MW Topic of the Week: Private Labels

This week in Paper 4 land:

Private labels in the wine industry are a huge—and growing—part of the wine industry. Related questions have been on the Paper 4 exam the past two years in a row, reflecting this trend. 

2019: Why does a growing number of large retailers prefer to focus on own and exclusive labels over third-party brands? Is this good for the wine category?
 
2018: What are the advantages and disadvantages of private-label wines for wineries, distributors and retailers?
 
These questions, while phrased differently, both look at the supply chain, margins, and profitability. Understanding what private labels are, why they exist, and how retailers leverage them to maximize profit is fundamental. The UK is a huge market for this, while US and other markets are growing. Knowledge of multiple markets and hard numbers are very important for answering this effectively.
 
How would you approach these questions? What are the pros and cons of private labels? Who do they benefit the most?
Sources:
  • This question terrifies me!!!! I don't know anything about this stuff!

  • Anecdotally, retailers like them because they generally offer an opportunity for higher margins.  Because the consumer has nothing to compare them to, retailers can charge whatever they think that they can get for them.  Distributors like them because they (the distributor) merely serve as the clearing house between the winery and the retailer.  The sales are essentially guaranteed, so there is no expenditure on sales incentives, sales training, etc.  Zero risk, unless there is a big SNAFU with shipping or something.  For wineries, the benefits are similar to those at the distribution level, though I see that there could potentially be slimmer margins in order to attract the business from the retailer.  There could also be a little more risk involved, say if the retailer backed out at the last minute, all of the expenses that went into registering the label and printing labels is lost.  For domestic examples, look at the Kirkland Brand that Costco offers. 

    I personally, as someone who works for a large independent retailer, am not very keen on private labels.  The quality is frequently underwhelming and inconsistent, and US consumers are more interested in established brands first, then grape variety, then region.  I have to do a lot of hand-selling to move the product and have to commit to a very large quantity that I would be sitting on for a long time.  These products rarely come with any kind of "support" in the form of eye-catching POS, reimbursed (and frequent) consumer tastings, consumer magazine ratings, etc.  I imagine that there benefits for the retailer first, since they most likely make the highest margin.  Wineries probably also benefit substantially, but it could be a bit of "feast or famine" type cash flow.  Theoretically a retailer can shop around for new sources if the quality slips or the cost becomes untenable, and the consumer would never be the wiser!  Just my perspective.  I know that this definitely doesn't fit the format for a well though out MW essay.

  • And we’ll now all be quoting wine director at Lukas wine and spirits kcmo on the pitfalls of private labels. 

  • I put an outline together for the advantages/disadvantages question earlier this year! (Still a bit terrified)

    Here are a few ideas. With examples bolded. The data is current for 2019.

    The growth of private label wines in multiple markets is a result of the advantages that the segment offers to wineries, distributors, and retailers. According to WX Brands, the private label market in the United States has doubled since 2012. In the UK, the market share has climbed to over 45%.

    Advantages for the winery

    Wineries can either own a private label, or produce a private label for a distributor or retailer. Both options provide advantages.

    • For both winery owned and traditional private label, partnership with a large retailer can offer stability and predictable sales. Example: Treasury Estate brand “19 Crimes” has a specific product for HEB “19 Crimes Cellblock Select”. Treasury maintains the brand equity, but is guaranteed sales through HEB.
    • Margins may be higher than the regular winery product despite lower price due to lack of marketing expense

    Advantages for distributor

    • (Just like said) private brand is a guaranteed sale. Sales force labor and promotional costs are low.

    Advantages for retailer

    • Margin is high for private brands. Producer margins on private label wines can be 50-55% compared to 30-35%, according to Rockridge Wine Traders in Austin, Texas.
    • In regions that can legally sell winery-to-retailer, the retailer can circumvent the 3 tier system and increase their margin.

    Disadvantages for winery

    • Winery may have to sacrifice margin to attract larger retailers who are attempting to undercut major brands. Winery may have to sacrifice margin to match a competing winery bid for contract.
    • If the brand is a traditional private brand, product may make up an disproportionate amount of winery revenue which puts the winery in a risky financial situation if the brand owner decides to switch suppliers. Winery may be stuck with inventory if owner pulls out. Public companies may show “spiky revenue” and will have to justify to shareholders.

    Disadvantages for distributor

    • Powerful retailers can effectively bypass distributors. Example: Winery Direct (Total Wine & More) has brokering agreement with Deutsch Family Wine & Spirits to import private-label wines into the United States. Deutsch has separate agreements with regional distributors to move product to Total Wine. Deutsch accepts a very small margin but is guaranteed business with close to no warehousing costs.

    Disadvantages to retailer

    • Marketing expense for private label falls on retailer. Brand may not gain recognition if wines are not marketed. (same as said)
    • Retailer needs a healthy mix of private-label and other brands that consumers can identify. Consumer is more likely to try a private-label if they are familiar with the style or region of origin from a more recognizable brand.
    • Retailer is responsible for maintenance of product quality. Example: Costco has a large staff on the Alcohol Beverage team responsible for product quality. They monitor and asses all stages of production. This provides additional overhead costs.

    For this essay I concluded that the growth of the category indicates that wineries, distributors, and retailers often view that the advantages outweigh the disadvantages.

  • This is quite an interesting topic. i work with a variety of "private labels" in my restaurants, however they are often at the high end. We use a top tier producer, and work on a special cuvée or bottling that is co-branded.  This allows both parties to take advantage of the other's market cachet. As volumes are higher, we can achieve better margins on these products too. As i recognize that this is a bit unusual when speaking about the global industry, I just wanted to work out a couple other thoughts. 

    Could one talk about the consumer when addressing this question in an exam? There wouldn't be any hard facts to support it, but the consumer certainly doesn't win in these scenarios.  These wines can end up as cheaper, gateway wines for people new to the category.  However, better margins for retailers and producers rarely, if ever equate to better quality. 

    Producer support as mentioned earlier is an awesome point. And with it, brand recognition goes out the window when one creates a private label. This further creates a dependence on what is in the bottle, though we realize what gets it off of the shelf is what's on the bottle and how much it costs. It's pretty hard not to get cynical about the industry when answering a question like this. 

    The distributor role changes quite a bit in other countries. Only the US forces every transaction through a wholesaler.  Every private label I work with has been negotiated and purchased directly from the producer. Comparing the impact of the three tier system in the US to other countries could be an interesting POV. Outside of the US, distributors don't profit from private labels unless it's their own. 

    Lastly, DTC online subscription services represent major growth in private labels.  Once a consumer is signed up to the service, they are quite open to receiving whatever is sent to them.  These wines rely on design-heavy labels and attractive mailer packaging much more than what is in the bottle. The millennial consumes more wine than any other market segment.  And, an instagram-worthy label that can't be found anywhere else but in their subscription service is exactly what they want. I think the online subscription-based retailer wins big on private labels. 

  • Thanks so much for these insights! You're in Australia, yes? Your point about the role of the distributor in the US v. outside is well-noted. My friend at German retailer Hawesko does the same as you, negotiating directly with the producers for their special projects, as they call them. I also think your point about DTC services is a good one I hadn't considered -- in the US, we have Firstleaf, Winc, and Naked Wines (now part of the UK market via Majestic acquisition); curious if you have other examples to add?

    Could one talk about the consumer when addressing this question in an exam?

    I think this is an essential element to consider for the 2019 question. Obviously, there is the question of capitalizing on customer loyalty (you like this? you can only get this here), even though the customer is paying a premium for wines for which the source may not even be clear. I definitely think that's a negative for the customer. 

    Obviously, it sounds like your restaurant does some co-branding, which is meant to leverage a reputation of a well-known producer to rubber-stamp the quality for the customer, while still providing that sense of exclusivity, similar to how Frog's Leap in the US makes co-branded wine for Shake Shack. That could be considered a plus for the consumer, if the price-quality ratio is better than the pricing for the regular label. 

    Producer support as mentioned earlier is an awesome point. And with it, brand recognition goes out the window when one creates a private label.

    Yes, the producer name is often not included, and there is an all-or-nothing impact on the producer's bottom line if a private label is discontinued or another source found. However, the counter-point should be made that a private label can be a lucrative source of income, and that it may help odd-load wines that don't make a higher selection/that may not be bottled for a particular vintage but still incurred costs in being produced

    Again, I think defining private label in the scope of your essay is important. If you decide to discuss co-branded wines, there is some potential brand recognition with that (indeed, a retailer may leverage that brand recognition as marketing point). I think the risk that should be noted is that a co-branded wine may end up cannibalizing the sales of the regular labels, as the retailer will have greater incentive to move the wine that brings in more money. 

  • Thanks so much for the insights everyone. I'm super interested in any offline facts if anyone wants to PM me. And , I added some sources for you to reference in the original post. Since you offered a good start of an outline for the 2018 question, I'm going to dive into the 2019 question to wrap up this week's thread.

    2019: Why does a growing number of large retailers prefer to focus on own and exclusive labels over third-party brands? Is this good for the wine category?

    It requires a two-part answer: an explanation, with statistics (although, as the examiners noted, only use hard numbers if you’re sure of them) and, less common for a P4 question than P5, a subjective opinion that must be well-argued and contain strong analysis. The latter half can be approached in many ways, whether looking at stops along the supply chain or as an overall SWOT (strength-weakness-opportunity-threat) analysis.

    Introduction:

    A growing number of retailers prefer to focus on own and exclusive labels, here defined both as wines that they may have sourced and created brands around them specifically for the retailer, and existing brands that they have exclusive rights to sell. This essay will explore the reasons for this rising trend, as well as the impact that it has on the broader wine category.

    Part I – Why:

    • Complete price transparency in the market has led to pricing pressure on third-party labels (Internet/wine-searcher, apps like ViVino)
    • Additional challenge of open trade borders (EU) or grey market (US)
    • Increase profitability via greater margins
    • Customer loyalty (exclusive place to purchase, price competitiveness, etc.)
    • State of the market evidence:

    Part II – Opinion:

    • Producer:
      • Could provide lucrative contracts (although it's a boom or bust if the wine is discontinued or another source is found)
      • Ability to use grapes/wines they have no use for in their established wines
      • Potential to increase margins when directly negotiated 
      • Brand awareness non-existent (if not stated) or variable (if co-branded)
      • Can cannibalize sales/shelf space for established wines
    • Retailer:
      • Straight revenue enhancer (can make margins anywhere from 50-100+% versus established brands)
      • Control the supply chain and drive down costs (pre-order, pre-established quantity)
      • Offer consumers low pricing with no or low competition
      • May reduce shelf space available for third-party wines
    • Consumer:
      • Competitive pricing
      • Loyalty – if they enjoy a brand, they have a go-to resource (this helps within the fragmented wine marketplace)  
      • Lack of transparency around sourcing (many shelves stocked with wines that look like they are fun, small labels, but in reality choice is limited given quantity of private labels stocked)
      • Quality variable