private-labeling

What Is Private Labeling? The Private Labeling Business Model In A Nutshell

Private labeling involves one company selling the products of another company using its own branding and packaging. In most instances, a retailer purchases products from a manufacturer that are then sold to consumers with the manufacturer’s brand and packaging visible. In private labeling instead, the retailer might have a third-party manufacturer produce goods and sell them under the retailer’s brand. Therefore the manufacturer acts as a private label, not showing its brand toward consumers.

Understanding private labeling

Sometimes, however, the retailer may sell private label products that are manufactured by a contract or third-party manufacturer and sold under its own brand name. The retailer acts as a de facto product manufacturer by controlling what goes in the product, how it is presented, and what the label looks like.

Private labeling is present in most consumer product categories, including personal care, beverages, pet food, cosmetics, condiments, dairy items, frozen foods, clothing, and household cleaners. In Australia and the United States, private label brands account for 18.1% and 17.7% of all retail sales revenue respectively. In Europe, these brands are more popular, comprising 41% of sales in the United Kingdom and 42% in Spain for example.

Examples of private labeling

Following is a look at some of the companies making a success of private labeling:

Amazon

how-does-amazon-make-money
Amazon has a diversified business model. Amazon’s primary revenue streams comprise its e-commerce platform, made of Amazon labeled products and Amazon third-party stores. In addition to that, Amazon makes money via third-party seller services (like fulfilled by Amazon), advertising on its platform, AWS cloud platform, and Prime membership.

The eCommerce giant owns over 100 private label brands that appear across various categories including food and beverage, electronics, and automotive. Many of Amazon’s private-label brands are created to mimic the success of brands that sell well on its platform. Examples include Amazon Essentials, Revly, Nod, and Happy Belly.

Trader Joe’s

American grocery chain Trader Joe’s sources most of its products from third-party manufacturers including PepsiCo and Snyder’s-Lance, the second largest salty snack maker in the United States.

Costco

retail-vs-wholesale
In a retail business model, usually, the company has direct access to final customers, which will consume a final version of the product/service, sold in units, and at higher margins. Where in a wholesale business model, instead, a company usually sells raw products in bulk to retailers and middlemen who sell directly to customers. In a hybrid model (like Costco) the wholesaler also sells to final customers.

The retailer’s Kirkland Signature private label range sells everything from batteries to wine to rotisserie chicken. The company reported in 2020 that it made $39 billion in revenue from the Kirkland brand alone in the previous twelve months.

Walmart

walmart-business-model
With over $555 billion in net sales in 2021 the company operates a differentiated Omni business model with three primary units comprising Walmart U.S, Walmart International, and Sam’s Club (approximately 12% of its net sales) a membership-only warehouse clubs. Together with Walmart+, a subscription service including unlimited free shipping, unlimited delivery from its stores, and discounts launched in 2021. 

Which has recently made a foray into private label apparel for men, women, and children. The supermarket chain also operates private label brands in wine, toys, tools, and consumer technology.

Advantages of private labeling

Private labeling has several benefits for the business that extends beyond the simplification of the product development process.

These include:

Control over costs

Despite not manufacturing the product, retailers still control the product pricing strategy and can optimize production costs to increase profit margins. Retailers also have the final say over specifics such as product quality, pricing, ingredients, and volume.

Product rotation

Retailers also use private label products to accelerate product rotation. Companies such as Nordstrom sell private label products to increase their responsiveness to seasonal trends and compete with fast-fashion retailers such as H&M.

Market stability

In countries where private label products are prevalent, consumers choose them for their quality, consistency, and affordability. Thanks to lower price points, private label products can boast steady sales even amid a recession. Since there is more stability and less price inelasticity, retailers may even increase their order quantities during economic downturns.

Nevertheless, there are some disadvantages too.

Disadvantages of private labeling

Production dependence

While retailers have control over many aspects of private labeling, they do not have control over the product manufacturer. Inefficient processes could cause inventory or quality issues and, in a worst-case scenario, the manufacturer may declare bankruptcy and severely disrupt operations.

Brand dilution and loyalty

Some consumers perceive private label products to be of poor quality, which can cause brand dilution for a retailer’s more premium brands. Furthermore, building any sort of brand loyalty to a bulk, low-cost product is difficult.

Cost

Some manufacturers will ask for an initial payment if it is the first time they are working with a retailer. There may also be a stipulated minimum order quantity to ensure both parties profit from the arrangement. These factors make private label products a challenge for retailers with smaller budgets.

Key takeaways:

  • Private labeling involves one company selling the products of another company using its own branding and packaging.
  • Private labeling is used successfully by companies such as Amazon, Trader Joe’s, Costco, and Walmart.
  • Private labeling gives retailers more control over costs and product development and also allows them to maintain sales in economic downturns. However, the approach is only as robust as the product manufacturer and some companies may find it difficult to build brand loyalty in a low-cost product from scratch.

Business Models Related To Private Labeling

C2M Business Model

consumer-to-manufacturer-c2m
Consumer-to-manufacturer (C2M) is a model connecting manufacturers with consumers. The model removes logistics, inventory, sales, distribution, and other intermediaries enabling consumers to buy higher quality products at lower prices. C2M is useful in any scenario where the manufacturer can react to proven, consolidated, consumer-driven niche demand.

B2B2C Business Model

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Account-Based Marketing

account-based-marketing
Account-based marketing (ABM) is a strategy where the marketing and sales departments come together to create personalized buying experiences for high-value accounts. Account-based marketing is a business-to-business (B2B) approach in which marketing and sales teams work together to target high-value accounts and turn them into customers.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Direct-to-Consumer Business Model

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

Marketplace Business Models

marketplace-business-models
marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

E-Commerce Business Models

e-commerce-business-models
We can classify e-commerce businesses in several ways. General classifications look at three primary categories:
– B2B or business-to-business, where therefore a business sells to another company.
– B2C or business-to-consumer, where a business sells to a final consumer.
– C2C or consumer-to-consume, or more peer-to-peer where consumers sell to each other.

Marketing vs. Sale

marketing-vs-sales
The more you move from consumers to enterprise clients, the more you’ll need a sales force able to manage complex sales. As a rule of thumb, a more expensive product, in B2B or Enterprise, will require an organizational structure around sales. An inexpensive product to be offered to consumers will leverage on marketing.

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