Retailers from Coast to Coast Discover Profit in Private Label Brands

Private label product lines are an excellent way to individualize, expand and expose a retail business.

Private label products are achieving new levels of growth every year, accounting for one of every five items sold daily and comprising a $50 billion market at retail, according to the Private Label Manufacturers Association. In the natural products industry, private labels—or store brands—can be an outstanding means of differentiating, developing and strengthening a business. Launched correctly, they furnish the retailer with a powerful opportunity to establish trust and repeat sales with customers and to distinguish the business from the competition. At the same time, private labels offer the customer increased choice.

“Possessing a private label supplement line is a significant advantage that any business can have over its competition,” said Paul Licata, president of Licata Enterprises, a private label manufacturer in Huntington Beach, Calif. “It tells your customers that you believe in the products you sell—enough to put your name on them. It reminds your customers where they bought the product, gives your employees a focal point for selling supplements and is used by the vast majority of successful health and natural food stores.”

However, the decision to launch a private label product line is not one to be made lightly. Arriving at such a conclusion necessitates a systematic review of several crucial factors. Variables to appraise include potential benefits and risks, fiscal feasibility and minimum requirements. Fortunately, experienced private label manufacturers can endow the retailer with an excellent source of guidance in making the choice.

Sharmin Karim, executive director at NHK Laboratories Inc. in Santa Fe Springs, Calif., suggested one of the top reasons for launching a private label is capturing customer loyalty to a unique line. Such exclusivity provides the retailer with an excellent means to distinguish his or her business from the competition.

“When consumers purchase your private label supplement line, retailers gain loyalty and are guaranteed business for quite some time, because that unique product line will not be found anywhere else but your retail store,” he said.

In addition to repeat business, customer loyalty brings other ancillary benefits, according to Gene Nakagawa, vice president, marketing & strategy, at Lake Forest, Calif.-based Vitamer Laboratories. “It leads to the purchase of other products, thus increasing a store’s revenue, not only in supplements, but also in the other products it sells,” he said.

Exposure of the business is another benefit commonly engendered by a private label supplement line. “As a retailer, when you have your own private label you maximize your exposure and strengthen your retail brand,” Karim said. “When a consumer purchases a private label or house brand, he or she is exposed to the store name on a daily basis.”

Additional benefits conferred by a store brand include higher margins and creation of the impression of size, Karim added. Greg Williford, vice president of sales and client services at Tustin, Calif.-based VitaTech International, cited ultimate control over the merchandise as a key advantage. “Retailing a private label is unlike retailing other products in that you have complete control over the line of products,” he said. “You are in control of the formulation, the marketing, the pricing, the quality and the manufacturer.”

However, this large degree of control also forces the retailer to accept ultimate accountability for the merchandise. The reputation of the business rides on customer satisfaction with the new line. “The products are tied to the store’s name, which is why it is important that retailers choose their private label manufacturer very carefully,” Nakagawa said. “Retailers need to remember that price isn’t nearly as important as quality and efficacy of the private label supplements they sell.”

As with any new venture, a certain amount of risk accompanies the launch of a store brand. “The two more obvious risks are capital and shelf space, both of which are outweighed by the benefits a good private label supplement line can bring to retailers,” Nakagawa said. He added one way the retailer can minimize risk is by ensuring the line is high quality. “The possibility of losing customers reinforces that need to put a high-quality product on the shelf, especially when it has the store’s name on it.”

Mary Miracle, national sales manager with Reliance Private Label Supplements in Somerset, N.J., agreed quality is a key issue. “Risks are taken if low-quality products are brought in as private label products,” she said. “You do not want to put your hard-earned name and reputation on a product that does not deliver.”

Although federal standards for GMPs (good manufacturing practices) have yet to be established, most manufacturers are preparing for the eventual creation of official standards. For example, a growing number of contract manufacturers are becoming certified for quality standards through third-party organizations.

One type of quality certification is offered through the National Nutritional Foods Association (NNFA). Its GMP program allows manufacturers to have their operations audited by official personnel. If a manufacturer passes the audit, it becomes NNFA GMP certified, and its product labels can display a mark indicating the products are produced in compliance with approved manufacturing guidelines.

Other types of certification are offered through USP/DSVP (USP: Dietary Supplement Verification Program (DSVP)) or NSF International. These organizations formally verify manufacturers observe a set of quality assurance standards including GMPs, quality control infrastructure, product documentation, product testing against specs and claims, and on-site audits. In addition, these organizations are increasingly conducting in-house laboratory or third-party testing, and serving smaller retailers. Like products made by NNFA-certified manufacturers, products made by manufacturers with USP/DSVP or NSF certification are allowed to carry a quality mark on the label.

The aggressive nature of the natural products market poses another risk in launching a private label supplement line. “It’s a very competitive marketplace and there are no guarantees of success,” said Bob White, executive vice president of Nature's Products. “To start your own product line, you must invest in the product, marketing, labeling, perhaps a trade show booth, and in all the other elements involved in introducing the line.

The product might not sell, it might not meet customer expectations, sales may not approach what you anticipated, the cost of advertising, labeling and promotion may exceed what you had planned for, and it may be difficult to educate the public about the benefits of your products. But, like any other endeavor with risks, you simply have to get out there and do it.”

Once the decision to produce a store brand has been made, the next step is to choose the right manufacturer to ensure successful launch of the new line. Most manufacturers and retailers agree a good starting point is to visit potential partners.

Factors to assess include the manufacturer’s facilities, methods for sourcing and testing materials, labeling options, cosmetic appearance of delivery forms, willingness to train and educate retailers, customer service and turnaround time.

“Choosing a reputable and knowledgeable manufacturer is the most important consideration because they will be producing products with your name on the label,” White said. “It’s critical to work with a manufacturer that is registered with all appropriate government agencies, has adequate product liability insurance and has its own in-house laboratory, established GMPs and standard operating procedures (SOPs). Quality, service and price—in that order—are key factors in selecting a manufacturer.”

“A good contract manufacturer has plenty of experience in doing private label, followed by speed, flexibility, followthrough, high standards of quality and dependability,” Rainer Schindler, general manager with Assonet, Mass.-based Sunlife USA Corp., added.

Another point to bear in mind in choosing a manufacturer is to avoid those that utilize subcontractors, according to Randy Schoenfeldt, vice president of business development for Redmond, Wash.-based Nutraceutix Inc. “Eliminating the number of manufacturers involved in producing a product is critical to being able to reduce costs, control quality and manage your supply,” he said. “With that in mind, finding a ‘prime‘ manufacturer who controls processes from the production or sourcing of raw ingredients, to formulation and blending, to product-forming and finished bottling is of significant benefit.”

In addition to choosing the right contract manufacturer, another initial consideration in launching a store brand is selection of the right product mix. “One of the most challenging first steps is determining the correct number and mix of initial private label items, as this can determine the amount of time and money a retailer needs to expend in introducing their own private label,” White said. “Rather than attempting to go with a broad range of products, it is safer to start with six to 10 items that you feel will be the best sellers—other items can always be added later. This helps keep down label and inventory costs because some products will always move better than other products. The initial impact on cash flow is an important consideration because funds will be expended and it may take some time to recover those costs, especially on the initial order.”

Nakagawa suggested an initially broader approach to creating the preliminary product mix. “A good private label line should first include all the basics in each product category,” he said. “Second, add specialty items with proven brand sales at the store. Finally, consider any unique products from the private label supplier that can give your own brand a cutting-edge presence. By eliminating some of the duplication of the store’s product offerings among the national brands, it is easy to make room for the private label set. Practice efficient category management; there’s no need to carry four different brands of vitamin E 400 IU mixed tocopherol softgels plus the private label version.”

Sokoloski stressed the retailer’s most important guideline for selecting items is to choose products in which he or she has faith. “Retailers must pick items that they believe in— ones that have a proven track record for their businesses,” he said. “For example, if your customers buy a lot of joint formulas, it would be easy to introduce that in a private label line. Once customers start using the store brand for products they already use, they will be more inclined to try new items from that line.” Williford agreed the retailer must examine the track record of items he or she normally sells in order to gain the confidence to add them to an in-house line. Clearly, observing consumer buying patterns helps create the reassurance necessary to adopt a product as one’s own. “If I noticed one or two products that sold well, and promotional materials provided by these products’ manufacturer weren’t the main cause of their sales, then I’d consider going to a manufacturer and having such products made myself as my own private label supplement line,” he said.

In addition to drawing on personal observations and experience, a retailer can also examine market trends for guidance in selecting products for a private label, according to Karim. “Determine what are the large-scale best sellers in the marketplace— what your consumers are asking for,” he said. “In general, examine market trends. This can be as simple as reviewing current commercials on television, the Web, etc. What products are being put out there the most? For an older market, you would want to have joint products, heart products, cholesterol control, etc., while products for a younger market might include sports nutrition, diet, fitness and Ayurvedics.”

Peter Sokoloski, private label manager at NOW® Foods in Bloomingdale, Ill., suggested once the right product mix has been determined, the new line must be supported adequately. “It requires more focus and support than any other supplement line in your store,” he said.

Such support requires a great deal of commitment from the retailer; without it, the business risks loss of its investment. “If the retailer is not 100 percent committed to selling the private label line, chances are the line will fail,” said Karim. “By launching a private label supplement line, you put your retail brand at risk, as well.”

Commitment to the success of the new line must also be shared by the retailer’s employees, Miracle said. “The owner and managers must make it clear to their employees that they are bringing in a private label line as a business decision, and they need to help their employees get behind the line and build it,” she said.

Nakagawa agreed all employees must support the decision to launch a private label. “The entire store’s hierarchy, from owner(s) to department clerks, must understand the private label proposition and its potential impact on the store’s financial health,” he said. “If they ‘get it’ and are well trained on the quality of their new brand, they will always sell the private label first when it meets their customers’ needs.”

In addition to selecting products for the new line and ensuring staff commitment, another initial consideration is start-up costs. Although prices vary from manufacturer to manufacturer, the minimum requirements the retailer can expect to cover fluctuate from case to case. Minimums may be as little as a few hundred bottles of product, or a small predetermined minimum of individual capsules or tablets, to much higher minimums per SKU, per product.

“It depends on the unit dosage form (i.e. capsule, tablet, or powder blend), and the size,” Karim said. “The smaller the size of the dosage forms, the larger the minimums, and so on.”

In general, smaller initial quantities of product are more expensive to produce than larger orders, and if the retailer cannot sell the initial inventory over a certain period, the venture may not be economical, according to White. “If initial order quantity is low, one must calculate the developmental expenses and cost of inventory to determine the rate of return on investment,” he said. “If the minimum order is 1,000 bottles of 100, calculate how long it will take to sell all 1,000 bottles. If the order cannot be sold in a certain period, it may not be worthwhile doing a private label.

Most retailers who own multiple store locations see the benefit of having their own private label and are generally able to move the type of volume necessary to get into private label. Also, if stores have other marketing avenues (i.e., Internet, mail order), they may have enough volume to justify adding their own private label brands.”

Labeling constitutes another start-up cost. The price of product labels hinges on factors including size, quantity, number of colors, type of material used and coating. In addition, the complexity of the label’s design can elevate its cost, whereas an internal design team and in-house printing can lower it. Some manufacturers may be willing to use labels provided by the client, for minimal or no additional charge.

According to White, retailers with smaller initial orders may be limited to basic labeling. “Many companies that let you order a small quantity of bottles generally use a ‘generic’ private label and don’t give the retailer the capability to develop custom label design, colors, or other factors,” he said.

Cost is not the only consideration surrounding product labeling. Labels must also comply with certain regulatory guidelines established by government agencies including the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC). These organizations aim to ensure products perform as claimed and are backed by valid scientific testing. To meet product labeling requirements, the retailer must investigate current regulations mandated by these agencies and consider working with legal counsel to help shape and verify the legality of label claims. Manufacturers may also offer to help retailers with the legalities of labeling.

“We generally recommend staying away from making structure/function claims on labels for customers not moving large quantities of each product,” White said. “Doing so eliminates the possibility of having a government agency knock on your door asking for substantiation and also eliminates the need to file a structure/function claim prior to market introduction. We also assist customers with information to guide them on what can and cannot be said on the label relative to the potential benefits of the product.”

Since many retailers may not have extensive legal resources at their disposal, it is important to choose a private label manufacturer with a strong regulatory department, experience with FDA issues and extensive knowledge of regulatory requirements, Nakagawa added. “A good private label supplier should be able to handle most legal questions a retailer may have,” he said.

Once the new line is finished and shelf-ready, the next priority is deciding how to market the goods. The retailer must decide how to advertise the new line, including what marketing channels to use. Sometimes, the manufacturer may lend the retailer promotional assistance in the form of posters, shelf talkers, bag stuffers and other in-store materials. Certain manufacturers may also help design print and Web advertisements or arrange in-store seminars for customers.

“Like any other line in your business, it comes down to how you support it,” said Sokoloski, who recommended introductory discounts on the new line; buy-one-get-one sales; requesting sales associates try products and offering them commission for items sold; proper in-store merchandising, sales fliers; print, radio and TV advertising; and featuring the new line on the business’ Web site.

Miracle and Nakagawa recommended the retailer educate staff about product benefits. Nakagawa recommended prominent shelf placement and displaying private label items next to national brands, while Karim advised retailers to investigate promotions and mailing lists. “You want to make sure that you highlight the fact that the retailer now carries its own private label supplement line,” Karim said.

White recommended the retailer spend time educating customers on the benefits of products in the new line. “Most retailers are very customer oriented, which means that they devote one-on-one time to their customers,” he said. “This gives retailers the chance to explain the advantages and benefits of their private label product over other similar products in the store. Remember, you’re not only selling your private label items—you’re selling your store reputation.”

With the right amount of thought, degree of commitment and choice of contract manufacturer, launching a private label can benefit a retail business.

“I’d say our customers’ most successful private labels are those that are well researched in terms of market potential, well differentiated with distinctive characteristics and well marketed,” said Schoenfeldt.

Miracle added, “Retailers have spent the last 20 to 30 years building national brand sales, so they need to realize that they have the power to build their brand and it won’t happen overnight. But if they just remember that customers buy what they recommend, they will be successful in building their house brand.”

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