Private label arrangements can bring in new sales channels and revenue streams. However, a craft beverage producer should carefully evaluate whether such an arrangement is the right move for its business.
Private labelling affords you the opportunity to reach larger audiences and gain the credibility of the retailer. A restaurant patron may never have heard of your winery or brewery but would be willing to try Olive Garden’s table red or house craft IPA. Even better, you don’t advertise the product and may be able to sell directly to the retailer, alleviating the profits lost to distributors. Those two factors can make private label sales more profitable.
The first factor to evaluate is your ability to produce the demanded volumes and ensure quality product with on-time delivery. You can consider private labelling if you have excess capacity and reliable suppliers.
Exclusivity is an important issue. You do not want to limit your ability to sell to other retailers and hence will want to avoid exclusive arrangements. One solution is to develop an exclusive recipe for the retailer. You can sell to other retailers but the retailer will be the only one with the particular blend. That exclusive recipe arrangement will often be acceptable to the retailer.
You should also avoid “most favored nation” clauses, there are some pitfalls to avoid in these arrangements that require the lowest price sold to others to be offered to the retailer. These will seriously chip away at your bottom line. Each deal is unique, especially with volume pricing. You don’t want small accounts to get the same price as Big Box volumes.
You will also want to avoid first rights of refusal on your future products. You need to reserve the ability to have exclusives for yourself or other purchasers. It will be important to require the retailer’s packaging to differ in color, imagery and overall commercial impression from your own branding and packaging. This will prevent direct competition between the brands. Remember, the goal is to increase market share, not lose it!
Another important provision concerns minimum volume requirements. You and the retailer will have to balance your respective interests and find volumes you can both live with. You will want to include a provision requiring reimbursement for unused packaging and storage costs if you have to warehouse significant volumes over a significant period.
What else needs to be in a private label agreement? Each party’s intellectual property should be protected and confidentiality agreements should be included, especially for costs, profit margins and recipes. Other key terms to include are quality control, billing, delivery, order procedures, warranties, pricing, term, indemnification, insurance and damages limitations. If you are considering a private label arrangement, consult your legal advisor to get custom advice, and an arrangement suited to your business needs and goals.