#253 - Private Label Arrangements: What CPG Brands Should Know Before Signing the Deal | Hillary Hughes, Foster Garvey

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1:16Most of the time when I see something go wrong on a private label, it's because the obligations don't flow up enough to the co-man. So you had your co-man agreement and relationship in place. You didn't go back and address changes to it, or you didn't plan ahead for having the private label piece. And so you just sign the private label deal with the retailer, and then you don't have enough harmony between the two to pass through the obligations up to the co-man. That's where I typically see the problem. Hello, everyone. Welcome to a special mini episode on private label. These arrangements can be a really powerful way for your brand to grow quickly, but it must be structured really thoughtfully.

1:55In this episode, Hillary Hughes looks at what makes a successful private label relationship, how the arrangements are built, how ownership of the product and brand assets are defined, how expectations on things like quality, regulatory responsibility, and risk are established in the contracts. We're covering things like pricing and exclusivity to where products are sold and what happens if the relationship comes to an end. If you aren't familiar with Hillary, she is a CPG legal legend. She leads the Consumer Brands Industry Group at Foster Garvey. They work with tons of brands in the community, providing strategic full-service counsel that helps brands seize opportunity like this while managing risk.

2:33From business formation and capital raising to intellectual property protection and regulatory compliance. If you want to chat with them, you can head to foster.com. It's in the show notes. You can check the link. All right, let's get into it. Here we go.

2:50All right, Hillary, my friend, welcome to the podcast. I'm very excited to talk with you about private label because I think it's really poorly understood by people out there, but they always have questions about it and some people do very well with it. So let's start with the basics. Why would somebody consider a private label opportunity? What is the first thing that comes to mind? Well, most brands like it because it's additional revenue and cash flow. And if you do it right, it can really be an additional revenue stream and help you with the cash flow. But there's trade-offs, so it's really a big decision for a brand.

3:25I feel like people think about it really early on when they might not be ready for it. And it's a lot of operational logistics because you would have a really big additional volume flow, volume commitments to retailers that maybe you don't have the infrastructure for. So you really want to have a good operational infrastructure to be able to truly capitalize on private label. And how do you define private label? Let's make sure we're all on the same page. That's right. There's different kinds of private label, right? So the most traditional would be you're truly taking your product and allowing a retailer's brand to put their brand on it.

4:04You're not making any changes. You're not doing any innovation or anything new for them. You're just making a version under their label. but there's steps in between them. They could have their own tweets that they want to the recipe or formulation. They could want something truly, completely different, but similar. Or they could ask you to come up with a slightly different version for that. And by version, I mean on the actual product, not necessarily the branding and the packaging is generally driven by the retailer, but they could want specific packaging types that differentiate it from your original product.

4:38That makes sense. And I've heard of it happening a few different ways and at different stages of people's businesses. But yeah, like, okay, so Whole Foods has their 365 label. I don't know if they are just kind of going around to brands in this emerging brand ecosystem that a lot of our listeners are in and asking for their products. But basically, it's what you're saying, which is, oh, you have this cool new innovation, or I see this is really trending. We would love if you could just make that for us under our label because we're looking for a product like that. Do you want to do that? Yes, no.

5:08By the way, if you don't, you know, there's always a risk. They might just go and do that themselves, launch their own brand. Who knows? Hopefully not go to your Coleman. But they do have resources out there. And in a lot of instances, I've also heard when you're talking to those bigger players, let's talk about Whole Foods or Trier Joe's, someone like that. It seems like they're less likely to approach your brand new brand that you make with a Coleman and you have tough economics and they're more likely to talk to people who maybe even have their own manufacturing or just have some really solid innovation they cannot get somewhere else.

5:42Is that your experience generally? Yeah, generally they're either seeing what's hot in the marketplace until they have a gap in their own private label brand offerings and they want it. Or it could be that there's something hot that's out there that's trending that they want to take advantage of. But to your point about your own manufacturing, you're absolutely right. And this goes back to what I was saying about having your kind of operational efficiency there to be able to scale. If you have your own main factoring and you're looking to build line capacity, it's a private label is a good way to do that.

6:10A good way to monetize sort of the down line time. But brands may, the retailers may come to you on their own. It could happen through a broker. And sometimes it could happen through your co-man. As a matter of fact, I have a few horror stories that co-men have like essentially private label a brand's recipe or formulation without the brand's knowledge. I know of one brand that's in litigation about this with their co-man right now. So you want to tighten some of that risk up on the co-man side too. But yeah, private label can be a big opportunity, but also a big burden. As I said, retailers have a lot of requirements, a lot of demand.

6:47Sometimes they want the custom things that require additional time and money on your end too. And then of course there's margins. So you're going to make less on a private label product sale than you are on your own branded sale. And then there's cannibalization, right? That's the whole big part of it. Because if there's a cheaper version of your product out there that a consumer can buy and the retailer is all in control of the promos for that and the shelf placement for it, you can end up cannibalizing your own sales if it's being sold right next to your branded product in the same store. And yeah, I think that goes back to just what is your differentiation and why would they be interested in private labeling?

7:28Because there are a couple of different arguments here. One, I've worked for a brand in the past that truly had a very unique innovation. Nobody else in the market had it. They were a trailblazer. They put a lot of money into consumer education about this thing and the technology behind the product. And at the time, we were not interested to private label it despite many requests because it was so unique out there. than a shelf next to something like us. If we had done it, we would have given them probably a dumbed down version of the product, right? Like, okay, we'll give it to you, but you're not getting this feature or this feature, or it's not going to have this certification, or it's going to have this ingredient that's not as good, just not as good as ours.

8:07But even so, we just didn't want to do it because it was so unique. We just had so much runway to have that differentiation. But there is a counter argument that some people could make that could be, I think, legitimate in some cases of, well, I need help growing this category. And actually, if there's a little bit more shelf space dedicated to this new thing that I'm creating, then people will see it more and I'll get more attention and they'll discover why mine is the best one out there. But it will help bring consumers into this emerging area. What do you think about that? Yeah, I think that's true.

8:38And that's a good strategy. I think keeping it sort of like as a good, better, best is how I think of it. Like the private label version under the retailer's brand is good or better maybe, but your branded is the best and have something to back that up, whether it's different ingredients, different flavors, different size value or packaging sizes. I think there's different ways to make it. And you can still capitalize on all of it by controlling sort of the cannibalization through doing it with different channels or different geographies or territories. Like you mentioned Trader Joe's, that's a perfect one because they have a ton less branded products than Trader Joe's.

9:14So you're not really cannibalizing your own brand in Trader Joe's because there's just the Trader Joe's brand. So picking and choosing who you're partnering with and where you're doing it, what channels, what price points can be a way to preserve the differentiation and the kind of prestige value of your brand version. And I like a lot the point you made about pack size. I hope everybody really caught that one about that can actually be a great way to differentiate what's going on or a flavor like, okay, I'm going to give you this one, but not that new, new, that beautiful new flavor that I've developed is just for me.

9:47So you can have the one that is the standard one. And that probably also won't give away that we're private labeling here. It's so funny. And I also, I really wonder from a consumer standpoint when they know and when they don't know, I will say it was so obvious to me that would like Whole Foods private label on the eggs for the pasture raised eggs was Vital Farm. Like if you're buying Vital Farms, probably it's because you're a sucker for me. Like the way the The yolk looks as orange is cool. That's super new. I mean, there are very few national egg brands and they just blast it onto the scene with this.

10:21And then if you notice that Whole Foods started carrying a private label pasture raised one and it looked exactly the same and it was cheaper. And so I felt very clever indeed for getting a little bit of savings on these expensive pasture raised eggs. I don't know if it's still true. Yeah, I recently saw an Aldi commercial, which I don't see very often. And the commercial was like, all the products you want or something like that without the brand markup was how they were positioning it. And I was like, that's so funny. That's so clever. That's private label kind of in a nutshell. So, yes. So you guys can save money.

10:53Those brands, don't worry, they won't make any money, but we'll make it at Aldi and you'll keep it, but not the brands. Like, thanks, guys. Thanks. Everyone has a role to play in this. Okay. So let's talk a little bit about the actual arrangement. arrangement. So obviously you work with a lot of brands on how to define these kind of arrangements. Can you tell me a little bit about what does it look like? What are the important parts to get right? Well, some of it goes to some of the things we've already talked about. Are we doing purely a white label where it is your product inside and just their brand on the outside?

11:24Is there any kind of innovation going on where they're suggesting something specific that they want or you were mandating that theirs be different in some way? Who's going to own that, of course, is something that's always debated. If you use a co-man and you're not doing your own manufacturing, getting your co-man to produce for them under their brand and kind of making sure that relationship to the extent you want to control it flows through you and that the co-man is not dealing directly with the retailer. So getting some control over that piece of things too. And then of course, there's all the like commercial terms, the forecasting, you want it to be reliable because you're managing your own branded output and then you're managing your private label volume as well.

12:08So getting some of those commercial terms practical for you so you can predict and plan. And then there's exclusivity fights too a little bit. You'll see they want an exclusive. They don't want you to private label for others. And there are ways around that. There are ways to negotiate it. Of course, all of it has to do with bargaining power and how in demand your product is and whether or not they can source it elsewhere or get something similar elsewhere. You can get them exclusive or limited time rounds or specific flavors or... Geographic, yeah, channel. There are ways to kind of narrow that.

12:40But what's tough is when you're signing up for all the obligations without the commitment on their part. So you want to try to match what you're signing up to deliver and perform on with them committing to give you some minimum amount of revenue. So volume, commitments and obligations, exclusivity on their end, too, is very helpful. You can get from a practical standpoint, like the arrangement is typically like, OK, so I am going to private label this for you. And then here's the product. Come pick it up. And you're paying me a dollar a unit. That's it. Very clean. Right. Like, is there no deductions involved?

13:16Like the spoilage doesn't really happen that way because they're just taking possession of the whole lot of the stuff as soon as they pick it up or you deliver it. Yeah. And you're responsible for most everything. And else, regulatory compliance, it's your product. Unless they're putting something weird on the pack that's not authorized by you. So you're on the hook for regulatory compliance and manufacturing arrangement and supply and meeting all their obligations. Obviously, sometimes they want, as you mentioned before, their unique pack size or pack design. But really, they're just the brand that's going to be sold on their brand.

13:52and what's in it is all kind of on you and your co-man. Almost like it puts you into the position of being the co-man, even if you're using a co-man for it. Because if there are problems, this is your problem. And then you might say it's the co-man's problem. But I mean, in reality, you're signing a contract that you are responsible for producing, finished product that meets the standards and specifications that you've agreed to. And if there are problems, then you're going to be liable for that. And you may be able to go back to your co-man, And I guess in that instance, if there are problems and put that burden right back on them, hopefully that doesn't happen, obviously.

14:26Yep. You're absolutely the middle person in that situation where it's going to be your problem to make sure the product's good. And if there's a problem to try and hold your command or your raw material suppliers accountable for it, because the retailer is not going to assume responsibility for anything other than their own label. Have you seen any of these situations go wrong where it wasn't totally clear? I wonder if you have a story for us about like, yeah, if you had clarified that or maybe it's just unavoidable and just in the litany of things that can go wrong and twist out in different ways.

14:58You couldn't have really prevented it. And the conflict was eventual just because of some product thing. It's also sometimes it's so hard with comans to assign blame about like, well, no, it was the ingredient. It wasn't us. We did according to spec. That it was it was the fault of the packaging and the packaging company is like, no, no, the packaging was correct. So tell us a story. You're right. There's always the finger pointing thing. And most of the time when I see something go wrong on a private label, it's because the obligations don't flow up enough to the co-man. So you had your co-man agreement and relationship in place.

15:29You didn't go back and address changes to it, or you didn't plan ahead for having the private label piece. And so you just sign the private label deal with the retailer, and then you don't have enough harmony between the two to pass through the obligations up to the co-man. That's where I typically see the problems. And now I'm a finger pointing to your point on, oh, it's something with the ingredient. That's not our problem. What we tend to encourage brands to do is wire the command to inspect the ingredients when they arrive and notify the brand within, say, 24, 48 hours of any problems. And if they're not, then they're deemed conforming.

16:08And that way you prevent the finger pointing because you're saying, hey, you didn't notify us within 24 hours, 48 hours, whatever it is. so you can't blame it on the embryon supplier so we tend to do it that way now if the brand is sourcing some of the embryons and having them shipped to the co-man we try to also get them to have a written supply arrangement in place or supplier guarantee or something with the raw material supply so you actually have two recourse in two directions if you need it but generally most of the co-man will commit to that inspection and notification period only the real sophisticated ones who are using a lawyer that's not like their cousin who's a real estate attorney will say, well, that doesn't work for latent defects, ones that you can't see on inspection.

16:54So we need to carve that out. So that's generally how we try to structure things. Yeah, there's so many things that can happen. And then you're like, no, the product was fine when it left. This was a problem that happened in transit. Like it must have not been refrigerated correctly or something. It's so hard to prove all that stuff. Okay. So I just want to ask you another question about the pricing, by the way. So let's say you're locked in, like I'm going to sell you this at a dollar unit. Okay, great. I can make profit off that, or I own my own manufacturing and that's going to help me to get a little bit more capacity utilization.

17:27And so I like that, but things can change as we know if anyone has a car these days and has to fill it up, the price of inputs can change. So So what does that look like usually in the agreement that you have with a retailer? Is there typically room to make cost adjustments based off commodity pricing or inputs, anything like that? Or are you just locked in and then all of a sudden they might be ordering more and it could be in a bit of a hole? Yeah, it's a negotiation. I mean, ideally, you get yourself some flexibility to change pricing or revisit pricing on whatever cadence you're allowed to.

18:04Usually you're not going to get just random income you need to. But whether it's quarterly, semi-annually, annually, or on renewal that you want to get some ability to, or you could put some real fluctuation, almost like a force majeure type provision where if the price of inputs increased by X percent, then you're allowed to pass some of that along. And we saw a lot of this during COVID. A lot of sunflower oil, believe it or not, comes from Ukraine. And between COVID and the war in Ukraine, like for a while, it was tough to get sunflower oil. And so the price of it went through the roof. So now it's more like tariffs or things related to lack of oil supply or the price of oil going up, which in turn affects plastic indirectly or jet fuel costs.

18:52Get things moved around the world, start to cost more. Fertilizer, I understand, is very much affected by the whole straighter formulas thing because a lot of the fertilizer comes through the straight. And so there's a lot less fertilizer available. So those types of events, if you can't get a regular price revisiting some sort of force majeure type, well, something changed and the prices have gone through the roof is usually reasonable to ask for. OK, and then the other part of revenue, we have price. And now I want to talk about volume a little bit. So that would be my other anxiety of like, OK, I'm agreeing to this thing and my co-man's on board or I'm going to manufacture it myself.

19:33But I mean, how much volume is this going to be? And I'm not required to fill all of it. And I don't know if you're going to put this in all your stores and it's going to fly or you're going to slow roll it and it's going to be delayed. And then all of a sudden you ramp up the volume. And by the way, I've got my own product to worry about. So how do the minimums or maximums or expectations work when it comes to the volume that you will be obligated to fulfill for them? Yeah. And this is almost like putting you in your co-man's shoes when you were negotiating this with your co-man. And now you've got the co-man hat on and you need to be able to predict the volume you're going to need to produce.

20:09But obviously you still need your co-man to produce that if you don't have your own manufacturing, which makes it difficult sort of on both sides of the coin. You have your own manufacturing. And either way, really, you need reliable forecasting and you need sort of maybe quantity tolerances shifting, maxing up or down, depending on what the forecast is so that you're not required to fill more than you can actually produce capacity wise. And just being able to predict what's coming in. And it's hard. Sometimes retailers can't or won't commit to that. And then you've just got to decide whether you want to take all the risk and feel like you're going to ramp up or onboard another coman or more.

20:48Or if you're doing your own manufacturing, onboarding a coman just for the excess volume. If you do find yourself in that position. So it's a dance. You really want to be able to support because retailers will move on if you can't keep up. And generally, they're not picking brands for private label that don't have kind of stable operations and the ability to scale if it does well. By the way, I've heard in some instances of retailers being like, yeah, no, no, we'll think about carrying you as an everyday item if you do this thing for us and do the private label. Then we can have that. I'm always so skeptical of that kind of stuff.

21:24Like, is it in writing, though? Or are they actually ordering both right now? Because I hear that kind of stuff. I hear these promises that you are not enforceable. You want to get anything you care about, you want to get in writing. Yeah. And that's not just with retailers. That's anybody, right? Think of anybody else you're on, Warden, any kind of vendor or something you want them to deliver. If you care about it, you need to get in and write it. The buyer changes. Now it's not their problem. So much can happen. That happens a lot. Yeah. A buyer who really likes the brand and the product, and then there's a change.

21:55And then all of a sudden, you're no longer the golden child. All right. Last one for you, Hillary, which is it's always good to think about the end of these kind of relationships, whether it's gone great and you're like, no, I just need my product back. I'm going to do great now. I don't need this anymore. Or maybe because you're ending a product line or maybe they wanted to end it. How do you plan for termination, I would say, in these kind of arrangements? Yeah. Well, the most obvious one is if you can't keep up or there's not enough demand, so both directions, or you get acquired and you're required as one of the private labeling for retailers.

22:33So you just need to build in the outs that you need and feel like you've got to have to feel stable. The retailers got to want outs too. And so you just have to do your best to negotiate terminations and car vows if you discontinue a skew for whatever reasons. You need to be able to revise that skew in the private label arrangement as well and drop that skew if it's a particular flavor. You just want to preserve as much flexibility as you can to discontinue a skew to modify your formulation. Let's say you come up with a modification that's going to save you a bunch of money. You want to be able to pass that through to the private label product you're selling to the retailer.

23:13You want to be able to discontinue. You want to be able to drop the relationship if you have a bigger opportunity. Or if the unit economics no longer work. So just preserving as much flexibility as you can. The hotter brands obviously can negotiate better terms than brands that are less competitive in terms of private label demand. All right. Hillary, thus ends our mini episode here, our brief dive into the world of private label. But I love this. I love jamming with you on these topics. And obviously your experience is very obvious, having been through the battle, healed on this one with people before.