White labelling your goods and services: The pros and cons
The production of white label goods: a way to fast profits or the route to future problems?
Whether it's white boxes of cornflakes or Tesco-branded software packages, own-brand products are big business. While the obvious associations are with supermarkets' cheaper own versions of leading brand goods, white labelling is about far more besides.
For a start, for every ‘value' product there's something that claims to be of the highest quality, with matching price-tag. Most supermarkets now opt for a multi-brand approach for their ‘white label' products with a classic good, better, best marketing strategy. So where you have Tesco Value, you also have Tesco Finest. As a result of this, we are seeing a change in the consumer perception of such goods and, consequently, the last few years have been particularly formative for this growing sector.
More and more categories are tapping into a market worth £29.2bn in 2005 and which looks set to exceed £36bn by 2011, according to Mintel. These days washing machines, ceramics, DIY goods and even financial services are sporting the brands of the big retailers. The question is, could you be one of these faceless suppliers and what can you gain from such a strategy?
Horror stories of contracts being pulled at a moment's notice are legion – enough to put the frighteners on many. And considering the buying power of the big multiples, the natural assumption follows that they have their suppliers over a barrel. On the flipside, however, the idea of own-brand supply is understandably seductive, offering market reach without the risk and cost of marketing a new brand. Being carried by a huge established brand that promises quality to consumers will, of course, drive sales of your product. So what are the realities of these relationships and how, if ever, can you get decent margins?
Choose your product
First, you need to decide where your skills lie. If you're a manufacturer or distributor – and you know you're not a consumer marketer – then supplying own-brand goods to a retailer is a logical option. However, first you have to think about what category your product falls into. According to Peter Shaw, managing director of brand consultancy, Brand Catalyst, while many categories of food and drink are dominated by own-label, there are many others, such as oral healthcare, feminine hygiene, nappies and even beer, where manufacturers' brands still rule the roost.
“Own-label does exist in these categories,” says Shaw, “but where the consumer believes that the technical performance or product quality is too important to compromise, then manufacturers will always win, as long as they remain innovative.”
Guy Weaver is the managing director of Premium Appliance Brands (PAB), a distributor of both branded and own-branded white goods, such as cookers and washing machines, to a portfolio of customers including Tesco, Argos and Currys. Weaver argues that the own-branded approach makes a lot of sense with these particular products, due to the difficulties involved in launching a successful new brand from scratch in this sector. “Most white goods brands are long-established, such as Creda and Belling,” he says. “Some have been going for over 100 years, so how do you break into that market?” Therefore, he argues that the own-branded solution has a lot to offer the retailers, giving them the ability to customise their product ranges and promotions, and slot in nicely as the ‘good' proposition, alongside the popular, more established brands, again in a classic good, better, best offering.
However, if you're trying to break into the ownbrand market yourself, you need to have the right attitude towards your product, so thinking you have to have a product better than any other is the wrong mindset. “You have to understand what the market is and what it demands and produce that kind of product. In short, you have to be an entrepreneur,” adds Shaw, citing the example of a friend who runs a biscuit business as a case in point.
One day a supermarket phoned the biscuit manufacturer out of blue and said it was cancelling an order, after millions had been invested to gear the factory up to supply it. The order was for a value line and the retailer had managed to source cheaper versions from abroad. So, although he complained that the replacement biscuits were not as good as his own, the supermarket concerned was happy to accept this because it was for the low-cost range.
Do your homework
Business advisers and suppliers are unanimous that gaining knowledge of the market, and therefore how your product will drive sales and increase margins based on this, will undoubtedly ‘turn on' the retail buyers. You have to behave like a service provider and not a manufacturer. In other words, you have to differentiate your product, based on an understanding of the retailer's position in the market and knowledge of what their customers want.
David Williams, chief executive of consultancy firm How to Experience (H2X), advises suppliers to think about why the retailer would make more margin per square foot with their product than the one it is replacing. You then have to convince them of this. “If you can do this,” he says. “You're far more likely to be granted a trial process, and the fi rst week of sales is usually highly predictive of what the take-up of a product will be.”
Weaver concurs. One of the main reasons behind PAB's impressive portfolio of clients, he says, is its understanding of what the retailers' customers want. “We have a huge amount of knowledge of the drivers of the market and get onto trends early,” he explains. “For example, ecology is a big driver of sales at the moment and lower energy products are very popular.” Buying teams usually face immense time pressure, so you have to demonstrate very quickly – often in just 15 or 20 minutes – how the contract would be profitable for them.
The retailers themselves confirm this. According to Ian Jarmarkier, head of Sainsbury's Food & Innovation Centre, the company willalways favour suppliers who can go the extra mile and show an understanding of what its customers will want to buy.
“We are particularly focused on finding new products that are closely aligned to the trends in the nation's tastes,” he says. “In choosing suppliers, we don't just look for a great product, we also look for a strong match in our respective values.”
However, it's important to ensure that this is an ongoing process. You also have to be aware of seasonal trends and so be able to foresee what the customer will want in the future. Duncan Swift, a business adviser at Grant Thornton, warns suppliers that they have to remain innovative to avoid an invariable price squeeze.
“You need a successful record of new product development to avoid whatever you're offering becoming commoditised.” If you're supplying the same thing year in, year out, the only thing you'll see is a price squeeze being imposed by your customers, as they squash your margin.
Why supply your own brand?
Marketing a new brand is an expensive and risky business, so providing own-brand products is a way to get around this. To launch a brand, you need consumer pull and must be able to demonstrate this to a retailer. However, one of the overriding benefits of supplying white label goods is that you do not have to support the marketing costs of your product, the retailer will almost always take care of this for you.
At the same time, your products are wearing the ‘badge of honour' of a well-established brand, giving consumers the assurance that there is a certain level of quality that is commensurate with the price. Swift recalls working with one manufacturer of chilled dairy desserts who was supplying own-branded products to supermarkets, but was simultaneously trying to launch two new brands itself. After spending in excess of £1m marketing these new brands, they ended up bringing in just 1% of the company's turnover.
For retailers there are also many obvious benefits, the main one being that it provides wider margins because an own-brand product won't ‘sell itself' or offer the same value as a successful brand. It also gives retailers control over packaging and promotions and the ability to experiment with new ranges.
As a distributor of own-brand products, you can capitalise on your role as go-between by offering retailers ranges and options that they may not be able to access directly. Distributors can often offer retailers the opportunity to try things out with smaller, more flexible orders than if they attempted to source products directly.
Weaver testifies that not being tied to a particular factory is one huge advantage that PAB holds over the big brand players. “Different factories are strong in different categories, so we can cherry-pick the factories we use to find the best products,” he says. Weaver also reveals that, by not owning a factory, PAB dramatically cuts down on its overheads and is able to achieve higher margins.
Another advantage of supplying own brand is that once you've got one big retailer under your belt it will help you to attract others because the serviceability requirement is so high – as long as you're innovative enough to differentiate your product when needed to fit a new customer base.
What can go wrong?
“Retailers are like a promiscuous girlfriend or boyfriend,” says Shaw. “The relationship may be fine for a couple of weeks, but after that they will start looking over their shoulder. They will definitely look elsewhere.”
Retailers will ultimately have the upper hand in these relationships, because they have the franchise with the customer. That's why, as Shaw suggests, you literally need to ‘service' their requirements and make sure you're giving them what their customers want. “If anything, the supplier has to be an even better marketer than the retailer, to convince them to stock its products,” he adds.
If the retailer becomes dissatisfied, the consequences can be severe. You have to go into the arrangement with your eyes open and resist the temptation to make promises you can't keep to win business. As Swift warns, supermarkets will treat their own-branded products as their own.
“Often, if you don't meet their volume requirements as and when necessary, financial penalties will be levied on the account,” he explains. “Similarly, this can happen if you don't supply the quality standard that they set.”
He adds that you have to be very clear as a supplier what promotional contributions you will be required to make and be aware of any new product development expectations in the relationship, because if you don't live up to the buyer's expectations, again you can get penalised.
Another risky element in the supply of own-branded goods is the frequent lack of written terms. Weaver admits that all of PAB's relationships with its clients are based on trust.
You have to make sure that your business is not dependent on or geared up to supply just one retailer, as this is an extremely risky strategy. You have to balance the risk by dealing with different retailers and make sure the loss of one contract would not be catastrophic. In addition, if you have lots of high-ticket value items packaged specifically for one supplier in your stock room and the market moves on, not only do you end up with overpriced stock, you lose the chance to sell it on somewhere else.
Make sure the retailers' terms and conditions are acceptable to your business. The FPB warns that supermarkets will sometimes demand periods of exclusivity, and some have even been known to demand that you start manufacturing your product from a new site. It's also crucial to make sure you can survive with the payment terms, which can sometimes be 60 days following supply. To do this you have to know how much your products cost to source or package, and what your overheads are. Swift also advises suppliers not to be shy about credit control over fear that the buyers will take a dim view, since it's unlikely that they will know if you're chasing payments.
However, the easiest way to reduce the risks involved is to work out if the relationship will be commercially viable before you agree to supply, and ensure you are able to meet the demands for volume and quality. If not then it's time to walk away. “It's not a market share game, it's a profit game,” Weaver concludes. “It takes guts to turn down an order for 100,000 pieces, but we have. If it's not going to make you any money, you simply have to.”
Case study: Supplying a multiple
Name: Dave Flack
Catalus supplies own-brand memory sticks and cards ? for digital cameras, phones and MP3 players ? to Tesco. Marketing director, Dave Flack, says it was vital that Catalus differentiated itself from the major brands to win over the supermarket buyers.
?We decided that we would become category managers for the division ? specialists on the product technology, how they?re constructed, their capacities, the market trends and what other people are doing.?
The price erosion on the products has been enormous and they?ve become commoditised quickly, says Flack, but by supplying own-brand, the company has been able to either re-package or add content to the cards to create value.
It?s important to make that fi rst contact, he adds. ?You have to get names,? he advises. ?Try and fi gure out how their buying process works, make contact and send through a supporting email.? Once contact has been made, Catalus will also send through explanatory literature, including a mock up of an own-branded product. To minimise risks, all Catalus invests in is a few months? worth of packaging materials.
?All of our product sits on our shelves in the form where it can be sold to anyone at any time,? says Flack. The company aims to work on a ?just in time? strategy, so if the market does move, the product is kept in its rawest form, so it can be packaged in any way.