Private Label

Lets Retailers Stand Apart

As consumers increasingly discover the importance of nutritional supplementation, many are also discovering the costs inherent with supporting good health. Fortunately for natural products retailers, these dual trends afford the opportunity to build long-term relationships by providing both education on product benefits and supplying private label offerings that provide value and keep the store’s name in front of the customer’s eyes.

In the natural products industry, private labels, also known as store brands, can be an outstanding means of differentiating, developing and strengthening a business. Developing a private label line gives retailers an opportunity to establish trust and repeat sales with customers and to distinguish their business from the competition.

The Private Label Manufacturers Association (PLMA) noted store brands now account for one of every five items sold in U.S. supermarkets, drug chains and mass merchandisers, representing $50 billion of current business at retail.

The association further noted consumer’s purchases of store brands vs. national brands yielded $15.8 billion in savings to the consumer pocketbook.

“Margins are generally 6-percent to 10-percent higher than national brands,” noted Frank King, president of King Bio Natural Medicine. “And offering your customers the same or greater quality as the common national branded products at significant cost savings tells your customers you care about them.”

Beyond the simple cost equation, other market trends are influencing the move toward private label. “There has been an increased demand for private label products, as the increase in Internet sales of brand name goods has hindered sales at health food stores,” said Deb Papillo, sales manager with FoodScience of Vermont.

Damon Armani, account manager with Progressive Laboratories, agreed with the assessment. “There has been a geometrical increase in participation in private label by retailers at all levels,” he said. “Today, anyone who has a retail store, Web site or is involved in direct selling can private label their own line. In the future, inventories will be spread among three separate categories: a brand name, a private label and a local vendor. For example, in your weight loss section, you’d have your top seller, your private label version and one from a marketing firm that has a local rep you work with.”

Consumers are increasingly familiar with store brands. A national study conducted by The Gallup Organization found 90 percent of consumers are familiar with store brands, and 83 percent purchase those products on a regular basis. Similar results were posted in a 2006 study from The Hartman Group, Private Labels from a Consumer Perspective, which found only 14 percent of consumers had not purchased any type of private label products in the past three months.

“Branding is no longer the sole domain of national consumer packaged goods manufacturers; retailers have taken a page out of the manufacturing play book and called it their own,” said Laurie Demeritt, president and chief operating officer (COO) of The Hartman Group. In its new report, Hartman noted one-third of consumers believe private labels are “identical” to national name brands and almost half (49 percent) see them as “close” but not yet on par with name brands.

Consumers are selecting private label products at retail by assessing both price and quality to determine a perceived “value.” The Hartman Group found two-thirds of consumers feel having a point of comparison—examining a name brand product next to the private label—is important for determining whether to purchase the store brand.

“Store brands no longer carry the stigma of lower price for lesser quality; the consumer increasingly perceives the retailer’s store brand as a superior value,” said Karl Halpert with Private Label Select. “The private label becomes a branding opportunity itself, and retailers gain the equity of their own brand.”

While there is great opportunity in the private label sector, there are several key considerations when deciding whether to make the move into private label. One that weighs on many retailers’ minds is the cost equation. “Many people assume that to produce your own label you must have a high minimum and high start-up fees, which is not always the case,” said Sandra Herbert, customer service rep, and Jim Sarti, director of research and development and formulation at Arizona Nutritional Supplements. “But most of the quality private label products out there are made in the same facilities, with the same operating procedures and using the same raw ingredients as the ‘national brand’ products. Private labels are able to cut many of the distribution, stocking and marketing costs associated with the ‘national brands’.”

Another issue is the involvement required by the retailer. Most operators note they try to make it as simple and turnkey as possible, respecting the time constraints most health food store owners are facing. “We offer fast delivery and professional assistance throughout our simple and quick process of designing a private label to delivery of finished goods,” Papillo said.

Time is a key part of the equation. “The development of a product and its packaging, and any necessary testing, typically involves myriad details involving dozens of people and numerous vendors—more so if there are multiple SKUs,” Halpert said. “Customers often have a false sense of the time and costs involved in developing a product and getting it from the planning stage to the store shelf.”

However, many companies have developed a range of products to allow their customers to get involved in private label in a short time period. “You could have an entire line of products in your store in as little as two weeks,” Armani said. “With small minimums, we allow our customers to ‘spread the sand from their bucket’ around to multiple SKUs, allowing them to catch the competition in the shortest amount of time possible.”

Balancing out the concerns are the many benefits inherent in developing a store brand line. Unique lines offer a retailer exclusivity that builds customer loyalty, helping distinguish the retailer from the competition. Those loyal customers are also likely to purchase ancillary products while they’re in the store, building the average order size.

In addition, developing a specialty store brand can also position the retailer as a provider of quality goods; this also forces the retailer to be more accountable for the contents and effects of those products. The store’s reputation is, in effect, on the line, making it critical to select the right partner.

One first step is to check on quality measures such as certifications. Although federal standards for GMPs (good manufacturing practices) have yet to be established, most manufacturers are preparing for the eventual creation of official standards, and a growing number of private labelers are becoming certified through third-party organizations.

“GMP certifications provide our customers with additional security that we are producing products in such a way as to provide a quality product that is safe and consistent,” said Sarti and Herbert.

Among the organizations offering quality certifications are the Natural Products Association (NPA), NSF International and U.S. Pharmacopoeia (USP). Their GMP certification programs involve on-site audits of the manufacturing facilities to assess compliance with a number of standards involved in quality control, product documentation, product testing and standard operating procedures (SOPs). Manufacturers that pass the audit and are certified have the opportunity to include the organization’s GMP logo on product labels, giving consumers assurance that those products were produced in compliance with approved manufacturing guidelines.

“The quality of a manufacturer and whether they are GMP is a key consideration,” said Tim Lally, president of Optimal Nutrients. “Quality manufacturing is of the utmost importance in providing service to our customers.”

Peter Sokoloski, private label manager at NOW Foods, agreed that GMPs are critical. “As an early adopter of GMP certification, quality is our most important goal, and we strive for control in every aspect from receiving to shipping to follow through after the customer has used it,” he said.

Armani noted Progressive Labs is expanding into a new facility built to comply with NSF GMP guidelines and will be certified once construction is complete; the firm is also registered with Food and Drug Administration (FDA) and is routinely inspected by the Texas Department of Health. “Certifications are becoming increasingly more required, mostly due to expansion into international markets or legal positioning taken by product distributors,” he added.

Private Label Select holds over-thecounter (OTC) registration with FDA and was also one of the first personal care producers to be certified for organic product, allowing its customers’ labels to carry the USDA Certified Organic seal. “The important aspect of both designations is that all claims are third-party verified, and our company undergoes regular third-party audits,” Halpert said. “This gives our customers the ability to convey to their customers—the consumer—full confidence in the efficacy, quality and validity of the products sold.”

Certifications also speak to a manufacturers’ emphasis on quality assurance (QA) efforts. “Having a well educated and well trained QA department is essential,” noted Bob White, executive vice president of Nature’s Products. “It is necessary to have written published SOPs, along with continuing education to ensure the department is operating optimally. In addition, because we produce products for both the U.S. and international markets, we must meet or exceed all U.S. governmental requirements as well as those in other countries, which are often stricter.”

To help assess the quality of the operation, most manufacturers and retailers agree an onsite visit is important. In addition to providing the opportunity to assess the manufacturer’s facilities, retailers have the chance to talk in person about the manufacturer’s sourcing and testing methods, delivery form options, formulation capabilities, labeling services, customer service and turnaround time. Halpert noted, “Any hesitation on a manufacturer’s part to welcome the customer to the facility is a red flag.”

Minimums are another important part of the discussions with potential partners. Although prices vary from manufacturer to manufacturer, the minimum requirements the retailer can expect to cover fluctuate. 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. Also, many larger contract manufacturers now offer turnkey private label programs for smaller retailers to provide basic items and best-sellers with low minimums.

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 a store has other marketing avenues (i.e., Internet, mail order), they may have enough volume to justify adding their own private label brand.”

Once you’ve found the right partner, it’s time to develop the right initial product mix for the store brand launch. “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.”

While the standard stock products build the basis of a store brand line, enhancing the options available can further draw in interested consumers. For example, Papillo noted FoodScience of Vermont offers both stock items and custom formulations.

“Whether the customer has a formula design or needs help in developing one, we offer the assistance of our vice president of new product development, as well as a nutritionist, nutritional biochemist and scientific review board,” she said. “We want to help produce a high quality, effective formula that meets our customers’ needs.”

One way to enhance the line is to focus on what products are already moving in the store, and adding those to the store brand as a special value item. For example, if combination glucosamine-chondroitin products are selling well in the joint health area, a retailer could add either a similar product, which would allow him to reduce the number of national brands he needed to carry, or develop an enhanced formula—perhaps adding cetylated fatty acids or methylsulfonylmethane (MSM)—to have that added value option.

King noted King Bio’s focus on homeopathic items provides retailers with offerings in a high-value category without the high cost to consumers. “King Bio offers bio-energetically enhanced, patented products to provide customers with products that are registered as OTC drugs with FDA, allowing the use of specific therapeutic claims in the marketing,” he said. The company has two levels of private label offerings, delivering items that have the same ingredients as the top national brands as well as products with multiple potencies or additional formulas to augment the line.

Another way to differentiate product offerings is through the use of branded ingredients. Sokoloski said such ingredients offer several benefits to retailers and consumers. “The use of branded ingredients provides confidence that the ingredients are of a higher, more consistent quality than other similar commodity ingredients,” he said. “Branded ingredients are also more likely to have studies backing them up. And a number of branded ingredients are known to retailers and consumers because of the manufacturers’ marketing efforts.”

Once the product line is launched, ongoing support is a must. “It requires more focus and support than any other supplement line in your store,” Sokoloski said. A critical first step is making it clear from management through the store staff that the private label launch is a business decision to add value to the store, and everyone should help build that brand. This means explaining the private label proposition and consumers’ affinity for the value it brings, as well as ensuring everyone understands the differences and quality points inherent in the products.

Manufacturers can help in developing a marketing strategy for both in-store and community outreach. “We are working with our top customers to create new advertising models that will draw new customers into their stores,” Lally said. Collateral support is also available from many purveyors. King Bio, for example, provides brochures, posters and advertising examples.

Sokoloski further recommended stores try some aggressive marketing options including 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 store’s Web site.

At the end of the day, most manufacturers said it’s not the size of the operation, but the commitment behind it that determines the fate of a store brand. “The question is one of timing and level of commitment,” Armani said. “If the commitment isn’t there, the products will just sit. But you have the ability to brand your business, keep your customers coming back and realizing higher margins, since you are selling a product only you have. It’s the best way to compete with the big guy down the street.”

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