Last year I had a client who manufactured a paint and graffiti remover. Their product was available in several chain stores; however, the most profitable of these chains wished to end their contract in the interest of private labeling the product with their own brand.

So, the client came to use to tell them if they should allow this chain store to private label their product.

What you must first look at in this situation is a few things such as:

  1. Will the new contract be profitable?
  2. Will your brand suffer target market perceptual consequence when it's discovered to be literally labeled as a generic (inferior good) product?
  3. Will the demand for capacity be greater or less?
  4. Will you be cannibalizing sales?
  5. How will this effect market share?
  6. Are you comfortable with a dependence on a contract from a chain that has no equity in your company?
  7. If the chain is prepared to cancel your current contract, can you afford to refuse this new contract?

So, you have some thinking do do, which means doing some math. Let me help you a little.

1- Are you going to increase revenue? Remember, you are cannibalizing your brand visibility so the payoff had better be huge.

  • Is this a good deal?
    • Old deal = (Current sales volume) x (percentage of loss of chain contract) = (new revenue) x (profit per sale) = (Gross sales)
      • Example: 120m x .15 = 18m x $.050 = $9m
    • New deal = (Sales volume of new contract) x (profit per sale) = (Gross sales)
      • Example: 50 m x $0.25 = $12.5m

    As you'll notice by this figures, this new deal would mean more profit, unlike the New Deal under Roosevelt (boom boom, ching!); however, this would also require a great deal more capacity which is usually the case when allowing a chain store to private label your product. One of my best friends had to refuse a deal with Walmart 28 years ago because he couldn't accommodate Walmart's initial need in product. He still cries about it to this day.

2- So, what does the new contract require in terms of quantity?

  • Is it greater than your current output?
    • Short term solution
      • Will the contract allow you to outsource labor?
      • Is it profitable to increase shifts and overtime?
    • Long term solution
      • Can you acquire additional players?
      • Is it logical to increase production line?

The bottom line is you have to be very careful in terms of increasing manufacturing based on the duration of the proposed contract, and what you are permitted to do in terms of increasing capacity. Most chains require that you to continue to produce the product, so it may be wise to acquire another manufacturer if the length of the contract justifies the risk.