The state of private labeling in distribution

Industrial Distribution takes a look at the state of private labeling in distribution

By Brad Perriello, Associate Editor -- Industrial Distribution, 3/1/2008 7:00:00 AM

Private labeling has become commonplace in many distributorships, a trend experts say will continue and even increase in coming years.

But what is private labeling? Generally speaking, it's the practice of buying off-brand products and putting a name brand on them. By other definitions, however, the term applies both to items sold under a distributor's label and to those sold as is, without being branded by the distributor.

Whatever the definition, the presence of off-brand products in the distribution channel has been facilitated by a number of factors, including the globalization of commerce and the rise of low-cost manufacturing overseas, the resulting demand for competitively priced alternatives and the dollar's slide against other currencies in recent years. However you slice it, private labeling is here to stay.

Grainger increases options

At W.W. Grainger Inc., which offers a variety of private label brands, the idea is to increase customers' options, says Tom Murray, director of private labeling.

“We have a number of different private label brand names that account for about 20 percent plus of our Grainger Industrial Supply business in the United States,” Murray notes. “It really starts with giving our customers choices. … We know that choices are important to our customers and in building a private label program, we're trying to give our customers as many choices as possible so that we have the opportunity to do as much business as possible with them.”

The company's private label items are sourced worldwide, he adds. The process starts with Grainger Global Sourcing, which asks for design specifications from various vendors.

“What we do is look for the best possible suppliers of high quality products that we can private label. … We select private label vendors on their ability to provide that high quality product and be reliable partners for us,” Murray says. “The Grainger Global Sourcing unit has a very complete, very sophisticated quality assurance program for bringing product in from the vendors that they source from. It starts with design specs and has checkpionts all the way through delivery to Grainger Global Sourcing in Kansas City.”

A random sampling from every container is tested in-house as part of the program, he explains. Customer feedback is also a big part of the picture.

“We're very fortunate in that, whether through our sellers or our branch network or through our call centers, we're in constant contact with our customers. We take that very seriously. We listen very, very closely … for opportunities to identify new private label alternatives from the feedback we get and improve on the offering we have on the market today,” Murray says. “We sell a wide variety of products to a wide variety of customers. Some have very specific brand requirements in certain categories. In other categories, they're not nearly as brand-sensitive. Our ability to build out a large private label program is really a great fit for the kind of business we do.”

Würth Industries adds value

Robert Stolz of Würth Industries, who is a member of the German distributor's executive management board and runs three of the company's four North American divisions, says Würth's private label program confers a distinct value for the company's customers.

“What we hear over and over again is, 'We're buying this product because of its unique place in the market.' They're products that people have not seen anyplace else,” Stolz explains. “What people have come to know as the Würth brand are very unique, one-of-a-kind products.”

That's because of Würth's emphasis on working with manufacturers to develop unique products to carry its label, he adds.

“We have proprietary products that might have been developed for us 15 years or 30 years or 50 years ago. We don't just buy another product, slap the Würth label on it and sell it as our brand,” he says. “I distinguish products in three areas. One is what I call traditional Würth products. We have a group of products that I call 'premium label' products—historical Würth products developed for us or with us. The second group I would consider other people's brands of products. The third series is private label—that would be products we would bring in and put our own label on. … The problem is that what you're doing by just slapping your name on somebody else's product, you're not bringing any value to the marketplace.”

Developing Würth's “premium label” products requires a prolonged, intensive quality-control program, Stolz notes.

“Quality is so critical to what we do and to what our customers expect,” he says. “They're tested at the point of manufacturing, they're tested at the point of sale in Europe or North America. It is an extreme process that these products go through before they can be considered a Würth product.”

IDC-USA: QA/QC is key

Jack Bailey, president and CEO of IDC-USA, notes that ensuring the buying cooperative's IDC Select private label products are up to snuff is no small task.

“You have to be willing to commit a lot of time and you have to be willing to commit a lot of money to do that. It's not just a matter of calling up a manufacturer and saying, 'Hey, put my name on the product.' It's not uncommon for us to work a year in advance before we have a product that comes into our warehouse that's packaged in IDC Select packaging. You've got to find a good manufacturer and you've got to go through testing, and after all that you've got to negotiate the deal and talk about things like packaging and shipping,” Bailey says.

Before any agreement is signed, he adds, IDC sends samples of the product to an independent laboratory along with five or six domestically made brands of the same size and specifications. The lab tests the proposed private label product against the domestic brands.

“[The product has] got to be equal to or better than the domestically manufactured product,” Bailey says. “Once we do enter into an agreement with a manufacturer, we continue to take samplings out of every container we get and send them to the lab in order to maintain consistency. We spend a lot of money just on lab testing.”

For smaller, independent distributorships, QA/QC can be a significant barrier to entering the private labeling market.

“The thing I would say is, proceed with a lot of caution. It's not a matter of just slapping your name on a product. Once your name is on a product, there are a lot of ramifications to consider. The appearance has to be considered, [as does] your responsibility in the marketplace because now you're introducing another brand of product out there. You've got to consider product liability issues, insurance, duties, dumping duties, export duties, freight, timelines from shipment overseas—it's just not as easy as it looks on the outside,” he says. “I think it would be extremely difficult for an independent distributor to do that. That's the advantage we have, using the economies of scale. It makes it a little bit more bearable because all of the expense and risk is spread out over the group.”

IDC began offering IDC Select products after its member owners requested products that could compete on price with other off-brand offerings. Today they comprise nearly 25 percent of the cooperative's sales, Bailey says.

“There were two things they were trying to accomplish. There were some doors they couldn't get into with end users—tier-one pricing wasn't going to get them in the door,” Bailey explains. “The other thing is, it gave them something different to talk about in a 'me too' situation. This gave them a way to say, 'If you want a tier-one product, I have that just like everybody else, but if you want a private label product that might save you 10 percent, I have that too.'”

The advantage of a private label option had an unexpected benefit for the tier-one manufacturers too, he adds.

“In a lot of cases, our private brand has helped our distributors sell more of their tier-one products. In those cases where they couldn't get in the door [without a private label offering], once they got inside the door they were able to do a lot of the pull-through sales of the tier-one branded products,” Bailey explains.

Another unexpected aspect is that many IDC Select products do not come from overseas.

“Believe it or not ... about half of them are domestic, manufactured here in the United States,” he says. “Some of our name brand manufacturers here in the U.S. are also our IDC Select manufacturers.”

A growing trend

Industrial consultants Stephen Griffith and Scott Benfield, who spent 2007 researching the distribution channel for their book, “Disruption in the Channel,” distinguish between the sale of off-brand products without a house label and the sale of distributor-branded products in their definition of private labeling.

The pair defines “off-brand” as products without a brand identification that are likely made overseas and have lower prices than their domestic, name-brand equivalents.

According to their research, more than half of all industrial distributors are buying between 10 percent and 30 percent of their products from offshore, off-brand suppliers. The motivation is, quite simply, lower prices they say.

“They are telling us that they're doing this primarily because of price,” Griffith says, noting that 92 percent of the 170 distributors polled for their research indicated price was the reason they bought off-branded products.

“It's overwhelmingly price,” Benfield adds. But other considerations apply as well, he notes: About 27 percent of respondents said they bought off-brand products because they could put their own label on them; another 15 percent said they liked the increased control over distribution rights those products offered. Thirteen percent indicated the value of the relatively trouble-free relationships with off-brand product suppliers and another 13 percent said off-brand products made overseas were of higher quality than their domestically made, name-brand equivalents.

But many distributors won't wind up putting their own label on these products, Griffith says.

“A lot of people are using the 'private label' name, but a lot of these distributors aren't going to private label these products,” he explains. “One of the things we're finding is the whole concept of branding in these highly commoditized items doesn't carry the same value it used to for the customer. As standards have grown in international commerce, brand doesn't mean a whole lot anymore and distributors seem to be recognizing that and saying, 'Why should I be putting my brand on that?'”

For example, 60 percent of the distributors surveyed by Benfield and Griffith said brand recognition is losing its value among their customers and only 20 percent indicated that brand recognition is maintaining value.

“We're not sure private labeling is going to grow, even though we know off-brand is going to grow,” Griffith says, adding that the Internet plays a major role in the decline of brand importance.

“In the past, marketing communication was a trade-off between breadth and depth. Marketers could reach a broad audience, but only with a 'one size fits all' message—a brand building message,” he explains. “[However], they could reach a very narrow audience with very product-specific information. This conflict forced brand image to become a surrogate for specific product and organizational information—quality, reliability and the like. The new paradigm of the Internet allows vendors to provide deep, detailed and often customized information to a broad audience at very little cost.”

Industry consultant Adam Fein, president of Pembroke Consulting, agrees that the Internet is changing the buying habits of distributors' customers, but says the phenomenon is actually benefiting distributors' brands.

“Business customers are embracing the Internet in the same way that consumers are using the Internet. They have much more information on products,” Fein notes, citing the online availability of the buying experiences of other customers, maintenance and repair details and material safety data sheets. “Customers are increasingly empowered with information. Just as consumers can make decisions about the equivalence or not-equivalence of products, so can business customers. It's facilitating and enabling the growth of distributor brands.”

Fein's definition of the practice includes the sale of off-brand products without a house label.

“Private labeling is situations in which the customer is selecting the distributor and relying on the distributor to select the product. It's a channel-driven decision. Whether the distributor creates a brand or simply offers a non-branded product, you're buying the distributor's brand rather than buying the national manufacturer's brand,” he says.

Private labeling is in for a banner year in 2008, Fein adds.

“There are two factors that are going to drive private label growth in 2008. A tougher economy is going to make customers more open to trading down to non-branded products,” he says. “The second thing is, the valuation of the United States dollar has been very low, but the places where we are importing products from have not seen that same level of change. Given that many private label products are coming from China … the dollar has lost a lot of value against most major currencies, but has not lost as much value against [the Chinese yuan].”

Another factor in the dollar's slide is the beneficial effect on exports, Fein adds.

“The reduced value of the dollar has opened up a lot of export opportunities for distributors. There are opportunities for the distributor to begin exporting their private label brand because the price advantage has become very significant,” he notes.

But a distributor looking to private label should be careful not to place all his eggs in a single basket, Fein cautions.

“Private labels, however you want to define them, are not a cure-all. They're not a magic bullet,” he says. “Distributors have to be cautious when they're into their own brands, because they put pressure on manufacturers. It's a double-edged sword. Distributors need to be evaluating the impact on supplier relationships before diving full–force into private labels. There are many manufacturers who don't mind having a smaller share of a growing pie, as long as their piece of the pie is getting bigger. If private labels enable a distributor to grow faster and penetrate markets more quickly, most manufacturers will go along because they will see their sales increase.”