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Our clients get really excited about receiving an offer to produce their product under a big chain store’s name. The scenario usually goes like this: The producer presents their branded product to the big chain, but instead of the chain agreeing to take their brand, they offer the producer a counter proposal. Will the producer put the chain’s own brand on it, and sell it exclusively to the big chain?
So why shouldn’t this be cause for celebration? The big chain will do all the selling, advertising and merchandising. Also known as house brands, own brands, or control brands, these exclusive brands get the best pricing, location, and promotion in the store. High volume is anticipated. What could be better for the producer? Nothing, if the producer wants to be under the control and at the mercy of the big chain store.
There’s a good reason why the big chains want exclusive brands. They can control the price, cut out middlemen, and make more profits. But when they buy independent brands that can be sold in competing chains, they must stay competitive. They don’t want to build independent brands but will carry them once established, if their customers are demanding it.
They also can ultimately change producers while keeping the brand name the same. So what happens to the producer when they give up on having their brand in the big chain in favor of producing their product under the big chain’s brand?
Big Money. That’s right. MONEY! And lots of it…at first. It is a godsend to a small struggling startup. The large purchase orders will help with cash flow, there is promise of growth, and efficiencies of scale. You become quickly dependent upon that relatively large and predictable string of purchase orders. But that can be relatively short lived.
Price Squeeze. Now that the big chain knows that you are dependent upon them and cannot sell their brand elsewhere, they begin to dictate what they will pay “this year.” They make it clear they can get another producer who will charge less. Every year there are lower bids that you must underprice to keep your business.
Limited Brand Value. Because your product is labeled with their brand, it has little value to an acquirer. You have, in fact, been reduced from a brand builder, building acquirable brand equity, to a producer of someone else’s brand with no real exit plan.
Sudden Death. Now that you have put all your eggs in one basket, you don’t have a diversified customer base which can continue to support your brand building efforts in multiple chains and independents. You don’t have a broad public brand awareness that puts your brand in demand. Now, you are just another commodity. If you lose the exclusive production contract with the big chain, you’re out of business.
So for the very reasons that independent brand builders want to position themselves for security, flexibility and control, the big chains don’t like them. But many producers of independent brands can be tempted into the exclusive brand production syndrome and live to regret it. At first, it seems like a big short cut and a shot in the arm financially, but in the end, you lose what you were in it for from the start, to build a brand and sell it.
When it comes to brand building, start with a good foundation of small independent stores that carry your brand. Then, after you become a household name, the big chains will be more likely to take you. After all, they don’t want to miss out on the new hot brand their customers are asking for!