Partnerships: Why doing it?

  • The need to reduce development costs
  • The need to reduce the time to market
  • Limited R&D resources
  • No confidence in ROI (too risky from financial perspective)
  • Long development time and we are not sure the market will still be there by the time we are done
  • Limited entry barriers for new competitors

Common types of partnerships

  • Private-labeling partnership
  • Joint venture partnership
Private-labeling partnership
  • Selling a third-party product under a different name
  • Based on a mutual sales expansion interest
  • The buyer is looking to fill in a gap
  • The supplier is looking to boost sales or access new markets and sales channels
  • The buyer decides their own labeling, packaging and certifications, and small product modifications used for:
    • Product or service gap filing (usually non-strategic)
    • Product extension (completing or complementing a existing line)
    • Access new markets quickly
    • Optimum time to release: 6mo-1y after supplier

Advantages when private-labeling

  • Quick time to market
  • Proven concept
  • No investments in R&D and manufacturing
  • Limited legal and financial liability

Disadvantages when private-labeling

  • Not much differentiation from the original (if any)
  • Potential for other similar agreements in the same market place
  • Low margins
  • High dependence on supplier
  • Potential for credibility loss
  • We don’t own the design
  • Potential for fierce competition, and sales channel conflicts
  • No control on manufacturing costs, pricing
  • Limited control on your markets and sales channels impact
  • Limited control on quality
  • Future uncertain
  • Viewed as non-core product by the sales force

Selecting the right partner for private -labeling

Selecting the right partner for private -labeling

Company perspective:

  • Preferably not competing in exact same markets (channel conflict)
  • Must be the right size: Not too big, not too small
  • Manufacturing capacity and location
  • Open to consider product differentiation or exclusivity
  • Watch for legal traps…if direct competitor, don’t discuss market pricing

Product or Service perspective:

  • Preliminary product testing
  • The product or service must be the right match and fill the exact need
  • Ideally: Good product but low branding power
  • Technology used and Quality
  • Must be able to obtain the right price for the product or service
Joint venture partnership
  • Strategic move (defensive or offensive) with significant impact on a company’s future used for:
    • Better or faster positioning against another competitor, market trend etc.
    • Mutually complement product or service offering
    • Access to new markets
  • Based on a mutual strategic interest
  • Share the design, manufacturing and packaging burden (or jointly outsource them)

Advantages for joint ventures

  • Quicker time to market
  • Reduced R&D investment
  • Co-own the new design
  • Good control on manufacturing costs and profit margins
  • Good control on quality
  • Less potential competition vs. private-label
  • Future more certain
  • Increase R&D throughput and capabilities

Disadvantages for joint ventures

  • Must share the pie
  • Takes longer to develop
  • Higher legal and financial risk, due to bigger investment and liability
  • Tougher contracts (sharing is hard…)
  • Potential conflicts with partners on costs, markets served, channel conflict etc

Selecting the right partner for joint-ventures

  • Executive alignment (trust)
  • Preferably not competing in exact same markets but adjacent
  • Ideally similar size (R&D)

Conclusion

  • Both types have their own pros and cons
  • If timing is important, PL might be the preferred route
  • PL agreements are very common and could be very lucrative if the corporate culture allows it
  • Considering how fast consumer’s demands are changing, PL’s could be essential
  • However, too much of it could dilute the brand power
  • If the gap is critical (strategic weakness) then joint ventures are preferred
    •        It takes longer and more costlier but…
    •        Offers better legal, financial and competition control)

Things to know before considering a product portfolio development partnership

  • Is your R&D department struggling to keep up with market trends and what sales and marketing team demands ?
  • Is your product development costs too high compared to competition?
  • Is your time-to-market too long too long to take advantage of a new market opportunity?

Private-label products or services, also known as “phantom brands”, are typically those manufactured or provided by one company for offer under another company’s brand. Private-label goods and services are available in a wide range of industries from food to cosmetics to web hosting. They are often positioned as lower-cost alternatives to regional, national or international brands, although recently some private label brands have been positioned as “premium” brands to compete with existing “name” brands.

Growing market shares and increasing variety of private label consumer packaged goods is now a global phenomenon. However, private label market shares exhibit widespread diversity across international markets and product categories. Empirical research on private label products has been of substantial interest to both marketing academics and managers. Considerable work has been done on well-defined areas of private-label research such as private-label brand strategy, market performance of private-label products, competition with national brands, market structure, and buyer behavior.

 

The Private Label Manufacturer’s Association (PLMA)  in the United States categorizes private-label manufacturers into four categories: 

    1. Large national brand manufacturers that utilize their expertise and excess plant capacity to supply store brands.
    2. Small, quality manufacturers who specialize in particular product lines and concentrate on producing store brands almost exclusively. Often these companies are owned by corporations that also produce national brands.
    3. Major retailers and wholesalers that own their own manufacturing facilities and provide store-brand products for themselves.
    4. Regional brand manufacturers that produce private-label products for specific markets.

 

Marketing and business tool

Retailers have extended the concept of private label to identify a brand with a store, a concept known as the “store brand”. This can be far more profitable than selling nationally advertised brands. To illustrate, a Food Marketing Institute study in the United States found that retailers earn a 35% gross margin on store-branded products compared to 25.9% on comparable nationally advertised brands.

 

Outsourcing

Several corporations source products from specialized contract manufacturers or contract packagers, which may or may not own their brands, because establishing their own production facilities would require substantial investments in equipment, human resources, and patents. Sourcing from a specialty company that has already made such investments and also has spare production capacity may be a viable alternative. If the two companies find that the market situation allows them to avoid or minimize direct competition and they are not stealing each other’s market share (cannibalization), then the companies may reach an agreement whereby the specialty manufacturer supplies the goods to the other. The methods to reduce cannibalization are general marketing practices such as dedicated distribution channels, different image and customer perception of the brands, pricing, and separate regional presences. The same basic concepts apply to the service industry.

 

Market entry

Private labels may be behind the decision of some companies to enter the market with products that are quite different, but somehow associable, to those that have made them famous (e.g., apparel companies launching perfumes, car companies launching watches). Private labels may be extremely profitable for companies with a dominant market share and for certain products that enjoy high customer recognition.

 

Safety and quality

As sophisticated technologies become widespread (and even subsidized) in emerging countries, sourcing of a wide range of products can be made at very low cost. These same products may have prices that allow for net margins to account up to several times the cost of the goods sold. Customers may be unaware of this business practice and may be paying higher prices for products that differ little from others with less famous brands. On the other hand, some companies do provide additional guarantees to these products offering better quality, customer support, and additional services.

 

Use by small companies

The use of private-label products by small companies has grown. Small companies usually do not have any input in the recipes or packaging of the products they buy. They buy from a specialty food company that uses their recipes and simply label for the individual retail store. Small companies do this for advertising benefits. For example, if John’s Farm Market sells jams or salsas, each time the consumer uses the product they are reminded of their visit to John’s Farm Market, where they will have to return to repurchase it. The brand also benefits when products are gifted, as this allows the gift recipient to become another potential customer. In recent years, Amazon has been a popular channel for small companies to launch a private label product, where almost 500,000 products are released on a daily basis, many of which are private label products. By leveraging Amazon FBA infrastructure, small companies can launch private label brands without having to invest into any storing facilities.