Private Label Outlook for 2023

Private label market share traditionally increases in a downturn. Dorn Group President and CEO, James Dorn, sees a perfect storm brewing as softening inflation and supply chain pressures add some tailwinds to that equation. But brands are not going away.

Listen to his conversation with Tom Gale on The MDM Podcast as he explores strategic options  for both distributors and manufacturers to consider:

James Dorn is a regular guest on The MDM Podcast. Listen on your favorite podcast platform. 

Thoughts? Questions?

As always, feel free to reach out to talk in greater depth about these and other issues impacting your business.

Podcast Transcript:

Tom Gale: Welcome to this week’s edition of MDM’s Quick Rake. My name is Tom Gale, CEO of Modern Distribution Management. My guest this week is James Dorn, president and CEO of the Dorn Group, a strategic advisory to manufacturers and distributors. James, welcome.

James Dorn: Hey. Thanks, Tom. It’s great to be here.

TG: I’d like to talk about private label products today. For some distributors, particularly large general line and traditional catalog houses, it’s a significant percentage of the product portfolio with higher gross margin contribution and an important part of go-to-market strategies. We’re in a really interesting place right now as we start 2023. In spite of fourth quarter GDP rate of 2.9% reported last week, consensus forecasts are for a significant slowdown later this year, if not a mild recession. Historically, private label market share generally goes up when the economy is struggling, and down in stronger economic cycles. How do you see private labels stacking up this year?

JD: I think it’s a perfect storm, Tom, for distributors who are very progressive in stealing market share. The market’s cycling, and there’s still a lot of things in supply chain, a lot of really good buying power that you could have. Distributors are looking for these ideas to steal market share. So you’re seeing a lot of momentum right now in making more investment into private label as a whole. And the gross margin is just too attractive. You’re at minimum 20-plus points to your gross margin. And on top of that, some distributors are pulling back today and trying to be conservative, going into markets that might be slowing. These ones who are making aggressive investments, they’re doing it in these areas as a way to steal market share and do market development. So I’m seeing it increase and I think it’s a perfect time for it because of all the factors that are going on right now.

Big picture, you’re seeing a little bit more capacity open up overseas. You’re also seeing US currency being an advantage, even getting further discounts from there. And even container costs are coming down. So great time for distributors as a whole to source products directly from overseas markets. I think the biggest factor though, Tom, in addition to that would be… And this is something we’re starting to see more through our research that we’re doing with end customers, is there’s this pricing or price increase fatigue out there that we’re starting to see, and customers, they’ve experienced two to three years of price increases from manufacturers and distributors.

So they’re getting to a point to where they’re looking to start to save costs on certain areas or wherever they can. So it’s still very early in this trend right now, but the sooner some of these distributors can come into these end customers with price saving or additional value, it’s creating a lot of really good opportunities for certain distributors to be able to steal share away from maybe who that end customer is currently doing business with. So we’re seeing a little bit of a race for some distributors to get into this faster and to start to make those offers directly to these end customers.

TG: So do you see where in a traditional cycle, when you go into a slowdown, you see private label interest by customers increase for the cost saving capabilities, but do you feel like now that we’ve come over the crest of the inflation wave, that that’s actually a tailwind to this type of a cycle as well?

JD: It could be. In a lot of B2B markets, probably more prevalent with B2C. So consumers looking for off-brand types of products from national brands. B2B, they’re not necessarily going to be buying more products because of this price discount or the value added. So it really has to be sold as an option that’s now available. So we actually see it more so as a market development tool or a share-stealing tool to where distributors can try and go after some higher value, more strategic items that could help either capture more sheer wallet with existing customers or help them attract new customers into a much bigger offering or a much bigger deal and whatnot.

TG: Talk more about what that looks like.

JD: Yeah. So it would be trying to, let’s just say get strategic on, if you haven’t been able to get a certain product category or a certain piece of business with, given end customers, you could use private label as a way to actually reduce price, but offer more value in say, the product attributes of what you’re selling. And if that’s a big part of what these end customers are buying or a critical part, it gives the distributor more flexibility to either provide cost discounts or even provide additional availability types of options to that end customer. So it could be used strategically almost as a tip of the spear to get into accounts that are hard to penetrate.

TG: With what we’ve come through in the past three years, the pandemic impact, the other factor in terms of the increase of marketplaces and alternate channels, how do you see the state or the power of brand at this point?

JD: Brand plays a big part, especially in the B2B space, because it comes down to level of trust and level of experience. It’s really hard to get end customers to switch from one brand to another, especially if they’re already happy with that brand and that product. So brand plays a big part. So distributors still need that. If it’s a good, better, best type selection, they still need that best offering by a national brand. But where private label comes into play is can you start to offer more within that, say good to better range of it’s a price alternative to either stay competitive with some of these lower cost structure distributors like marketplaces and whatnot, to where you can still keep those customers sticky to you and have a price alternative to compete with. So it’s a really effective way for maintaining the customers you have as well from some of these new entrants.

But brand itself at the private label standpoint, we’ve actually seen some of the distributors that we work with actually make larger investments into building the brand awareness and equity of their private brands. Historically, it’s been just source a lower cost product and make it available. But in the recent, I would say five years or so, we’ve actually seen distributors trying to behave more like manufacturers when it comes to product management and brand management with their private label offering. Learning some of those practices as to how manufacturers do it has really been an area that we’ve been able to add a lot of value to some distributors with.

Big part is they want to drive more that share into their private brands. And to do that, they have to be able to convince or help that end customer understand that this isn’t just something that’s lower cost and not going to perform to their needs. It has to be able to still perform at the level of these national brands, but it may just be missing a few features here and there. But all in all, they can trust this brand and still get more value from it.

TG: So is there a playbook for smaller independent distributors in private label this year?

JD: A lot of these private label strategies for bigger guys are… They’re sourcing directly in containers, and that’s a really strong play if you’ve got that type of infrastructure. But for smaller distributors, it really comes down to working closer with their supplier partners to say, “Hey. Can you help us develop a product here that fits within this area of quality of good to better? And can we source that directly through you and you can help us manage the supply chain aspects of it?” And then the distributor then just focuses more on how they actively sell that brand and what selling situations it comes in. Is it a price alternative? Is it a value-add in some ways. So definitely for smaller distributors, focus more on partnering with your existing supplier partners.

TG: I remember there was an article in a Harvard Business Review many years ago. It talked about how for manufacturers, sometimes it can be a narcotic in terms of when capacity frees up, it’s very tempting to fill it as a source for private label products. Your views on that?

JD: That has historically been the way manufacturers have seen it is we can fill our capacity, but we can also invest in more automation to increase our capacity and reduce our overall costs for our branded products. But I would say manufacturers fall in one or two buckets on this topic. Some stay away from private label at all costs. They want to focus on a branded product, and private label comes and goes. There’s a huge risk if you do too much private label. You’re always at the risk of that product being directly sourced by distributors in the future or from another supplier. So if you lose that business, you then have to fill it again. That’s a really large area to fill if it’s a significant portion of your business.

In some cases, most those manufacturers focus on we’re going to divert all of our energy and focus on selling and improving our branded products and selling it at a mid to higher level price. The other side of it is you get manufacturers who it is, it’s a major portion of their business and they don’t invest heavily into brand or into the commercial aspects of the product. It’s all about being efficient at creating the product, building the product, and manufacturing it. And those are the supply partners that tend to work really well with some of these smaller distributors as well because they just set up to actually get the product to you and make a really good product.

TG: James, thanks for your time today. Have a great week. Look forward to our next conversation.

JD: Yeah. Thanks, Tom. It was great being here with you and the MDM community.