Many food manufacturers produce both under their own brand and for retailer private labels. Isn’t it inevitable that this causes a conflict of interests? With private label on the up, it’s a conflict manufacturers need to resolve, as Bernice Hurst reports.
Go deeper with GlobalData
Attitudes towards producing and purchasing private label products vary worldwide. In the UK, they are often associated with both quality and value; most consumers are aware that tinned food, for example, purchased under the retailer’s name may actually have been produced by the manufacturer of their favourite “name” brand.
In the US, there is more resistance and an underlying suspicion that the lower price means lower quality. Or that there may simply be a larger profit for the retailer selling an inferior product.
But what’s in it for the manufacturer who is sacrificing awareness of his own brand in favour of his customers’? Producing under customers’ labels rather than the manufacturer’s own can be a route to achieving critical mass. The recipe may or may not have been modified but purchasing greater quantities of basic ingredients can lead to considerable savings for manufacturers, enabling them to sell private label at a price sufficiently low to attract the larger contracts to which they aspire. Swings and roundabouts then. What you may lose in brand loyalty, you gain in profitability.
In a commercial world where brand loyalty is every manufacturer’s dream, many retailers choose to throw their own hats into the ring, setting their own products out on the shelves for consumers to weigh up against the big names. If this means displacing some of the big names then their manufacturers can fight to regain placing (and profitability) by producing for the retailer.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataAs with most aspects of retailing, there are ways for everyone to win and ways for everyone to lose. Where private label orders provide an opportunity for manufacturers to maximise spare capacity, or to purchase greater quantities of ingredients and materials at lower price, there are obvious advantages all around. The danger is in going too far and becoming too dependent on “super-customers” whose contracts may leave the business in trouble should there ever be disagreements or cancellations.
Where do manufacturers draw the line, then, between producing under their own name and their customers’? Do large contracts with super-customers fit with building their own brand? Or are they the kiss of death?
Interdependency can be the kiss of death
Duchy Originals prevents problems by ensuring that they never become their suppliers’ biggest customer. Fiona Gateley, PR and Communications Manager, explains that they are aware that interdependency could weaken both parties. Duchy Originals concentrates, therefore, on generating additional business for their suppliers. Explaining that they do not, in fact, function in the same way as a retailer selling private label, Gateley points out that this relationship constitutes a key difference in their methods.
Liz Crick, Sales Manager of Denhay Farms, endorses this. Denhay products are sold under their own name to independent retailers, under the St Michaels brand in Marks & Spencer (but with Denhay’s name on the label) and to Duchy Originals for whom they act primarily as contract packers. “We expanded to meet Duchy’s requirements,” says Crick, “but it meant we could take on business and reach outlets we wouldn’t have otherwise. There is no conflict between what we do for Duchy Originals and the business we generate in our own right.”
Greg Baskin, Corporate Manager for Private Label and Contract Manager of American manufacturer meat manufacturer and processor, Hormel Foods, believes that their biggest challenge is negotiating acceptance of formulations. Producing several variations on a basic recipe for, say, chilli has decided advantages and can result in large volume orders that keep the production line busy and efficient.
Achieving the balance between quality and price, however, with an eye to the specific audience of shoppers each customer attracts, is a skilled job. Hormel sells its chilli under its own brand but also, with variations, under more than one other supermarket brand. Baskin says that they avoid problems by offering product only to carefully selected customers. The degree of variation depends entirely on the customer, volume likely to be sold and consumer tastes.
But Julie Lamont of Accenture, attending a European conference on efficient consumer response (ECR) in May, was of the opinion that big store chains usually get what they want from manufacturers in terms of price, specification and conditions. She told bloomberg.com that “The power sits with the retailers. Ultimately the manufacturers will have to do what the retailers want.”
|
“The power sits with the retailers”
Where private label is concerned this is not necessarily the case. Warren Thayer, Editorial Director of PL Buyer in the US, believes that consolidation may be restricting the number of potential private label suppliers available. Writing in the magazine’s May edition, Thayer says: “Private label vendors who are still standing are consolidating in self-defence, and we have more and more categories with fewer and fewer vendors bidding on our little reverse e-Bays.”
Thayer’s reference to online auctions shows just how much potential there is for backfire. The harder retailers push to get price down, the more resistant manufacturers become. A crack suddenly appears between maximising production capacity and cutting corners which can result in greater infringements on quality and/or profit margin than are acceptable.
This trend may go some way towards explaining the growth in global trading enjoyed by members of the PLMA. International sourcing was emphasised at the recent World of Private Label show in Amsterdam where buyers were expected from more than 50 countries. Founded in 1979 and now renamed PLMA Global, the organisation focuses on creating opportunities for manufacturers and retail and wholesale buyers in the US, Europe and Asia. To support the expected continuing expansion, three new trade shows will be held over the next two years in France, the UK and Germany to build closer relations between major retailers in those countries and PLMA member manufacturers.
Such international sourcing can be seen in two lights. One, that retailers want to offer consumers a broader range of international products. But secondly, they may be having to look further afield for suppliers as traditional sources become more price-resistant and reluctant to meet the terms demanded. Either way, there still seems to be a market for manufacturers to utilise their production units to full capacity with a demand for private label that is steadily increasing.
By Bernice Hurst, just-food.com correspondent
