How would you like to have a big-name company sell your product under its label? It might not be as complicated as you think. While licensing seems like a good element for inventors and entrepreneurs, landing licensing deals remains elusive for many. Still, private label arrangements can be almost as advantageous and are much easier to work out.
If you are here, you possibly want to reach a private label agreement, then you need many guidelines and courses of action to create a precise yet excellent private label agreement.
Follow our complete and easily understandable guidelines on private label agreements before jotting anything down on paper.
What are Private Label Agreements?
Private label agreements are a kind of manufacturing agreement used to produce foods and beverages. A manufacturer agrees to create their recipe and formula marketed under a third party’s branding in private labeling.
In a private label agreement, it is vital to address issues like proper food and nutrition labeling, food safety, food recall liability, the packaging of the product and what the label looks like and intellectual property issues related to product formulation.
Several examples of retailers utilize private labels such as Walmart, Costco, Aldi, and Trader Joe’s. According to Private Label Manufacturers Association (PLMA), in 2018, the private label products made up just under 20% of the market share for consumables in Nielsen tracks’ channels.
Private-label products are available in a wide range of industries, from food and beverage to cosmetics. Those products are often positioned as lower-cost, high-quality alternatives to regional, national or international brands. Some private label brands have recently been set as “premium” brands to compete with existing “name” brands. For instance, Aldi rolled out a private label line of vegan food products under their Earth Grown brand.
Why use Private Label Agreements?
From the manufacturer’s standpoint, private label agreements maximize production potential without building retail markets for the product. The manufacturer can get the product on lots of shelves without bearing the expense of building a broad market.
From the retailer’s perspective, the margins on private label products are better, which gives retailers more economic bargaining advantages with suppliers of national brands. Private label agreements provide significant retailers such as Amazon the capability to rapidly expand product offerings with a minor investment (both capital and intellectual) in food and beverage processing and production.
Neither party will realize the actual benefits of private labeling unless the manufacturing agreement is put in writing. An excellent private label agreement needs to identify and address the significant risks of contract manufacturing a food product.
There are four primary risks:
- Retain solid control over intellectual properties like product recipes and formulas.
- Marketing a misbranded product.
- Inadequate manufacturing practices and types of equipment that result in sick customers or product recalls.
- The primary risks are inherent in any manufacturing process or supply relationship – the quality of goods, delivery timing, price, and risk of loss.
6 Key Ingredients to a Successful Private Labeling
1. Intellectual Property
The most critical part of a private label agreement is acknowledging that the manufacturer upholds the ownership of the product recipe or formulation after the conclusion of the production run.
2. Period of the agreement
You don’t want the deal to continue forever, as your business goals may change. Three years is the most extended period, you should agree.
A private label agreement must address which party takes responsibility for product recall expenses, accurate nutrition information, and recall management.
4. Product Details
The private label manufacturer needs to provide the marketer with a Specification Sheet for the product. The information on the Specification sheet will set the basis for all product labeling and marketing.
The Specification Sheet should include essential information like nutritional products, a list of all product ingredients, a list of any allergens, and information on any additional claims that can be made about the product like organic certification, gluten-free manufacturing, and so on. The Specification information is the manufacturer’s warranty for the product and is incorporated into the Private Label Agreement.
The buyer of the product should have access to the manufacturer’s food and beverage safety records that pertain to the manufacturing of a product. Total transparency is the goal. Both the manufacturer and the private label buyer have a duty to produce wholesome goods.
Suppose a marketer has access to the food and beverage safety documentation of the manufacturer. In that case, the marketer’s product safety and quality control professionals can check the manufacturer’s work.
6. Commercial features
The commercial features of the deal should be established by thorough and concise writing: how orders are submitted, manufacturing costs, shipping and billing details, delivery dates, and payment terms are just some of the basic requirements that need to be addressed.
The difference between Contract manufacturing and Private label manufacturing
There is much confusion regarding the fundamental differences between contract manufacturing and private label manufacturing. There always have pros and cons to each type of manufacturing, and all types can work well depending on the product and the buyer’s requirements. The end goal for both ways is to procure a great product that customers will buy.
In contract manufacturing, the buyer works with the manufacturer to design and manufacture a product based on their requirement.
While the manufacturer will often give advice and expertise, the buyer retains the final say, responsibility, and control over the product produced.
- The buyer has complete control over the product.
- The relationship gives the buyer access to advanced skills: The manufacturer is an expert in making a product and can improve upon it.
- The buyer upholds the image, branding, and packaging control.
- Product quality will be a guarantee because the buyer sets the standard and testing methods.
- Lower unit costs: Since the buyer is contracting the manufacturer, they can negotiate market pricing lower than private label options.
- Higher start-up costs and longer development time.
Private Label Manufacturing
When a buyer procures a product using private label manufacturing, they typically choose the name of the product that the manufacturer has already designed and built.
In this case, the manufacturer usually has total control of the product, specifications, and manufacturing.
- Quick and easy access to the product: There is no design, engineering, tooling, or ramp-up phase required.
- Reduced united cost: Spending money researching and developing a new product is a risky endeavor. Using private label products from a private label supplier is less risky, and unit costs are usually cheaper. You can buy the exact number of products you need, enabling you to maintain a minimal inventory.
- Laser focus: Having a ready-to-market product helps the buyer focus on selling and marketing. Also, they can be a wholesaler of their brand. This factor will generate more income and will also help expose the brand to a broader market.
- Branding and marketing: Private-label buyers can create their unique image, promoting more robust customer recognition. Manufacturers who offer private label branding must tailor the packaging and labels the way the owner specified it. It includes the product name, ingredient description, company logo, and contact information. Such things can personalize a customer’s shopping experience, which can drive customer loyalty higher. A successful private label brand will also help with raising the number of sales.
- High-profit margin: Private label products offer higher profit margins than resale products. It is because the cost of making private label products is it is often much lower. And it is said that the lower your cost at producing, the higher your profits will be.
- Competition in the market: Multiple channels might be selling the same product. This will require more work for you to stand out from the competition.
- Minimum order quantity (MOQ): Relying on how big of a product inventory you want to sell, minimum order quantity (MOQ) could be a problem. Several manufacturers might have a MOQ higher than you expected.
The Private Label Agreement Templates
We’ve covered the primary form of private label agreements in our nifty Key Ingredients to a Successful Private Labeling section (see above). These are great resources for a basic private label arrangement. We also re-organize our private label agreement template more accessible and understandable for the manufacturer and the customer to manage.
Here is the sample Private Label Agreement Template that will help your business.
The Private Label in the food & beverage market
The global private label food and beverage market is assumed to witness significant growth in the following years, mainly due to an increasing number of competitive private label players in the ready-to-eat and functional beverage products industry segments worldwide.
The whole private label food and beverages market is expected to grow by $215.81 billion during 2020-2024 and progress at a CAGR of 6% during the same period.
The market is predicted to exhibit substantial growth on account of the surge in the requirement for ready-to-eat products leading to an increase in the manufacturing-specific sector, especially in the Asia Pacific region.
Millennials belong to the age group from 18 to 35 and a significant driving force behind the growth of the ready-to-eat product market. The millennial resident in the US was estimated to be about 75.9 million, which holds 23.3% of the total US population.
The private-label food and beverage manufacturers will focus on ‘on-the-go’ food products and increase online retailing to compete with already established F&B brands globally. The application of flexible packaging solutions such as wraps, films, pouches, etc., and contract packaging by private label market players are presumed to further aid towards a preferential shift of customers from branded food and beverage products to private label food products.
There are several leading private-label food and beverages market vendors that include:
- Amazon.com Inc.
- Costco Wholesale Corp.
- Dollar General Corp.
- Edeka Zentrale AG & Co. KG
- Giant Food Stores LLC
- Target Corp.
- The Kroger Co.
- United Natural Foods Inc.
- Walmart Inc.
5 Essential guide to choose the right Private-Label Manufacturer
To find a potential private-label partner, do an internet search for “private label,” and you’ll find hundreds of companies that offer private-label products in dozens of ways. Finding trusted, reliable private label manufacturers is crucial to the success of your business. But what does an excellent private label manufacturer look like?
Before you approach a manufacturer for a private-label contract, make sure you’ve taken these five things:
1. Product specialization
You want to find a private label manufacturer that specializes in producing your unique product. Suppose you want to start a beverage business and consider between two private label manufacturers. One is the most popular with creating a wide range of nutrient products, and the other is specific in bringing out the best taste drinks only.
The second choice is the manufacturer that you should consider if you want to stand out in the beverage industry.
2. Competitive pricing
Securing a good deal from the manufacturer means your profit margins will be higher. It’s such a clever strategy when you request the sample price from five different manufacturers at least, so you know you’re getting a competitive price.
Compared to dropshipping, the difference with private labeling is that you’re negotiating the price for adding the brand name and any other features to the manufacturer’s product. Ensure to also inquire about pricing for sample products, minimum quantities, discounts for bulk buying, and delivery costs.
3. Product quality
The quality of the product is probably the most critical thing to watch out for when finding a private label manufacturer. We can ensure product quality by researching their forums and eCommerce websites. The buyer can also use the supplier directory or any other trusted list of suppliers and manufacturers for the research.
It’s also advisable to get some samples of your private label product made, and then you need to test them before they go to market. Some careful people even visit the factory to oversee the production process with their eyes before committing to a manufacturer.
4. Reliable delivery
Before signing into the agreement and committing to a manufacturer, don’t forget to ask them about delivery times. Any delays or unexpected problems related to delivery time when getting the private label product to your store will lose sales and make customers unhappy.
5. Low defects
What’s the manufacturer’s track record with product defects? What if they got a lot of negative feedback from previous customers? This can be hard to come by, but you should find feedback online from other sellers who have used the manufacturer or look for their finished products to evaluate.
As you can see through this article, there’s a lot to consider before dividing into a private label agreement. Thus, it is desperately important to understand the implications of the method you choose. But if you put in some research or planning and keep in mind some pros and cons when deciding, it will reward you with a successful brand or e-commerce business worldwide.
For help deciding if private label manufacturing is suitable for your business or not, you may need more guides and professional knowledge. Let’s check out our service to explore more!
Tan Do is a global beverage ODM/OEM manufacturer and supplier located in Vietnam. Since 1996, we have built trust and credibility not only throughout Vietnam but also in many parts of the world. Leveraging state-of-the-art technology, we have crafted thousands of products that align with ISO, HACCP, HALAL, FDA, and many other standards.