About 40 percent of distributors in a recent MDM survey said they offer private label. This article examines the growth of private label in B-to-B markets, shifts in the private label landscape and what’s driving distributors to offer private label brands to their customers.
This is the first in a series of articles from MDM on private label in the wholesale distribution industry. Future articles in this series will examine the distributor’s balance between national and private label brands; challenges for distributors who pursue private label; and how distributors approach the production and marketing of their brands.
Distributors are increasingly looking to private label products as another weapon in their arsenals in a rapidly changing competitive landscape.
“I don’t see distributors shifting to an entirely private label portfolio and essentially becoming manufacturers or brand-owners of contracted manufacturing product,” says Guy Blissett of IBM, author of the National Association of Wholesaler-Distributors’ Facing the Forces of Change: Reimagining Distribution in a Connected World.
“But I do see much more attention being paid to private label and the role that private label products can play in (distributors’) value proposition, allowing customers to pick and choose the price point and quality and value proposition of product that they want to buy across different categories.”
Large, national distributors have invested heavily in their own private label brands in recent years. Grainger has grown its exclusive brand SKU count by more than 200 percent since 2007. About 22 percent of MSC Industrial Supply’s new SKUs in its September 2013 catalog were MSC private brands. And Fastenal’s private label brand, focused on non-fastener product lines, now makes up 10 percent of its total sales.
But it’s not just the nationals that are investing in private labels, also known as exclusive brands, own brands or store brands. More than 40 percent of distributors in a recent MDM survey said they offer private label brands.
Of the 59 percent that said they don’t offer a private label, 13 percent said they had plans to offer one. About a third said they weren’t sure.
Acceptance of private-label brands in B-to-C markets has bled into B-to-B, bringing with it both opportunity and tremendous challenges. The opportunity, when done right, can translate to margin expansion, a stronger distributor brand, increased customer loyalty and a better selection for end-users in an era of growing choice thanks in part to the Internet.
But distributors should also beware the side effects of private label, including the chance for channel conflict with national brand suppliers, the challenge in finding new skill sets to produce and market their own products, and an increased responsibility for product liability.
Growth of a Segment
Private label growth has been strong since the start of the recession in the U.S. JB Steenkamp, author of Private Label Strategy: How to Meet the Store Brand Challenge, says that as a share of the Consumer Packaged Goods market, for example, private label moved from about 17 percent of units to nearly 22 percent in the wake of the economic crisis; it now sits about 21 percent. Steenkamp is also a professor of marketing at the University of North Carolina’s Kenan-Flagler Business School.
No figures were readily available in other segments, but distributors and manufacturers across sector lines say they’ve seen continued growth and interest in private label product lines.
Distributors have more options these days to add a private label to their product offerings. Some distributors develop their own product specifications, playing a big part in the design of a private label product either in-house or with a branded or contract manufacturer. Others put their names on what a contract manufacturer has already designed.
Some master distributors – selling only to distributors – offer white-label products, allowing distributors to brand or co-brand products in their local markets. Many distributor marketing groups offer private label branded products to their members, giving members a cost-effective way of offering a brand that competes effectively on a national scale, especially for national accounts that are looking for consistency across locations.
“We’re seeing a pretty dramatic move to private label,” says Beau Walter, sales and marketing manager for Athea Laboratories, which contract-manufactures more than 400 private label specialty chemicals and cleaning products for retailers and distributors. “I think largely because of what’s happening on the consumer side, there’s been a growing acceptance on the B-to-B side for private label.”
Private brands have been a growth segment in the pharmacy channel for distributors like Cardinal Health, according to Shaun Young, Cardinal’s vice president of consumer health.
“(The growth) has been in the high single digits for the last several years,” Young says. “A lot of it is really driven by the value that the consumer is finding when they go to the shelf, and they find a national brand product. They see a private brand sitting next to it at a much better value for their dollar. One of the big pushes that retailers – our customers – have seen is the gross margin dollars are much greater on a private label product than on a national brand product. … Not to mention consumers’ acceptance of these options has been at an all-time high.”
For many distributors offering their own brands in the MDM survey, private label was perceived as a margin opportunity, as well as an opportunity to offer a product at another price tier. In some cases, the goal was to recapture lost sales opportunities due to price.
But distributors cited more reasons than price and margin for diving in.
For some, it was a defensive move against new competitive forces in the market. “We know it brings higher margins and is less likely to be cross-referenced to Grainger or Amazon,” said one distributor, who added that it plans for 25 percent of its product offerings to be private label in 2014.
“You really ensure that reorders are going to come to you,” Walter says. “… Today many of the professional brands that our industries are used to selling and buying, those can be purchased at big-box stores now. That makes it particularly challenging for a given distributor to keep that business when the product that they might be selling can be purchased anywhere.”
Ted Stark, president of janitorial and sanitary supplies distributor Dalco Enterprises, New Brighton, MN, says private label helps the distributor fight showrooming, when reps consult on products and services to the customer who then gets quotes from other distributors and outlets carrying the same products. “That becomes a motivator to sell the private-branded product because if we go out and do all the sales and marketing for a Dalco product, nobody else is going to come in and show the exact same product,” Stark says.
Some distributors, including Dalco, are fighting converging channels, where their products are now being sold by a broader array of traditional distribution competitors.
“There really aren’t any exclusive distribution arrangements anymore,” Stark says. “And we’ve seen the national manufacturers increasing their distribution. We’ve seen them add not only additional independent jan-san distributors, but they’re also adding on the big-box guys, and distributors from other industries are carrying our product.”
Distributors are also using private label to fill holes in their lines or to provide custom parts to customers. One distributor wrote it has a private label offering “to protect our engineering efforts vs. the ‘me too’ … distributors. Essentially protect ourselves vs. those willing to drop price.”
In some segments, distributors are introducing private label to compete against low-quality imported goods. “For us more than anything it is a defensive posture to respond to competitive distributors that import non-branded Chinese goods,” says Michael Flink, president of ADI, a security and low-voltage products distributor with more than 200 branch locations.
He says customers want a “cost-effective” solution that they can trust. The distributor’s private label products are positioned on the good end of the good-better-best spectrum, with national brands filling the better and best buckets.
Other reasons distributors said they offered private label included: avoiding geographic restrictions on branded products; responding to suppliers’ “attempting to control the customer”; consolidating third-tier suppliers; and preventing the “excessive discounting of premier suppliers.”
A Demand for Higher Quality
The demand for higher-quality private label is growing, providing more opportunity to add value for distributors.
“Years ago in the industry, private label was considered a low-end, low-cost solution,” says Greg Polli, vice president of product management and global sourcing for MSC Industrial Supply, Melville, NY. “Customers’ expectations have evolved, and they expect more. Our customers are counting on us to help them cut cost out of their operations, so presenting strong quality products at an effective price point is absolutely critical for our customers.”
“Now you can go into a Target or a Kmart … and they all have their own brands. It’s packaged nicely, priced more competitively, and the bottom line is you take it home and you say, ‘this stuff isn’t bad,’” says Ed Rossi, president of janitorial and sanitary supplies distributor DawnChem, Cleveland, OH. “It has evolved over the years to where it’s not frowned upon as a generic product.”
Retailers and distributors recognize the importance of nicer-looking packaging, supporting literature and better marketing. The bottom line, according to distributors that offer private label, is that the product has to work as promised.
Vince Phelan, director of trade marketing for United Stationers, a master distributor of office supplies, agrees. “I think customers are savvy today – they know they have a lot of choices,” Phelan says. “And that product experience is so important.”
Close to 20 percent of Dalco Enterprises’ chemical products sales are from private label; as the quality gap between private label and national brands began to close over the past two decades, Dalco has promoted the products more and customers have been more receptive.
And the recession provided an opening for many distributors, including Dalco, to offer a quality alternative at a lower price point.
Blissett says distributors need to view private label with an eye toward quality to remain relevant. “If distributors only view private label as a low-cost cheap alternative to the branded product, then I think there is a potential risk for a race to the bottom,” he says. “But if they think more innovatively about private label as having the potential to build a whole new brand of high-end product under the distributor’s own brand name, or a subset of that brand name, that’s a different mindset, and it takes private label in a whole new direction.”
Phelan says United Stationers is in tune with the need to raise the bar on private label products. “We try to manage our brand like their national brands,” he says. “We try not to let it become too commoditized. I think our distributors are savvy enough to understand that it can be a quick race to the bottom if you’re not careful.”
The Value of a Distributor’s Brand
As distributors add private label to their product portfolios, it begs the question: What is a distributor’s brand worth? Historically a distributor’s brand – depending on the sector – was largely dependent on the national brands it carried. That mindset has shifted.
“I see distributors being more assertive in terms of their own branding, and understanding the power of their brand and the importance of getting their brand out there in the marketplace,” Blissett says.
Take foodservice distributor Sysco, which recently partnered with the Food Network to promote its brand to the end-user through sponsorship of the television show Restaurant Impossible. Sysco has 40,000 Sysco-brand products, according to its Investor Fact Sheet. “This is the first time in the history of Sysco that we’re going to formally introduce our brand and our company to the end-consumer,” William Goetz, senior vice president of marketing for Sysco, said in February 2013 at the 2013 Consumer Analyst Group of New York Conference.
Steenkamp says distributors sometimes have market propositions over and above the national brands they may carry due to relationships in local markets or services they provide. Distributors often have a closer connection to the needs of end-users, giving them insights into products or customizations that will add value for customers. The presence of private label will likely continue to grow in distribution.
“I think there’s definite upside for the market,” MSC’s Polli says. “Private brands will certainly not replace the stronger industry brands, but there could be some displacement of weak industry brands that aren’t driving real value-add for their customers. I see us growing as a percentage of our revenue in the private brand area.”
Jenel Stelton-Holtmeier and Angela Poulson contributed to this report.