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:
Parents
  • 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. 

Reply
  • 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. 

Children
  • Thanks .  We've ensured that our co-branded wines throughout our restaurants have enough of a price discrepancy from the other wines that specific winery might produce to prevent  competition within the programs. Some major players in the DTC market include VinoMofo and No Bad Pair Days here in Australia (they really put packaging over quality), but even when looking at something like McClintic's Viticole, he's co-branded with Pax for a special cuvee.  It's become a way for these online retailers to separate themselves by having something unique to them that might create an added sense of value.