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
  • 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
Reply
  • 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
Children
  • Interestingly, one thing that hasn't really been noted in this discussion is the rise of sommelier-branded wines, at least in the US.

  • While, as Jonathan mentioned, many restaurants dabble with private label wines, that segment of the business is a tiny, tiny drop in the bucket compared to the volume of brands like Kirkland from Costco, California Roots from Target, and of course, we can't forget the flagship wine from Trader Joe's: Two Buck Chuck!! In the UK, all the major grocery retailers (Waitrose, Tesco, Lidl, etc.) have their own branded wine as well. I answered this question, and I didn't even go beyond large retailers, though reading the comments above, I think you certainly could cast a passing glance at other types of less common private label scenarios, such as wine clubs, subscription services and restaurants. 

    A few other thoughts... I would definitely mention the consumer, as they are the last point in the chain. Are private labels good for them? On one hand, quality wine (i.e. wine that is typical of variety and place, as well as free of flaws) has never been cheaper for the consumer. On the other hand, these labels might be placing a lot of pressure on independent retailers, as they can't compete on price, which may cause a lack of product diversity in the marketplace for consumers down the road, as retailers close or condense.

    Which leads me to my next observation: I would also distinguish not only between producer, distributor and retailer, but also big vs. small in each category. Private labels are often a boon for big retailers, but a total bust for small retailers for the reasons outlined above. Likewise, only large wineries can supply big accounts -- what about smaller wineries in regions with an excess of wine?

    And lastly, only somewhat related, I bought the $29.95 bottle of Kirkland NV Champagne a few months ago, and it was actually very drinkable -- to be honest, better that a lot of big production NV Champagnes! I would definitely drink that over a lot of more expensive wine. Not sure if that makes me a winner or a loser...