Is private labeling right for you? Maybe it is and maybe it isn’t . . . but what exactly is “private labeling” and why would you be attracted to the concept?
In the tackle/sporting goods business, everyone complains about the competition and low margins. If your total expenses are 33% of sales, how can you generate a profit if your margins are only at 32%?
“Simply raise prices,” you say. But potentially, this might make you uncompetitive—and both your sales and reputation will suffer! For the small independent retailer, this is often the case when they try to match prices with the heavy hitters.
The solution is often found through the use of private label products such as fishing rods, reels, lures, terminal tackle and certainly for rainwear and apparel.
The advantage of using private label products is simply greater margins, aka the spread between what you pay for product and the price you can sell it for. Where color, styling, cosmetics and perceived quality are apparent, brand name is less attractive.
How private labeling usually works
Consider fishing rods, most of the rods are manufactured by a relatively small number of manufacturers or importers. The same rod, with similar or identical specifications might command higher margins simply because it looks better or because the retailer bought it directly from an importer versus a tackle distributor.
A well known, brand name, rod might command a higher price (with lower margins) simply because it is well advertised and thusly discounted by the competition . . . whereas a rod of equal specifications and quality, but with a private label name, can be purchased through an alternative source and sold at the same price but yielding significantly higher margins.
That’s the way the big boys play the game. They stock the name brands but offer a private label name for their rods, thereby yielding higher sales and margins. Commonly, the larger retailers with significant volumes, will simply have the name brand rod vendor make them a special model of rod supplied to only that particular retailer. Here again. the object is increased margins in the absence of easy price comparisons.
The major tackle retailers (e.g. Bass Pro, Cabela’s, Shields, etc.), have the advantage of having copious purchasing power, thereby facilitating the use of private label brands or models of name brand products.
How can smaller retailers compete with big box chains?
Okay, now that you fully appreciate the margin implications of private labeling, how can a smaller retailer compete with the big boys? Clearly what is needed is increased purchasing power achieved through aggregating usage (orders) with other retailers or joining an existing buying group or forming your own buying group.
Purchases through a buying group makes it easy to generate the necessary volume to have your own private brand manufactured or imported. In the alternative, you can go around the distributor or importer and buy directly from the prime manufacturer.
The biggest opportunity for increased sales and margins lies with private label apparel, whose margins typically begin at 50% or greater. Moreover, since most apparel is made off shore, creating a private item can be as simple as changing the label or color of the item.
Private label apparel appeals to all people and is very responsive to promotional pricing, easy display and online marketing.
You don’t have to be one of the “big boys” to buy and sell like them. You do, however, need to barrow from their playbook and embrace special makeups and private label products. As they say in politics, “follow the money.”