House brands make good business, but where's the added value?

Prohibition begat speakeasies. These outlaw saloons hid in plain sight throughout the land as common folks galore gained entry with passwords that spread among friends deemed ”okay.” That is, they weren't working for the feds.

Speakeasies have nothing to do with the PHCP industry, except as an image evoked after trying to investigate one of our industry's biggest contemporary trends, one that also is hiding in plain sight throughout the country. Private label merchandising programs have taken hold with PHCP distributors more than ever before. Yet, it's hard to find any willing to speak on the record about it.

The analogy breaks down in that, unlike speakeasies, there's nothing illegal about private labeling, nor are gangsters running the business. But that just adds to the mystery of why so many wholesalers are reluctant to go public with this respectable and growing enterprise. Their squeamishness may have reasons both trivial and profound, which I'll get to later. For now, let's analyze what's already on the record, along with insights from a couple of wholesalers with private label programs who were willing to speak forthrightly with me as long as they remain unidentified.

Why the surge?

Private labeling is nothing new to the industry. Various wholesalers have pursued this merchandising strategy for as long as anyone can remember. Interline Brands' Barnett unit has built its considerable business largely on privately labeled products made in Asia. Private labeling also has been common practice for a long time among master distributors. Today, however, it seems hard to find a wholesaler of even moderate size that isn't private labeling a few lines or looking to do so, and certain buying groups are starting to get involved with it on behalf of their members. A Web search turns up dozens of firms offering production and labeling services for plumbing and PVF products.

Some wholesalers attribute this to a follow-the-leader mentality stemming from Ferguson Enterprises' introduction a couple of years ago of its Pro Flo line of privately labeled products. (Our industry's biggest distributor also has come out with a private line of upscale bathroom fixtures called Mirabelle.) Additionally, private label proliferation is an outgrowth of the cost-cutting mentality that reverberates throughout the supply chain, as well as the continued breakdown of traditional distribution channels. Meantime, globalization has made outsourcing viable for more distributors than ever before.

Home builder consolidation also appears to have played a significant role. As builders' purchasing clout has grown, so has the squeeze for better and better deals, which vendors and distributors pay for with smaller margins. Private label brands made in China or other parts of the Third World are a way to provide the pricing that big builders command without sacrificing gross margin dollars.

In fact, private labeling appears to be a godsend for margin-squeezed distributors. The distributors I spoke with told me their private label brands amount to a relatively small percentage of sales, on the order of 10% or less, but contribute significantly more than that percentage to profits. They also like the market exclusivity afforded by house brands. With these advantages, it's easy to understand why so many distributors are opting for private labels.

A few downsides prevent everyone from jumping on the bandwagon. There's upfront investment involved, and in some cases reluctance to upset longstanding vendors. No demand exists for private label products, so they must be pioneered at considerable effort. Some customers - plumbing contractors in particular - need a lot of convincing before they will turn away from favored brands they've been using for decades. Moreover, field failures can cause big trouble, so quality control is a major concern, and that can be hard to manage with overseas producers.

Nonetheless, these seem like minor obstacles to many wholesalers compared with the opportunity to increase margins and return to the “good old days” when distributors could boast of being the only ones in town carrying certain brand names.

Are private labels good or bad for the industry?

In general, I'm all for anything that puts extra dollars into the pockets of this magazine's audience. From that standpoint, let's applaud the private labeling craze.

But not without misgivings. It was stated earlier that distributors are reluctant to talk about their private labeling for reasons both trivial and profound. The trivial is their belief that they are safeguarding competitive secrets. I love all you folks, but have to say that most of you are deluded about what constitutes clandestine information. Don't get paranoid, but almost everything you don't want people to know about you is widely known.

As for the profound, our industry's furtiveness may have a little to do with an uncomfortable truth about private labels. It's that they amount to smoke and mirrors.

Private labeling is a merchandising strategy, nothing more. It's certainly not dishonorable, and if there's money to be made, go for it. Yet, deep down we must realize that private labels add nothing of intrinsic value to the products so identified. Slapping a unique name on a fixture, faucet or water heater does not enhance its performance or make it last longer. In fact, while some private label products may be top-notch, overall it's logical to assume that most don't match the tried-and-true national brands in quality.

Besides, the national vendors are not just sitting idle watching their market shares erode. They are cutting deals and coming out with their own retrograde products to stay competitive with cut-rate private labels. This inevitably shifts sales and marketing efforts away from value and toward the price end of the spectrum. Private labels also drive vendors toward alternative channels of distribution. If you don't care to sell my product, Mr. Distributor, I'll find someone in a different field that will.

Private labeling proponents would argue that product exclusivity is a value unto itself for dealers, and they have a point. Yet, proliferation could extend this benefit to the point of absurdity. Imagine a marketplace overrun with regional house brands nobody ever heard of competing with one another for customer affection based on nothing more than price and shallow perceptions of uniqueness.

Ultimately, private labels will be bad for the industry if they lead people to believe that business success can be achieved through marketing smoke and mirrors. The distributors who survive and thrive in the long run will be those that provide real value with the products and services they sell. <<