Consumer interest in private-label brands, or store brands, is growing, presenting opportunities for small businesses that want to manufacture merchandise to be sold under the brand or name of a third party.
In 2018, private-label sales totaled $128.6 billion nationally, up 4.4 percent from the previous year, according to a report from the Private Label Manufacturers Association, citing Nielsen data.
“Private label is a vehicle that could help a small business get big and achieve accelerated sales growth,” says Charles Internicola, managing partner at The Internicola Law Firm PC in Red Bank, New Jersey, a business and franchise law group. The private route provides another revenue channel for small businesses to get their goods to market without worrying about the marketing, distribution and other costs associated with selling directly to the consumer.
Still, he adds, businesses need to make sure private-label manufacturing is the right fit.
You don’t want to enter in an agreement with a third-party retailer/seller that’s too restrictive, he says, prohibiting you, for example, from selling within a certain geographic area.
To be sure, “larger customers often have more demands and have buyer power over you,” says Nick Horman, founder of Horman’s Best Pickles, the specialty arm of Glen Cove-based Allen Pickle Works, which together have a handful of private-label accounts. In such cases, “you need to stand strong,” he says.
These type of relationships are often not made public because typically the companies you’re supplying products for “don’t like to reveal they’re using a private-label manufacturer,” says Horman, who also sells his pickles under his own brand name.
Experts say it’s good to establish your own brand name and product quality first before seeking out private-label relationships. That way you have proof of concept and can show product demand.
Plus, selling under your own brand directly to the customer generally gives you better pricing than selling to a private-label customer, says Joe Cuomo, a law partner at Forchelli Deegan Terrana LLP in Uniondale. “In private label, the margins for the manufacturer are much lower,” he says.
The retailer also has to make money after buying your product, so you can’t charge the same price you would if you were selling straight to the customer, he says. But on the plus side, you can sell a larger amount of your product on a steady basis with a private-label customer.
Just make sure the agreement you’re entering into is fair, says Cuomo. Notably, be certain it allows you to sell your product under your own brand or to other private-label customers. But also recognize that a big private-label customer will likely impose some restrictions, he says.
If they are stringent, one protection a manufacturer can seek is a minimum-order requirement to make the limits “worth it,” says Cuomo.
You also want a deal to protect your intellectual property, such as patents, and to safeguard your business with an indemnification clause for any liability if, for example, a consumer files a lawsuit, says Internicola.
You may also have to sign a nondisclosure agreement, says Horman, which would prevent you from discussing any proprietary information with a competitor.
Beyond that, be sure you can keep up with demand, especially with larger orders, and make sure you check your ego at the door, says Angela Carillo, owner of Bethpage-based Alegna Soap, a handmade soap maker who sells under her own brand and to more than a dozen private-label accounts.
She’s been at events where other soap makers that are her private-label accounts are selling her soap under their brand, but she's OK with that: “I already got paid.”
Plus in slower months, such as after the holiday season, she says, “I still have my private-label orders and money coming in.”
Most of Carillo’s accounts are private, but there are exceptions like ScrubzBody Skin Care Products in Farmingdale, which isn’t secretive about the relationship. For one thing, ScrubzBody owner Roberta Perry, who sells her own scrubs and lotions to private-label third parties, says she likes supporting other local small businesses. Furthermore, Carillo “makes incredible soap, and it’s her specialty and not mine, so I would rather my customers have the best of something even if I didn’t make it personally.”
85% of consumers say they trust a private brand just as much as a national brand, and 81% say they purchase a private-brand product during every shopping trip.
Source: Daymon Private Brand Intelligence Report 2019