Private labelling involves a product being bought off by a third party but sold under its own brand name. The retailer has full control over the product or products such as how it is made, what the item looks like and how it is packaged. Most consumer product categories include both branded and private label lines.
What is the private labelling process?
There is essentially a four stage process starting from the creation of the product to it being sold. First is the manufacturer creating the product. This is followed by the manufacturer selling the product to the company. The retailer who now owns the product, sells it to the consumer. In many cases, the consumer will then sell the product privately. It is important to understand that in the first stage the manufacturer places its branding on the product. Of note, once the retailer receives the product, its branding will be replaced.
Why private labelling and what is its use?
Private labelling is best suited for businesses that are a small company wanting to expand their product base. This is because it is expensive and time consuming creating new parts and packaging. Private labelling also requires very little research and manufacturers are widely available. It is also beneficial if a business sells a high number of products that achieve strong results in the market and have a well-known brand. Several advantages and disadvantages transpire in relation to private labelling. The key benefits of using a private label business structure include:
- Full control over the number of products produced, the ingredients, the quality and the costs
- Quick adaptability to new product trends in the market
- Slotting into the market with your own private label
- Differentiation in the market by providing customers with an alternative brand
The disadvantages of using a private label includes:
- Relying on a manufacturer to create the products on your behalf. A close relationship with the manufacturer is integral to building trust and avoiding collisions.
- Difficulty in a competitive market building brand loyalty. The market may already be saturated with your products.
- Products not being sold at a diverse range of stores. Stores may have contracts with more established brands selling a similar product.
- National and multinational brands have a far greater budget to use for promoting its products
What are the legal obligations a business must follow when private labelling?
If a business is firmly established in the market and is considering selling products with private labels, it is important to be in accordance with The Australian Consumer Law by not conducting or being involved in misleading conduct. The business needs to understand its branding and advertising obligations. There is a risk that customers may become confused with the company that manufactured the product. Therefore, customers can be unaware which party holds warranty obligations.
Private labelling occurs when a business buys products from a third party and sells it under its own brand name. It is integral to understand the benefits and limitations of implementing private labelling as part of the business structure. It can be profitable and advantageous to businesses in the scenarios detailed in the use of private labelling section. But, the commercial circumstances of a business may pose a challenge not suited for private labelling.
If you need assistance with the legal issues around private labelling, contact our team.