6 rules for successfully purchasing a private label
I have bought in 4 different branches and the proportions between A-brands and private brands are exactly the same everywhere. The A-brand innovates, builds the market, takes control and drives sales. The private label follows, gives you brand awareness and margin. Purchasing a private brand sounds simple, but there are quite a few dangers lurking.
1. Go for certainty
You carry a private label for two reasons: brand awareness and/or extra margin. As a rule of thumb you go for certainty, the proven fast movers that are in the growth or maturity phase. Forecasts are usually based on about 20% of the volume of the A-brand. There are of course exceptions, for example in the food sector you increasingly see a premium variant that allows supermarkets to compete directly with A-brands (AH Excellent and Jumbo La Place). On the other hand, you find white label propositions for routine products, where the volume is many times greater than the A-brand (milk and copying paper).
Be aware that you are the brand owner of a private label. You are therefore acting as the manufacturer and will have to invest in the product yourself. It is therefore customary to set aside part of the margin as a marketing budget. In addition, the risks of complaints, service and obsolescence are also for your account.
2. Buy from a private label manufacturer
A mistake made by many buyers when purchasing a private brand is that they buy the private label from the manufacturer of the A-brand. Nice and easy: ‘Could you also put our name on it’ and: ‘What volume is needed and what will the price be’. In this case, a brand manufacturer has only one goal: to stay in control.
The manufacturers that will want to collaborate give you a price that is 20% lower and impose a purchase obligation. In this way they can follow the success of their own brand and if scarcity ever occurs, the resources will of course go to the A-brand. Moreover, the manufacturer is in control of the quality and they can decide for themselves how your own brand will be downgraded. A brand manufacturer does not benefit at all from the success of your own brand. And that is not really a good fundament within your supplier selection.
So you have to look for a manufacturer who is specialised in private labels. A supplier who is proud to deliver almost the same quality as the A-brand, who wants to grow together with you and who has enough capacity to make a fantastic purchase deal. Because the success of a private label starts with a purchase price that is at least 50% lower than the A-brand.
3. Keep the price competitive
As soon as you have reached a competitive price for your own brand, it is important not to automatically start paying a price increase every year, as often happens with an A-brand. In this way you automatically get a price advantage of 2 to 3 percent each year, which can easily rise to 10 percent in 5 years time! In addition, you can negotiate a better price as soon as your volume increases. You only have to pay for the variable costs for your growth volume.
Suppose you buy ceramics in Portugal, in that case the producer has to deal with fixed costs of 19.44% (manufacturing overhead) plus 25.42% (general service & administration). You do not have to cover these costs again with your growth volume.
This means that 25% growth in this situation leads to a price advantage 7.3%.
Only when you have insight into the cost structure of your own brand, do you really become a leader. You can then decide for yourself how quality relates to the A-brand, to which cost advantages this leads, how big a production run has to be, how material costs develop, what the share of packaging is and how profitable your own brand can get. This way, you know exactly which buttons to push.
Finally, it is crucial to tender periodically. Let the market do its work and see if there are better providers who can calculate (even) more sharply. Have the discipline, even if you are satisfied with your current supplier, to organise a new tender every time. Make the best deal with the person who has the capacity restock your demand. And there’s a good chance that one year this will be someone else. But you’re not leaving for 1%…
At one occasion I contracted a new supplier and I figured I’d send them the remainder of the packaging. However, the cardboard was too wide for their machine and they didn’t seem to be able to handle the artwork. The result was that the material had to be destroyed.
4. Make contractual arrangements
A private label contract can be based on a period of time or on volume. In the first case there is a certain contract duration (usually 1 or 2 years) based on an indication of volume (we expect to buy 10.000 pieces). In the second case this is reversed: we commit ourselves to 10,000 units and expect to purchase them in 1 or 2 years. In practice you see a shift from time to volume contracts.
A manufacturer wants certainty about the number of units to be purchased and that is what the conditions are based on. In addition to the number and period, it is crucial to make clear agreements about the design and stocks of the packaging. If this does not happen, there is a good chance that a lot of damage will occur in the long run. Determine who designs the packaging, who owns the artwork and on what conditions approval is given so that a final design can be taken into production.
In addition, you have to determine how much packaging material the manufacturer is allowed to stock. For example, as a guideline, you can agree that a production run may include a maximum of 50% of the annual volume and that at the end of the contract duration no more than 3 months worth of packing may be kept on stock.
5. Assure yourself of reliable deliveries
If an A-brand is not in stock, there is often a shared responsibility with the supplier. With a private label, the market will see you as responsible. If we look at Kraljic (Purchasing Portfolio Matrix), a private label is often seen as a leveraged item; major financial impact, limited supply risk and many suppliers. As soon as you have few variants in stock, the private label can also be strategic. You have to be aware that the supplier only has one buyer for your private label: you. An A-brand is widely produced, kept in stock and distributed, often even to multiple countries. But the private label is unique. As a buyer, it makes sense educate yourself on the production process and get an idea of the batches and stock management.
I once bought a private label and, from the point of view of flexibility, I asked for the shortest possible delivery time as standard. But after hearing what the production process looked like, I asked what would happen if they would produce the complete annual volume of my private brand in one go, preferably in their off-season. We had plenty of space, so I was also willing to buy everything in one shipment. Result: one-off order costs, I didn’t miss out for the entire year and the purchase price dropped by another 14%.
6. Measure your success
If you use the private label for extra margin, then as a rule of thumb you should be more profitable in both percentage and euros than you would be with the A-brand. Allowing to give your customer a price advantage of at least 20%. I bought memo sheets as a variation on Post-it. Overall, the price structure was as follows:
In order to compare the developments in profitability of the private label with the developments of the A-brand. Not until the share of the private label within the total category develops positively you can speak of success. Ultimately, this results in a higher margin in euros within the category.
Concluding, when the A-brand manufacturer complains about your own brand, you can assume that they have a much bigger problem: apparently the higher price for the A-brand is no longer competitive with the added value and brand experience of the A-brand. Ultimately, the customer determines where the turning point lies.