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?
  • 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.

  • Thank you! This is super helpful!

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