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?
  • 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.

  • Re-reading this shows me that I don't have examples outside of the USA.

    Does anyone have any input for outside of the USA?

  • I'd peruse Jamie Goode's blog.  He will occasionally reference or review Wine Society labels (pretty sure this is a UK retailer, but not 100%).

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