Q&A: Surviving Inflation in Private Brands

Between the pandemic disruption of the last year and the wild inflation that has followed, it hasn’t been an easy time in the private brand space. While the economic environment could portend strong trends ahead for cheaper alternatives to branded goods, and trends among retailers using private brands to differentiate themselves and drive emerging categories show no signs of letting up, private brand suppliers are hurting as commodity inflation has shot well beyond their costs. This is forcing some to pass along those expenses, even amid negotiated agreements with retail buyers. In the following interview, excerpted below, Kyle Patterson, VP of client services for leading private brand consultant Daymon, urges retailers and suppliers to focus on long-term relationships over near-term transactional pain.

Jon Springer: When retailers get asked about inflation, they’ll often say they have private brands to fall back on. But from a big-picture perspective, private brands and their ingredients are subject to the same inflationary pressures on their branded counterparts, are they not? How do you see it?

Kyle Patterson: My background before joining Daymon was national brands—I worked with the Procter & Gamble and Kraft-Heinzes of the world. So I can see both perspectives. The primary difference is the private brand manufacturer has a bit more complexity, with unique formulations that are operated through. And then the reality is, it’s razor-thin margins through the retailer, to the RFP (request for proposal) process, and just negotiating those to win and be viable, given the focal areas around costs, in addition to innovation and quality. So it doesn’t leave a lot of room error.

When commodity pressures start to come around, it used to be there’d be a team swing of 13% or 14%, and that was material enough.

What’s happening with polys right now—the plastics which go into everybody’s packaging and in addition to folks doing things like making utensils—you’re looking at 100%-plus increases in that space. Corn is in the three digits.

Kyle Patterson, VP, client services, Daymon 

We’re also dealing with a pallet shortage that impacts everybody. It’s typical supply-demand fundamentals: Demand is impacted by wood pallets, which relates to the construction industry and new home building, and the absenteeism at sawmills. The increased need for lumber based off a new home construction has trickle-down impact to the pallet.

That’s just representative to how it’s all economics, and it’s all interwoven. It impacts everybody. And because private brand manufacturers are operating with thin margins, you know, they’ve got to push it forward in partnership with the retailer.

So what’s your message to retailers about what they need to do to manage these coming times, and how does private label play a role?

It’s the importance of establishing long-term partnerships with trusted manufacturers. It’s to move off, and not continue to orient yourself, against the transactional nature of the RFP.

The typical RFP environment is you RFP this category in January of 2021 and do again it in January of ’22, and do it again in January ’23: It’s worked for many years and it’s driven costs down, which has increased the profitability to the retailer. But it has also created no room for error, and a bit of an outlook where, sometimes, the supplier is viewed a bit more transactionally than someone who you could build a business and establish a long-term relationship with.

I think retailers are thinking through how to navigate that at the moment, [asking] what is the right outlook? Because today, tactically, when they go into the RFP environment, the costs are going up because the commodity pricing is going up, and the manufacturer cannot bear all those costs with efficiency plays. Some are just putting a pause on that environment because of the zero-sum game outlook. Others are thinking a little bit further out, [asking], ‘What does it mean to actually partner with somebody and not just transact?’ I think that that’s the next evolution.

So how would you assess the mix between transactional and relationship-based trading coming into this environment? Has it gotten to a point where it was too transactional to sort of absorb the disruptions in the market?

That was a component of it. Private brand lost a little bit of share through the pandemic, primarily because of lean manufacturing, the whole just-in-time principle that we’ve operated for the last 30 years. And quite frankly, with private brands’ continued growth year over year, capacity was maxed out to begin with.

And so when consumption went up and demand went up, there wasn’t a lot of flex in our plants to increase 20%, whereas national brands, whose share had declined over the years, were sitting on capacity and they could take advantage. And quite frankly, from a national brand perspective, it’s a lot easier to take advantage of that situation because it’s one product that you could shoot out through 1,000 different retailers: There’s no custom formulas, no custom packages, so they had it a bit of an easier run from a supply-chain perspective.

Private brand has got to be nimble and be agile, and we’ve got to service the needs of many. So that was where our environment was challenged then. Now capacity is back, but what’s happening is the commodities.

How long do you see this recovery period ahead for private brands? To the extent there remains a price element to it, you’ve got to figure there’s a tailwind coming as well.

That’s hard to predict. At Daymon, we track over 250 commodities, and each tells a unique and different story, from tuna to resins to PVC. What I can tell you is, it’s been hurting a lot of folks for the last six months. And so what you would traditionally do is you would see if you could get over that timeframe and like all commodities and see where [pricing] ebbs and flows. But except for certain instances, it’s only gone north. It’s at a point where then the manufacturer has to push pricing toward the retailer sometimes.

You know, that’s not a traditional thing because in the private brand manufacturer world,  you’re signing up for annual or dually annual contracts, and that price is established. But if the manufacturer is shipping something in the red, they have to take action on that through pricing. That’s the reality of the world. Manufacturers and suppliers are having to push price, call out force majeure clauses and things like that that are just outside of their control to get out of the contractual environment.

Let’s talk about other private label trends for a moment. We’ve seen retailers utilizing private brands to capture emerging categories, and also refocus their packaging and positioning like Wakefern/ShopRite has done with Bowl & Basket or Key Food with Urban Meadow. Would you expect those trend will remain, and is there any the chance the white-label opening-price-point brand comes back?

Private brands is a differentiator, absolutely. Going to spaces like plant-based is an easy one to go to because there’s a bit of a gold-rush mentality toward plant-based at the moment. The national brands in emerging categories don’t have the name recognition of their more trusted brands that are in households, so a retailer should appropriately differentiate themselves in that type of innovative space, and other areas like flavor trends and global cuisine.

Private brands have done such a great job to make you think that there’s not an opening price point, but the reality is, is there’s a value tier still, there’s still what we call national brand equivalent. And a lot of times there’s a premium or superpremium that resonate in such a way where you didn’t pick up on that. It was even a private brand, right?

I think even if someone were to return to like a generic, a white label thing, I think they do a cool and creatively take like Boxed and some of the e-commerce platforms have done, saying, ‘It’s okay to not have a national brand in my face, if the quality's there.’ And if I can't tell the difference, and I’m extracting value beyond price, there’s no significant need.

Anything else you see ahead in this space?

If I were to leave you with a single message, it would be around how to establish partnerships. At the end of the day, it’s a business and a professional relationship, so there will be a transaction. But how do we treat each other when commodity pressures are surrounding us? How do we deploy tactics that make it better for everybody, and so everybody makes payroll?

Communication is important, just sharing what’s going on, in a way that’s not just being transactional. The good manufacturers will have frequent updates as to what’s happening in the commodity markets, what impacts their spot buys, what’s happening from a labor standpoint, and how that affects their supply chain. And when you have that level of communication and transparency between a retailer and manufacturer, guess what? Like all good relationships, it improves. So as long as they can keep up strong communication between the two with a certain level of transparency that’s a great first step.

What a retailer needs to bring to that relationship is long-term commitment. You see some of the better ones establishing intentional relationships that are not oriented in that cyclical annual RFP, where they will swap out suppliers just cause somebody presents a cost savings initiative. And if you’re not beholden to the amount of movement that’s going on from retailer to manufacturer, and everybody’s operating in a lean manufacturing environment, it’s a good link for everybody to be in. And you find business partners like Daymon along the way to help those transactions run smoothly.