corporate ethics and citizenship—is a meaningful overlay for PL in order to reinforce security, trust and ethics.” And for a most pragmatic approach, “A no-questions asked money back guarantee could be a home run,” said Tierney. NIE |
