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Private Label Use to Grow
Strategy will strengthen but also strain relationships
By Adam J. Fein, Ph.D.
Private label products—products branded by a wholesaler-distributor—represent a break from the more traditional wholesale distribution approach of reselling manufacturers’ branded products. In our new research study, Facing the Forces of Change®: Lead the Way in the Supply Chain, we found that private label strategies by wholesaler-distributors will expand substantially over the next five years.
Private labels will strengthen wholesaler-distributors’ relationships with their customers. However, they will strain distributors’ relationships with their suppliers by challenging the wholesale distribution channel’s traditional role as an extension of a manufacturer’s sales and marketing activities.
Wholesaler-distributors will need to build new capabilities in manufacturing and design in order to create products with unique, premium benefits. They will also have to select the right opportunities for private labels and manage the new supply chain risks associated with global sourcing.
Future
Growth
We use the
term private label to include products manufactured by a wholesaler-distributor
under contract as well as more traditional branded products that are owned or
acquired by a wholesale distribution company. A private label product’s brand
may incorporate the wholesaler-distributor’s company name or it may use a
distinct name. In both cases, marketing of these brands contrasts with a more
traditional approach of reselling manufacturers’ branded products.
Exhibit One shows the current and projected prevalence of private labels for the six major markets covered in Facing the Forces of Change®: Lead the Way in the Supply Chain. On average, 43 percent of wholesaler-distributors currently sell their own private label products, although there are substantial differences between the six major product types in our study. For example, almost one-half of building materials wholesaler-distributors currently offer private label products, compared to only 23 percent of contractor supplies wholesaler-distributors. Keep in mind that every company is unique. Your company may participate in multiple markets regardless of the products sold.
Exhibit One: Percent of Wholesaler-Distributors Offering Private Label Products
|
|
|
2012 Forecast |
|
OEM and Production Materials |
61% |
77% |
|
Finished Retail Goods |
54% |
73% |
|
MRO Supplies (Industrial and Commercial) |
49% |
69% |
|
Building Materials |
47% |
74% |
|
Machinery and Equipment |
35% |
55% |
|
Contractor Supplies |
23% |
52% |
|
Average |
43% |
65% |
The lower costs and ready availability of overseas sourcing opportunities in Asia and South America accelerate the ability of wholesaler-distributors to get their own value-priced private label products manufactured. About 57 percent of wholesaler-distributors with private labels currently source their private label product from an overseas plant. By 2012, 81 percent of these wholesaler-distributors expect to be sourcing overseas.
For example, Do it Best Corp., a U.S.-based member-owned distributor of lumber, hardware, and building materials with annual revenues of more than $3 billion, opened Asian offices in Hong Kong and Hangzhou in 2006. Although the company has sourced from China since the mid 1990s, the new offices put company management physically closer to manufacturing, packaging, design, and inspection.
Business
Benefits
Private
label products offer three major benefits to wholesaler-distributors:
-
Buy-side margin. Private label products can be priced lower than comparable national brand products, especially when sourced directly from an overseas manufacturer. Since private label products are less expensive to purchase, a distributor can earn a higher margin even when the products are priced at a discount to national brand products. This option simultaneously grows margins for the distributor and aligns the distributor more closely with its customer’s objectives.
-
Sell-side profitability. A wholesaler-distributor’s private label products offer the opportunity for increased profitability by capturing the branded margin that would otherwise flow to an upstream manufacturer. The distributor also gains the ability to control the entire profit stream from production to sale, allowing for more flexible sales compensation models and higher commissions to drive sales. For example, a distributor can reduce the advertising overhead of a national brand manufacturer, especially on certain products for which customers see no value differentiation.
-
Differentiated product assortment. A private label brand name can be exclusive to a wholesaler-distributor and provide a point of differentiation. For example, some wholesaler-distributors find that they can fill gaps in the marketplace by offering the good (value) alternative in a good/better/best hierarchy. Availability can be another point of differentiation. A private label product can be sourced from multiple manufacturing companies and this gives a distributor the opportunity for more consistent product availability than when sourcing from uniquely branded manufacturers.
W.W. Grainger, Inc., a distributor of facilities maintenance products, currently has more than 9,000 private label SKUs equaling $400 million in sales. These products, which came primarily from China and Taiwan, had gross margins that are 20 percentage points higher than other products sold through the company’s branch network.
Strengthening Customer
Relationships
The
most innovative wholesaler-distributors are also using private label products to
strengthen customer relationships and grow their businesses.
Consider Arbill Safety Products, a third-generation distributor that provides safety products and services to customers in a wide range of industries. In addition to stocking more than 4,000 products from all major branded manufacturers, Arbill has offered its own private label products for more than 20 years. As part of the company’s growth to serve larger, national customers, Arbill began branding its private label product line under the TRULINE® brand.
Arbill can differentiate the brand in the marketplace by controlling the entire value chain from design to delivery. Customers can request specific features to existing TRULINE® products. This allows Arbill to produce a customized, unique product for customers with special requirements. To meet customer demand, Arbill even offers a better quality product in selected product lines than the manufacturer-branded products on the market.
Other wholesaler-distributors are using control over a private label to create new tools for their customers.
Interline Brands, a direct marketer and distributor of MRO products, receives 25 percent of its sales from private label brands. To support its Premier plumbing products, Interline operates a consumer-oriented product marketing Web site for the Premier Faucet Collection.
This Web site features images and technical information so that Interline’s plumbing contractor customers can showcase the products to household consumers. The Web site also allows Interline to provide new project leads to its contractor customers because the "where to buy" section states: "Premier Faucets are sold exclusively to trade professionals. Please complete the following form and you will be contacted by a Premier representative."
Building Your
Strategy
Wholesaler-distributors with private labels
have deepened their knowledge of their customers’ true needs by taking on the
role of brand developers and marketers. However, a private label strategy
requires the courage to walk away from supplier rebates on selected products in
favor of increased margins from customers and buy-side sourcing activities.
The ready availability of global supply sources will lead many wholesale distribution executives to consider private labels. Consider the following questions at the next off-site meeting of your company’s top executives:
- What are the most successful private label brands offered to customers by wholesaler-distributors (our company or a competitor) in our line of trade? Why have these products been so successful? Will a private label allow us to get higher product margins?
- Do private labels align us more appropriately with customers’ needs in our industry? How can we improve our marketing or product features to achieve premium positioning for our private label products?
- Can we build the brand management capabilities needed for maintaining success over time? Will our shareholders and owners accept higher investments in marketing and product development?
- What funds are at risk from the loss of potential supplier rebates or discounts? At what point would our suppliers perceive private labels to be a threat to the relationship?
- How will our corporate culture adjust to an evolution from the sales channel on behalf of manufacturers to a marketer and developer of unique products?
- Will our new supply chain expenses and risks reduce or eliminate any potential savings from global sourcing? How might geopolitics affect future currency rates and our relative cost advantages?
The world is changing, and wholesaler-distributors must keep evolving in order to stay relevant in their respective industry’s supply chain. Wholesale distribution executives who understand the big picture trends behind private labels will have the opportunity to lead the way in their lines of trade.© 2007 Pembroke Consulting, Inc. Adam J. Fein, Ph.D. is the founder and president of Pembroke Consulting, a firm that provides business and marketing strategy advice to executives operating in channel-intensive industries. He can be reached at 215-523-5700 or on the Web at Pembroke Consulting. This article is adapted from the new report Facing the Forces of Change®: Lead the Way in the Supply Chain, which is available online from the National Association of Wholesaler-Distributors at www.naw.org/ftf07.
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