The cosmetic company "Floresan" has been producing cosmetics for skin and hair care for 15 years, offering both private label production and contract production of cosmetics. We have innovative production equipment, filling laboratories, and highly qualified personnel. Thanks to this, our company is a reliable partner in the production of private labels and contract manufacturing.
- this is placing your order for the purpose of producing products on the premises of a manufacturer who has the resources to implement the contract. The idea for this term appeared at a time when private labels began to emerge. Private label (private label) is a product produced for sale exclusively in retail outlets.
What is included in contract manufacturing of cosmetics and private label production?
Performance communication includes services for the production of our products: pre-formulation development before and after fabrication. PDA for partners is aimed at creating their own brands, as well as at the functionality of the enterprise. The development production cycle means the latest recipes, manufacturing of the product, packaging, labeling and packaging.
The laboratory of our company has great scientific capabilities, a decent technical base and highly qualified employees with many years of experience. Within its walls the following is carried out:
- Development of formulations for any cosmetic products aimed at caring for the dermis and hair.
- Preparation of a complete package of documentation required for the implementation and release of goods.
- Ensuring quality control of manufactured products.
- A selection of organizations that provide goods or services to customers.
Our goal is to translate your idea into the latest product! Floresan LLC is a guarantee that you will receive high-quality cosmetics and preparations produced on your behalf and under your brand.
Ilyukha Sergey Guild of Marketers
The article was first published in the magazine “PROD&PROD Food Promotion” No. 2 for 2014
A private label (private label) is a brand owned by the entity that sells it. They can be created by individual retailers, as well as cooperatives and purchasing unions of chains, regional associations of wholesale and distribution companies, and large importers.
Abroad, private brands appeared as a result of the struggle between large retailers and manufacturers of famous brands. In the case when the market positions of both parties became approximately equal, the networks had to sell “promoted” products, overpaying the manufacturer for a big name and actually shifting advertising costs onto the shoulders of buyers. In the markets of different European countries, private labels account for different shares of turnover, but the trend towards its increase is observed everywhere.
Pricing and popularity among the consumer audience of these goods are largely determined by national characteristics, quality of life, consumption culture, development of national brands and many other reasons. In Europe, private label penetration is highest in Switzerland, the UK, Germany, Spain and the Netherlands, where private label market share exceeds 30% by value (Figure 1). Moreover, in volume terms, their share is even higher, since the difference in price between private labels and analogues of well-known brands in the Western market is 30-40%.
Despite the fact that Russian retail chains declare the development of private brands as one of their priorities from year to year, today, as can be seen from Figure 1, the share of these goods in the revenue of domestic retailers is an order of magnitude lower than in European countries. There are many reasons for this: starting from solving such a difficult problem as producing high-quality products at a low price, and ending with the no less complexity of its promotion. In addition, minimum batch restrictions make such products available mainly to federal chains, purchasing unions or regional associations of small retail chain stores.
According to the InfoLine agency, in Metro C&C the share of private labels in turnover is 11.2%, in Dixy – 10%, in Magnit for 9 months of 2013, sales of goods under its own brand amounted to 13.1% of the company’s retail revenue .
Part of the low penetration of such products in Russia is due to the fact that private labels here are cheaper than branded goods on average by only 10-20%, while in Europe the price advantage of private labels is on average 25-30%, and in the non-food category the difference can reach 40-50%. This fact significantly reduces their attractiveness for retailers.
Advantages of working with private labels
When deciding to introduce a product under its own brand to the market, the retail chain pursues the following goals:
1. Increasing loyalty to the network.
In this case, the private label product is intended to more fully satisfy the needs of price-sensitive buyers. All economy class brands are focused on this. Branded products are designed to fill niches in the product range and maintain the loyalty of regular customers. As a rule, the name of such brands is similar to the name of the chain store. Innovative products are produced in accordance with the latest market trends and trends and are intended for those who like to experiment and try the unusual.
2. Increase in profitability.
As mentioned above, most products produced under private labels, regardless of the price segment, positioning and tasks being solved, allow the network to increase profits. This goal is achieved through high sales volumes and optimization of the production process and logistics on the way from the factory to the end consumer.
3. Guaranteed quality.
As a rule, federal retail chains pay great attention to the issues of quality control of products produced under private brands, starting from the formation of technical specifications for the product and packaging and throughout the entire period of production and sales. Compliance with all required measures is a labor-intensive and quite costly process. At the stage of formation of the production of “own” goods, retailers assigned quality control responsibilities to employees of the private label development department, which most often turned out to be ineffective due to the workload and low competence of managers in purely technical matters. Recently, federal and even some regional networks and associations are paying more and more attention to the quality of their products, creating special services for this or attracting highly qualified specialists for outsourcing.
Guaranteed availability of goods.
Control of all stages of the production process allows you to optimally create a production schedule and ensure a sufficient quantity of it, taking into account the seasonality of sales and planned promotional activities. This protects the network from possible interruptions that could occur when working with the manufacturer’s brand.
It would seem that the advantages are obvious. However, when drawing up an economic model for working with private label products and comparing it with selling branded goods from the manufacturer, the retailer faces a number of additional costs. In order to estimate these costs, we will consider the full cycle of working with private labels, starting from the development of an idea, naming and ending with the disposal of unused packaging.
Production costs
When working with a manufacturer’s brand, the supplier comes to the retailer’s office, agrees on a price and promotional plan, provides a deferred payment (trade credit), delivers goods to retail outlets, provides assistance in merchandising, carries out marketing campaigns at his own expense and on his own, and pays a trade bonus . One drawback is that the products are presented in all competing chains, and the retailer is forced to keep a low markup.
In the case of private labels, the markup can be 15 or even 30 percent higher. But they are successfully “compensated” by additional costs.
The algorithm for working with your own brand is shown in Fig. 2.
The entire process of launching a new private label product takes from six months to a year and includes the following steps:
- Determining a private label strategy, name, logo Forming a concept, strategy, creating a logo for your own brand is an important and expensive task that a retailer, as a rule, entrusts to a marketing agency. The costs of developing a chain brand are transferred to all goods released under private label.
- Selecting a product category for product release. As mentioned above, private labels are designed to best satisfy any of the needs of the potential audience. Be that as it may, in order to form an optimal price offer for a non-unique product, it is necessary to obtain its lowest cost from the manufacturer, and this is only possible if the product has large sales volumes and the buyer is not sensitive to the brand. In addition, it is desirable that there is no clear leader in the product category. According to research conducted by Nielsen and analysis of private labels of leading retail chains, the most attractive sectors in this regard are dairy products, groceries, confectionery products, juices, water, beer, alcoholic beverages, as well as paper products, personal care products and household chemicals.
According to the results of a study by PwC in Russia, conducted in 2010, more than 90% of private label turnover in the Russian Federation is accounted for by generic trademarks (the names of which are not associated with the brand of the chain or manufacturer) and imitators (umbrella brands). At the same time, a large share of private brands is concentrated in the “economy” class. In recent years, they have begun to actively develop in the middle and high price segments, but their penetration level is still insufficient. - Development of a strategy for bringing a product to market. Today, experts identify three main strategies for developing private brands:
- Dumping. The most common strategy, since in conditions of market stagnation and the expectation of a recession, most consumers remain quite sensitive to the price of a product with acceptable quality.
- Replacement of a competitor. A more complex approach that focuses on the tastes and established preferences of the buyer. The challenge is to replace leading products in categories where brand habit is not a major consideration. As a rule, this strategy is implemented gradually or in case of significant disagreements during negotiations with the sector leader. The path is quite risky, since it is not possible to avoid a decrease in the level of sales in quantitative terms and a certain loss of loyalty even when achieving complete replacement of a competitor in terms of profitability.
- Brand extension. A strategy whose essence lies in the fact that buyer loyalty to the name of the retail chain is transferred to products under its own brands. In this case, the private label becomes a full-fledged brand, which allows it to be positioned as a direct competitor to a popular manufacturer in the same price segment, and over time it can go beyond the network.
- Development of specifications and packaging design. Certain costs are associated with the involvement of specialists in establishing the technical specifications of the product and designing its appearance.
- Conducting a tender for production. In principle, this stage does not require any special costs. Different retail chains hold open or closed tenders. But after agreeing on the terms of price and production volumes, it is necessary to conduct a study of the production capabilities and reliability of the supplier, and this is already associated with business trips, the involvement of specialists and, as a result, additional costs.
- Purchase of raw materials and components. As a rule, after agreeing on commercial terms of production, the supplier can only compensate for the costs expended. In this case, the costs of purchasing raw materials and packaging fall on the shoulders of the retailer. The main problem of releasing goods under a private label is that in order to obtain a competitive price it is necessary to purchase raw materials and components in large quantities, which leads to large advance payments, storage of containers, and sometimes products manufactured in large quantities, payment of credit funds (instead of a commodity loan in case of work under the manufacturer's trademark).
- Next come the costs associated with product promotion, merchandising, regular quality control, and possible disposal of leftovers.
- Another significant expense item is logistics. When producing private label goods, the entire logistics chain from the factory to the store counter is taken over by the retailer, and this, depending on the product category, can be very costly.
Let's estimate the total costs:
- trading premium – up to 10%;
- advertising, on-site placement for additional display, price promotions - up to 15%;
- logistics costs and merchandising – 2-5%;
- funds for launching the project, purchasing raw materials, quality control, disposal of residues - 2-5%.
As you can see, additional network costs can be up to 35%. And this is provided that there is also a 10-15% difference in price on the shelf. Apparently, the manufacturer must give a fifty percent discount on the cost of the main line when releasing a private label...
Hopes and Fears
What does a manufacturer expect and what does he fear when releasing a product under a private label?
There are several logical explanations why an enterprise can begin to produce goods under the private label of a retail chain:
- gaining network loyalty in order to introduce or expand a product line under your own brands;
- advertising of their brands and themselves as a manufacturer by associating in the minds of the consumer with the name of the retail chain;
- optimization of logistics for the supply of its products by increasing supplies to the Customs Union;
- receiving guaranteed and timely payment for goods;
- additional income.
The manufacturer's main concerns are related to the possibility of losses. They are due to the fact that the economic model of Russian enterprises differs significantly from the Western one.
In Europe, the production of private labels is carried out by companies that initially built their business on the principle of exclusively working with private labels of the network and were thereby spared from organizing an extensive sales and distribution system, which we see in Russia. They do not need marketing and sales departments, which, by the way, are quite expensive, otherwise these expenses are included in the cost of the goods. Thus, the European manufacturer can ensure the supply of products with acceptable quality at a reasonable cost.
The manufacturer's risks are as follows:
- Receive a loss from cooperation due to the need to provide the retailer with a price lower than the full cost of production.
- Become dependent on the seller due to the fact that when reorienting production to the production of private labels, you will have to reduce commercial divisions and the active sales department, as well as abandon the customer base that has been accumulated over the years. If the contract with the network is terminated or expires, it will be impossible to quickly restore sales volume, which will inevitably entail serious financial losses.
- If a retail chain insists on releasing an “umbrella brand” similar to the TOP positions of its own range, there is a danger of substitution and crowding out of its products.
Win-win move
A huge number of manufacturers are seeking to supply retailers with private label products. How to get the contract you want? There is a simple and effective rule: you need to understand what guides the manager of a private label retail chain when making a decision, and make him an offer that you yourself would accept if you were in his place.
- Assess the retailer's needs:
- analyze the market and network assortment;
- evaluate the network strategy when working with private labels;
- formulate the requirements for the product needed for the network.
- Weigh your own strengths and capabilities:
- check whether you can sell a product with the required characteristics at the required price;
- objectively assess your production capabilities: can you supply products in the required quantity without compromising existing sales volume;
- identify the need for project financing and determine sources of raising funds;
- identify suppliers of raw materials and components and make sure they are reliable and ready to provide everything necessary for the production of private labels;
- Calculate the cost of production before and after launching a private label project. Track how the increase in volume affected costs. Develop a cost reduction program;
- compare the economics of the contract when collaborating on your own brand and private label network;
- formulate what goal you are pursuing;
- Assess your risks and, if they are significant, draw up a program to reduce them.
- Make an offer that will benefit both the retailer and you, and make it without waiting for a tender to be announced. Your offer will become much more attractive if you:
- conduct preliminary research yourself;
- simplify the quality control procedure or take on part of the costs;
- minimize network costs for the purchase of raw materials and packaging and storage of finished products;
- distribute the package of additional services provided to your brands and private label networks.
The proposed operating algorithm can be quite effectively implemented by both domestic manufacturers and importers. The weakening of the ruble exchange rate at the beginning of the year reduced the competitiveness of foreign goods. Nevertheless, the emerging trends towards a fall in the EURO exchange rate, an increase in imports of food products from European countries and the focus of a number of Western enterprises on the production of private labels for European retailers make cooperation with Russian retail chains in the production of private brands and their own imports promising.
Determination of product requirements. Making a decision on the need to produce certain types of products under a private label. Approval of the assortment for release by the working commission.
Based on an analysis of the results of market monitoring, the need to release certain goods under private labels is determined. At this stage, the basic requirements for products are also formed, in particular for the assortment, quality and design of packaging, labels, volumes of products required for production, logistics requirements, possible ways of implementation, etc. The assortment planned for release is approved by the working commission.
Search for private label manufacturers, initial product tasting.
Potential manufacturers can either independently contact the Federal State Unitary Enterprise “Trading House “Kremlevsky” by submitting an application, or be identified by the company’s experts.
At this stage, commercial proposals are studied, technical issues are clarified and product samples are requested. Samples undergo an initial tasting assessment in focus groups, including through “blind tastings”.Assessment of manufacturers based on the results of the initial production audit and possible terms of cooperation.
Specialists from the Federal State Unitary Enterprise “Trading House “Kremlevsky” carry out an initial audit of production - checking the availability of the necessary documents for the implemented quality management system. If necessary, additional documents and information may be requested. If the results of the initial audit of the manufacturer are positive, negotiations with him continue. When selecting manufacturers for private labels, various criteria are taken into account, including quality indicators, pricing policy, production volumes, and logistics conditions.
Laboratory testing of products. Production audit.
Products of potential private label manufacturers undergo laboratory tests in an independent laboratory of the Federal State Budgetary Institution "Center for State Sanitary and Epidemiological Surveillance" of the Administration of the President of the Russian Federation, or in another laboratory accredited by the Federal Accreditation Service, selected in agreement with the Federal State Unitary Enterprise "Trading House "Kremlevsky". Subject to the successful completion of laboratory tests of products, experts from the Federal State Unitary Enterprise “Trading House “Kremlevsky”” visit manufacturers’ enterprises to assess compliance with the requirements of the legislation of the Russian Federation, Technical Regulations of the Customs Union and Russian and international standards governing the quality management system and food safety. Manufacturers who score a sufficient number of points on the checklist are considered as potential partners for concluding an agreement, the rest are given time for finalization. Audit reports are sent to manufacturers.
Repeated tasting. Conclusion of an agreement.
Products from manufacturers who have successfully passed all stages of selection are reviewed by a working commission. Repeated tasting of products is carried out. The working commission approves private label producers.
Essential terms of the contract are discussed with private label manufacturers approved by the working commission, distribution channels, requirements for packaging and label design, etc. are determined. Based on the results, a contract is concluded.
Manufacturers who work with retail are divided into three groups. Those who produce only private label networks. Those who will never produce private labels and those who are hesitant... We’ll talk about whether it’s worth producing private labels for those who have not yet decided.
A manufacturer of canned vegetables approached me. He regularly tries to start working with large retailers. At first I wanted to enter with my own brands. Did not work. Didn't take economics, etc. After that, he decided to “go the other way” - to enter with his own brands of networks. And the result is the same!!!
After doing a little diagnostics I found out that:
— the production is quite fresh, but due to the small sales volume the cost of manufactured goods is high
— commercial proposals for the introduction of products and the release of private labels differed slightly... Conventionally, if in one it was written “we are ready to consider the release of products under your brands,” in the other there was no such note.
— similar offers were sent to all networks. Moreover, the same ones where the manufacturer tried to enter with its brands.
CONCLUSION: the idea of entering the network was doomed to failure!
In the near future I have plans training on writing a commercial proposal and a master class on writing a proposal for the release of private labels, as well astraining and master class on negotiations . I'll try to combine these programs in one case.
1. I had to figure out my goals. I would put the following:
— increasing the competitiveness of the main product line through the release of private labels, additional production load and cost reduction
— obtaining favorable conditions from suppliers of raw materials and packaging due to an increase in production volumes and, as a consequence, purchases
- earnings on private labels
— entering the network using private label as a locomotive
After some discussion, we decided that all goals were important. But we will looktwo types of partners : for working exclusively with STM and those where we will enter with the main line, using STM as a locomotive.
Consequently: in the first networks we offer a TOP assortment, in the second - an assortment that will not overlap with our TOP brands.
2. In order for the network to accept the offer, it is necessary to convince the buyer to accept the offer of cooperation.This is already in the realm of negotiations. To write a killer business proposal, you need to understand:
— whether the employee produces private labels on his own initiative or simply fulfills his duties.
In the first case, you need to find out what is important to him: income growth, experiment or self-realization.
In the second case: what is required of him? What will be evidence of completing the task? What is important for him: to get a result or to close a position with minimal effort.
How to find out? Study the requests of the network, website, stores, set of private labels, for which brand (proven or new) the request is being made.
After this, you just need to network and write a wonderful commercial proposal that will be accepted immediately and without complications.
After all, a COMMERCIAL OFFER IS A NEGOTIATION THAT WE CONDUCT WITHOUT HAVING THE OPPORTUNITY TO SEE THE EYES OF THE OPPONENT AND RESPOND TO HIS OBJECTIONS
And, of course, we need to undergo a production audit and produce an excellent product in sufficient quantity. But that's a completely different story...