4 Steps to Increase Profitability in Wholesale with Successful Private Labels

January 31, 2021

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Wholesalers under pressure: Apart from the COVID-19 crisis, increasing (online) competition and manufacturers conducting direct sales are putting margins under pressure for wholesalers in all industries. While in retail this is common practice, the development of private labels in wholesale is typically underutilized. There are four concrete steps to approach this in a structured way, from a thorough identification and prioritization of product groups to taking along the sales team.

Challenging times for wholesalers: As we found out in an internationally conducted survey (carried out in spring 2020), 63 percent of wholesalers state an increasing pressure on margins and, above all, direct sales by manufacturers are causing them major problems. This development has been going on for years and has been further aggravated by the ongoing COVID-19 crisis. One solution is a stronger focus on private labels.

Other industries such as food retailing and drugstores show how well this could work: In 2019, retail sales of private label brands in the United States amounted to around 137 billion US dollars. Market data for 2019 across Europe shows that private label brands account for 32 percent in France, 37 percent in the Netherlands, 43 percent in Germany and almost 50 percent in the UK and Spain in volume in grocery stores. But so far, wholesalers have taken only small steps to tap into this potential.

Market analysis comes before developing private labels

Why is that? We know from practical experience that the initiative at wholesalers to develop a private label is often supplier-driven. Too rarely does such an approach result from analyzing the market’s needs and developments. That’s a missed opportunity, because a private label brand will only be successful if done right. This is why a thorough analysis of market needs is a crucial first step. On which factors should such an analysis lay its focus? Wholesalers have to consider possible conflicts with manufacturers, therefore it is particularly important that they determine answers to the following key questions:

  1. What is the total market potential of the product category?
  2. What is the right positioning of the product range?
  3. What is the optimal price and promotion strategy?
  4. What is the best sales approach?

Step 1: Identify market potential in a structured way

The first step in successfully developing a private label is to find out which product has the greatest market potential. How do you do this? Wholesalers need to analyze the market size as well as the odds of customers switching among different product groups. To find out the likelihood of customers shifting their preferences, we combine quantitative indicators, such as wholesaler and end-customer brand loyalty or price elasticities, with qualitative factors, such as a wholesaler's experience in a particular product group, to create a holistic view

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Market research shows: Wholesalers often successfully launch their own brands in segments with lower price levels, with products that require little explanation and are close to their core competencies. For a wholesaler of handicraft supplies, for example, this could mean that they position their private label brand in the same product groups (that need little explanation, e.g. fastening materials or installation accessories) as the manufacturer's brand. Once the private label is established in this area, there is then room for development: A leading European IT distributor, for instance, originally built up its private label with cable and adapter accessories. In the meantime, it has been able to develop the product range further and now also offers high-priced audiovisual solutions under the same brand.

Step 2: Strategically define positioning

Once a profitable product group has been identified, it is by no means enough to simply develop the private label and add it to the product range. Examples from the sporting goods retail sector show that a clear brand positioning and well-defined responsibilities within the company for brand management are both necessary. To establish those, wholesalers must be clear about which customer target group they want to address. Therefore, they must define where the new private label is positioned within the product group. Usually, we distinguish between basic, added-value, or competence positioning, which differ based on the value they offer to customers. What is relevant here is that the chosen positioning also has to fit the image of the wholesaler: If it has so far tended to operate in the low-price segment and its strength is beating competitors’ prices, it will be difficult to credibly represent higher-segment brand promises.

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Step 3: Develop price and promotions consistently

Third is the price and promotion strategy. In this context, the strategic positioning of the private label should not overlap (too much) with the price positioning of branded products. Too often we encounter that high quality products are sold at rock-bottom prices because a logical pricing structure and governance is not in place. In their pricing strategy, providing clear guidance on gross, discount, as well as (double) net price level are crucial. In addition, getting clear insights into customer value add (in comparison to branded products), competitor benchmarking and sales transaction analysis will optimize pricing from different perspectives. For example, in the automotive aftermarket, a common strategy is to link prices directly to a relevant branded product.

Step 4: Involve the sales force

Finally, a private label strategy will only fly if sales is fully supporting and equipped with the right tooling, training and incentives. There are different, but equally promising approaches to this. A well-known German IT distributor, for example, promotes its own brand of patchwork cables as a supplement to the branded product, i.e. it engages in classic upselling. A European IT wholesaler, on the other hand, built up its own brand parallel to branded products in order to market them in its own system house operations and become more independent. Another option is to choose different marketing strategies for different sales channels. In eCommerce in particular, the visual positioning of the private label is always a strategic decision. Since managing these different aspects requires special competencies, it is advisable to create a separate area of responsibility for this in your organization. This way, wholesalers also ensure that their own brand is given sufficient weight in sales.

Regardless of the sales strategy chosen, wholesalers should train their sales staff accordingly. In order for them to credibly communicate the appeal of the new products, they need to know the brand promise inside out and be able to understand and explain all the product benefits. We often see that the development of private labels also fails because the company's own sales force has not been taken on board and appropriately motivated with the right incentives.

4 steps to a successful private label

In summary, private labels are a highly effective but underutilized approach to alleviate price pressure and improve profitability in today's wholesaling market. To develop successful private labels, wholesalers need a structured analysis of the existing market potential, consistent strategic positioning, appropriate pricing and promotion strategies, and, last but not least, a well-trained and fully motivated sales team.