Private Label Primer, Part II

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From the Editors

Private Label Primer, Part II 

Lesson II - Financial Considerations 

(Lesson I was published in the January issue)

There are a few financial concepts that potential private label owners need to keep in mind as they consider investing in their own products:

1. The dry goods (glass bottle, labels, corks, boxes) for private label brands typically will cost more than those for distillery owned brands 

2. The cost of the rum and the cost of bottling it are also usually higher than for their distillery owned counterparts

3. The administrative costs of transporting, storing and promoting the final product are also larger, when applied proportionally to the number of units bottled.

For all the reasons listed above, it is very hard for private labels to retail at the same price as the distillery owned  products. Fortunately for potential brand owners, this is not a game-ending realization. First, let’s explore the previous three points in more detail.

1. Dry goods being more expensive comes down to purchasing power and minimizing shipping costs. When distilleries buy they don’t buy them by the pallet, they usually order multiple 40’ containers at a time (each container holding 20-21 pallets). The same applies to labels, corks, boxes, etc. This purchasing volume, allows the companies to negotiate better prices with the different manufacturers. Filling the containers to their maximum capacity also means that the shipping cost is divided over a larger number of units, thus reducing the per-unit share of the cost. Many new brand owners are surprised to find out that there is very little difference between the cost of shipping a 40’ and a 20’ container. There is also very little difference between the cost of shipping a 20’ container full and one that only has 4 pallets.

2. When distilleries bottle their own rum, typically they make their profit on the sale of the rum to the importer, so the cost of the rum in the bottle is calculated at its replacement cost. When the same distilleries sell the rum to a private brand owner, the distillery’s only option to prof it from the transaction, is by adding a profit margin to the rum and to the bottling cost. If the bottle selected by the private brand owner is not a perfect match for the existing bottling equipment, there is an additional capital expenditure on equipment, which is usually absorbed outright by the brand owner, or covered by the producing distillery and amortized to the client over a long production volume. If the private label is being produced by a co-packer, there is the additional cost of having the rum shipped from the distiller y (or broker) to that facility.

3. Established distilleries usually move dry goods and finished products using full 40’ containers. This allows them to minimize the freight cost of each shipped unit, by dividing it over the largest number of units that can fit inside the container. When small private label owners move dry goods for their products, they usually do so in partially-filled 20’ containers, sometimes consolidating only a few pallets of their goods with pallets from other companies. We’ll explore shipping in more detail in a future lesson, but for now all you need to know is that there is not much difference in the shipping cost of a partial 20’ container, compared to the cost of a full 20’ or full 40’ container. Thus, you can see how larger productions can benefit from smaller per-unit shipping costs. Also, the administrative expenses and time commitments to ship a few pallets or a few containers full of pallets, tend to be about the same. Lastly, companies that have multiple products in their portfolios are able to split their warehouse expenses across all of them, while owners of single private labels must allocate all their expenses to one product.

Another important consideration is the amount of capital required to establish the brand. Many of the private label owners who reach out to me are under the impression that they only need enough capital to pay for the initial production, and that profits from the sales of the initial production will finance additional ones. In reality, brand owners need to be prepared to pay for 2 or 3 productions without relying on sales income, to keep a steady flow of product throughout the retail chain. Otherwise distributors or retailers may be faced with out-of-stock situations which can be very detrimental to a new brand.

Having a good business plan, one that takes into account all of the factors listed above, is essential to ever y small star t-up. You may have a great product, a good distributor, happy consumers and still go out of business due to cash f low problems.

Next month we’ll review bottle selections and consequences.

See you then!

Luis Ayala

Rum Consultant