July 20, 2022 | By Meet Patel, Investment Associate, BGV
Key Trends
Early in the COVID-19 crisis, many consumer-packaged goods (CPG) brands disappeared from store shelves due to panic buying and pantry loading. Not finding their preferred brands, consumers started experimenting with private label brands and have continued to stick with them. The combination of high availability and low price made these private label brands considerably more appealing to consumers during the pandemic.
Now with the rising inflation, our thesis is that consumers will continue to move towards private label brands. Historically, private label brands have grown during inflationary periods as consumers sought to stretch their budgets, enabling cheaper private label brands to take market share. We believe that most major retailers across all product categories have multiple private-label brands and will take advantage of this growing trend. We also expect smaller retailers to launch their own private labels to capitalize on this trend. However, most smaller retailers will find it difficult to develop and manage private label brands due to relatively lower volumes and lack of relevant resources.
Similarly, with the increase in influencer power and billion dollar exits of some of the celebrity brands such as George Clooney’s Casamigos and Kylie Cosmetics, our thesis is that influencers with over 100k followers will also aspire to build their own brands. This will not only help them generate additional revenues, but also to increase customer retention after the loss of viewership in a few years.
With the popularity of the Thrasio model and many startups around the world collectively raising hundreds of millions of dollars acquiring FBA businesses to create ‘House of Brands’, our thesis is that Amazon third party sellers with over $1M revenue will start expanding their product portfolio to build attractive value propositions in order to be acquired by these startups.
BGV believes all three trends open a significant opportunity for a one-stop-solution to develop, source and manage private label brands. A platform that can help retailers, influencers, and amazon third party sellers to select a product, find the right manufacturer, build their brand, and manage daily operations associated to the brand.
The Challenge
Today, almost every major retailer has multiple private-label brands. Some popular private label brands are Costco’s Kirkland, Amazon’s Amazon Essentials, Tesco Everyday Value, Walmart’s Great Value brand and Target’s Mainstays. These large retailers can afford to have a special private label team to source, develop, and manage their private label brands, but it will be for small cost prohibitive for smaller retailers to develop their own brands with constrained resources.
Building a private label is a complex process involving product selection, product design, sourcing, production, logistics, fulfilment, website development, brand launch, marketing, and customer service. There are various startups tackling some parts of these processes. For example, Shopify supports in website development and marketing whereas Amazon FBA supports in logistics and fulfilment support. However, there are very few startups catering to curated product selection, design, sourcing, and production support specifically for white-label products. Therefore, we believe startups will jump into this white space and cater to the sourcing needs for private label production.
There are typically three concerns associated with Private Labels to make it worthwhile:
- Volume – In order to compete on price with national brands, the private labels should have significant manufacturing volume. They can only compete on price when they have economies of scale which large retailers have. But it’s difficult for small retailers, influencers, or amazon sellers to aggregate adequate demand by themselves alone.
- Quality – It is very important that consumers trust the private label brand and that its quality is at par with or better value-for-money than national brands. This requires a strict due diligence of manufacturers, strong quality control and end-to-end tracking of the products. Large retailers have their sourcing guidelines and quality control teams that ensure quality is as expected. But it’s difficult for small retailers, influencers, or amazon sellers to setup such a strict sourcing and QC process that ensures quality for their private labels.
- Unsold Inventory – There is always a risk of unsold inventory. Large retailers have set channels to sell-off their unsold inventory. They either keep it in storage, hold a sale, offload it to “off-price” retailers like TJ Maxx which sell branded goods at deep discounts, or move it to online resale sites. However, it is difficult for standalone players to establish these channels for limited unsold inventory.
The Opportunity
There was a time when consumers thought private label brands were merely generic, cheap alternatives. But now, against a backdrop of rising product costs and stock-outs, consumers are embracing them as viable options. At the same time, retailers have been ramping up quality, creating enticing packaging, and enhancing marketing for their in-house brands. Together, these developments make private label offerings a more important part of retailers’ strategies.
We believe that these concerns can be solved by a digital B2B private label sourcing marketplace that aggregates demand from multiple customers, ensures curated sourcing from pre-vetted contract manufacturers with high quality control and opens avenues to manage unsold inventory. If such marketplaces exist, then small retailers, influencers and amazon sellers will start building their private label brands. Such a transformation will be a boon for price-conscious consumers as these private labels are at price points that are the openers in the category.
Ideal customers for such a sourcing marketplace would be companies or individuals that have strong distribution power and currently distribute national brands. We have identified three potential customer profiles that would use such a marketplace.
- Small Retailers with 10+ stores
A typical standalone grocery store has significant distribution power because they have a loyal customer base living nearby and visiting their store regularly. They control the merchandize and assortment, therefore, they can launch their private label brands in categories where typically brand recognition or stickiness is low. For example, garbage bags, toilet paper or cheese.
If consumers start trying these private labels and like the brands, there will be a shift from manufacturer brand loyalty to store loyalty as these specific private label brands would only be available at these stores. This shift will increase the bargaining power of retailers over national brands and improve gross margins.
- Influencers with 100k+ followers
Influencers today have great distribution power because they have a loyal audience who value their opinion in specific categories. They control the way a product is showcased to the customer and control customer perception of the product or the brand. Therefore, they can ideally launch their private label brands in categories where they are experts and can develop niche products based on what their audience like.
Especially after the success stories from celebrity brands such as George Clooney’s Casamigos selling to Diageo for $1 billion, and Coty taking a majority stake in Kylie Cosmetics, influencers with significant followings would like to take a stab at launching a business. A successful brand can help these influencers develop additional revenue from loyal consumers even after their viewership starts declining.
- Amazon Sellers with $1M+ revenue
Amazon sellers are on a constant lookout for new products that can grow their sales. Their usual approach is that if a product has worked for one of their competitors, it will probably work for them as well. Therefore, they try to copy the successful products of all their competitors. However, sourcing a product is not an easy task. Especially, when a seller is doing large volumes, they must go all the way upstream to manufacturers to make significant money on the products as well as customize the product as per need. Therefore, a platform which helps them identify and source good quality high selling products can be a big help for Amazon sellers.
Especially with the increasing number of the FBA Aggregators such as Thrasio, these Amazon third party sellers want to build strong portfolio of products to make their business attractive for acquisition.
One of the key concerns is whether these private labels can be cheaper or better value-for-money than national brands. We believe it is possible. In the USA, a CPG brand’s marketing share is typically about 20% of their sales. However, a private label brand by a retailer or influencer doesn’t have to spend on marketing separately. This should roughly result in 10-15% cheaper products with private labels even with lower volumes. There is a component of lost opportunity cost but looking at the long-term value of launching a private label brand, this might be a good long-term strategy for these three customer profiles.
There are already some established marketplaces such as Alibaba that connect brands to manufacturers. But they are a crowded with thousands of manufacturers and predominantly wholesalers. This makes it difficult for an individual or small team to identify and figure out the right partner for them. Therefore, we believe the next set of marketplaces will focus on curation and private label focus. Some startups such as Fashinza, Pietra and Jungle Scout have erupted in this space targeting their respective niche categories or customer groups.
Fashinza is an AI-driven B2B marketplace that solves apparel supply chain challenges by connecting fashion brands to experienced manufacturers. Fashinza has a roster of over 250 manufacturers that currently serves 200+ brands across 6 countries, including the United States, Canada, UAE, and India.
Pietra helps influencers launch their own product lines by connecting them with high quality pre-vetted manufacturers that have a strong track record. Pietra has over 500 manufacturers on the platform that span 25 product categories, from clothing to candles to beauty and much more.
Jungle Scout provides multiple SaaS tools for Amazon sellers helping them optimize the business by suggesting new products, finding right manufacturers, track competitor pricing and what not. The Jungle Scout platform serves more than 500,000 sellers on Amazon and supports 10 global marketplaces. Its data engine processes data for more than 500 million Amazon products.
Conclusion
BGV is on a look out for Enterprise 4.0 startups that drive value creation in this area and inherently incorporate embedded AI, unique datasets, and intelligent automation incorporating high-value workflows in their business model that get better over time. We believe these companies will disrupt vertical markets, will be focused on business outcomes, and deliver full-stack solutions on top of existing systems of records.
Enterprise 4.0 entrepreneurs will need true “value add” VC partners on their company-building journey, investors who can see into the future, share, and shape their vision, and patiently help them navigate the road ahead. The BGV team’s deep experience in building and scaling global enterprise 1.0 and 2.0 companies as operators coupled with the investment experience in building and scaling enterprise 2.0 and 3.0 cross-border companies provides us with unique insights on what is required for success in the Enterprise 4.0 era.
If you are building an Enterprise 4.0 company in the B2B sourcing targeting niche private label customers, then reach out to the BGV Team.
