Things to consider when entering the private label market

Today private labels have a higher share of the tissue market than even before, leading many to consider the benefits of so-called store or retailer brands. But private labels can entail a number of pitfalls, including a much higher degree of production complexity than national brands require. To succeed in this market, flexibility is a must.

Worldwide, private labels represent around 14% of all consumer-packaged goods sales. In the tissue category, however, that figure can be as high as 35%. For many manufacturers, this trend has meant the need to find new strategies for competing outright with store brands.

Other manufacturers have taken a different approach. Rather than a risk, they see consumer demand for private labels as a profitable opportunity. Some mills have become dedicated private label manufacturers, while others engage in private label production on top of existing branded products. Each strategy offers different advantages, as well as a number of things to keep in mind.

Going all in on private labels

For tissue manufacturers, the decision to focus solely on private label production is one possible route. Overhead is lower, as there’s no need to invest in expensive brand building or risky R&D initiatives. Moreover, you can focus solely on building relationships with retailers rather than spending too much time worrying about end-customer needs.

However, while upfront costs are lower, private label manufacturers generally operate on razor-thin profit margins. The profits for a manufacturer on a store brand tissue product is around 1/6 of those for an equivalent national brand. They also need to be adept at quickly outbidding rival suppliers. Extremely accurate cost accounting and a detailed knowledge of cost structure are thus very important.

In addition, these manufacturers face incredibly complex production demands. Private-label-producing mills turn out a wide range of product varieties under different names. Demands can change rapidly, and production runs tend to be short. For these manufacturers, the ability to quickly and effectively switch between different types of production is vital to survival and to gaining the competitive advantage.

Finding middle ground

Compared to national tissue brands, private label production offers both clear advantages and drawbacks. That is why some tissue manufacturers have chosen a middle path: producing both. Many so-called “dual-trackers” have seen great profitability by making products for store brands as a complement to their own brand production.

The potential advantages here are self-evident. If you already have the mill, tissue machine and manpower, periodic short runs of private labels give you an opportunity to take advantage of spare capacity with little additional investment. Essentially, everything above variable costs contributes directly to profit margins, especially if you sell your private label in a different market to avoid undercutting your national brand.

In practice, however, the dual-tracker approach requires a fair degree of complexity. Private label production usually goes beyond occasional short-runs when there is “extra capacity.” Because the product is typically of lower quality than the national brand, dual-trackers have to constantly switch between production methods, which creates additional downtime where no product is coming off the line. The risk is that your original brand ends up subsidizing the private label, meaning the operation is less profitable than it may appear.

Flexibility is the key

As we have seen, the different approaches to private labels for tissue producers offer different advantages as well as different risks. The best choice for you as a manufacturer depends entirely on your specific capabilities, which is shaped in part by the equipment you have available.

A tissue machine designed to offer maximum production flexibility offers a number of benefits for both dedicated private label mills and dual-trackers. With technology like Valmet’s Advantage NTT, dedicated manufacturers can more easily produce different types of tissue products. This enables them to quickly respond to new demands on the market, which in turn makes it possible to win more bids and operate successfully on slim margins.

For dual-trackers, a flexible tissue machine like Advantage NTT minimizes the time it takes to switch between production modes for premium, plain or textured paper. That translates to reduced downtime, letting the mills truly take advantage of spare capacity and get the most from both their national brand and their private label production.

Still curious about private labels? We’re happy to answer any question you may have – contact us today.

Find this story interesting? You can read more about tissue at www.tissuestory.com. If you want to know more about how Valmet helps its customers become best in tissue, go here to get information about our products and services.

 

 

 

Category: Tissue in focus

Industry level: Intermediate

Est. read time: 4 minutes

Summary: Part two in a two-part series, this article looks at the possibilities of becoming a manufacturer of private label tissue products (store brands).