Going public about private labeling

Going private has helped some distributors avoid commoditization while also underlining their value-added features to customers

By Joe Nowlan, Associate Editor -- Industrial Distribution, 2/1/2007 7:00:00 AM

Private labeling has become a more common, and profitable, practice for distributors in recent years. Companies such as Kimball Midwest , looking to shed the perception that their products are commodities, have put their names on certain items manufactured especially for them—a step that has allowed them to place more emphasis on their value-added characteristics.

Kimball Midwest has its name on a number of MRO-related products, such as abrasives, cutting tools and paints. All products are produced by the original manufacturers Kimball works with, explains Curt Campagna, Kimball Midwest's director of marketing.

“We want to differentiate ourselves, so we try to work with manufacturers, using our expertise and their expertise, to come up with not just a generic product, but one that is better than the standard. By doing so, we help solve specific customer problems and reduce their overall costs. So ours is made a little differently and has our name on it,” says Campagna.

It's been an effective sales approach for the Columbus, Ohio-based distributor. In 2006, Kimball Midwest released 108 product lines. Of these, 58 were private-branded lines produced to Kimball's specifications. Any realistic opportunity to add more private labeling items is something Kimball is always on the lookout for, says Anchell Waks, product line manager.

“We private label any product, when possible,” he says. “We want to private label anything we can because there are a number of benefits, both for us and our customers.”

The move towards private labeling will continue, according to a survey conducted by Pembroke Consulting of Philadelphia.

In “Facing the Forces of Change: Lead the Way in the Supply Chain,” which will be available in March, Pembroke found that more wholesaler-distributors plan to expand their use of private labeling over the next few years. Many of these distributors look at private labeling as a way to avoid selling on price alone and to help them avoid commoditization.

But there can be other factors that make private labeling appealing, says Pembroke president Adam Fein.

“Distributors have different motivations for moving into private-label products,” says Fein. “One is the profitability the distributor can bring to his own business. [Another] is that distributors will also have the opportunity to strengthen their relationships with customers.”

Tweak the products

For Kimball Midwest, private labeling has proven to be a way to remind its customers of its value-added features, Waks says.

“The best way to provide a value-added product to our customers is to be able to control the performance of the product. We can control the performance because we can make tweaks to that product that will allow it to perform beyond the more conventional products,” Waks says.

Many of these same manufacturers make their own labeled brands and sell those through other distributors. But Campagna adds that with the private labeling arrangement, the manufacturers (who usually don't want their names known) can take advantage of Kimball's reputation and selling success.

“As we've got bigger, our purchasing power is bigger,” Campagna explains.

Many chemical manufacturers, for example, may not produce certain items for their own labels, Campagna explains. Kimball works closely with these manufacturers to try to come up with a more effective product than the manufacturers would be able to make on their own and market to a broader customer base.

The manufacturers who private label with Kimball do so according to Kimball's standards and specifications, says Campagna.

“Kimball Midwest may not actually go in and say, 'Let's come up with a brand.' But we make sure when we work with them that we're getting the highest quality product they have. We don't want to bring in the commodity stuff and just put our name on it. We want the best of their best,” he says. “When we get something private labeled we like to be sure there's a demonstrable difference in the way that product performs.”

Selling the added value in private-labeled items can be an effective way to avoid having product lines be perceived as commodities—a concern of distributors across the MRO landscape.

Many Kimball Midwest products are constantly fighting the tendency to be called “commodities” by some customers, Campagna admits. When applied to such an item, this can make the private-labeling advantage all the more attractive.

“Otherwise, it ends up being all about price, and that's not where we live,” Campagna explains. “We want to live in the space of value, not price.”

As an example, both Campagna and Waks point to paint.

Kimball has what Campagna describes as a “high solid paint that has a lot more pigment in it. So it will cover more in one coat than a 'normal' paint will.”

Such a private-labeled item must be demonstrated to a customer for its advantages to become obvious, Waks cites.

“It can then be very easy for them to recognize the value in [private-labeled products],” Waks says.

As part of the demo he recently performed, Waks spray painted a piece of cardboard with a competitor's paint. In such a demo, he says, it might take 14 spray passes before finishing a coating, albeit with still-wet paint dripping and running.

Kimball's paint could cover the cardboard in perhaps three or four swipes, with one coat doing the job, Waks explains.

“That paint might cost up to twice as much for a can, but the cost-savings and product quality reflected in that demo sells the customer,” he adds.

“One reason we like being private labeled is that it enables us to show we have a product warranty and guarantee. Having our name on it lets the customer know that we're standing behind that product,” Campagna says.

Kimball offers these private labeled items at what it determines will be a competitive price and lets their sales force hit the streets.

“We give them a product that they can physically demonstrate to customers is a better value,” Waks says. “They can go in and show them a better, faster and easier way to do something that can reduce [potential] downtime for them, which can be very expensive. ...They can get those at a price that can make them very cost-effective, reducing overall costs of doing business.”

Avoiding the price game

While a good price will draw any potential customer, Kimball Midwest's hope is that more than price alone will keep customers attracted to their private-labeled products.

“We like them to look at productivity and efficiency,” Campagna says. “But admittedly there is a cost to that.”

As an example, Campagna looks at a Kimball cutting disc, which “might be a dollar while the competition's is 75 cents. But [Kimball's] lasts three times longer. So how much more would you pay for something that can last three times longer? And that's how we put it to customers.”

It comes back to Kimball Midwest making certain that value, not price, is what benefits the customer most.

Kimball has more than 500 salespeople, Campagna says, and each salesperson is made aware of the unique qualities that, in the field, can set a Kimball product apart from their competitors.

“When we get something private labeled, we always ensure there's a quality difference in that product,” Campagna says. “We want our salespeople to go into the field knowing it can outperform the commodity type of product. If it can't, we will not put our name on it.”

When private labeling is thoroughly researched and properly implemented, Pembroke's Fein says, it can be profitable for both the distributors and their customers.

“The distributor can have higher profits, but the customer can have direct, hard-dollar cost savings by substituting private-label brands,” he explains.

In the “Facing the Forces of Change” report, Pembroke also found that 49 percent of MRO distributors they spoke to are marketing their own private-label products. Of these, 52 percent source these private-label items from overseas manufacturers.

“The lower costs and ready availability of overseas sourcing can accelerate the ability of a distributor to get their own private label product manufactured,” Fein explains. Countries referred to in the report include China, Korea, Taiwan, India, Chile, Canada and Mexico.

By 2012, Pembroke's report projects, 70 percent of MRO distributors expect to offer private-label products.

“This is something that domestic-brand manufacturers are going to have to confront,” Fein explains. “If they are not developing innovative, novel products, then they had better be a low-cost provider.”

The complete version of “Facing the Forces of Change: Lead the Way in the Supply Chain,” will be available in March at the Web site of the National Assn. of Wholesale Distributors, www.naw.org.