Several corporations source products from specialized manufacturers, which may or may not own their brands, as establishing their own production facilities would require substantial investments in equipment, human resources, and patents.
Sourcing from a specialized company that has already made such investments with spare production capacity may be a viable alternative.
If the two companies find that the market situation allows them to avoid or minimize direct competition without stealing each other’s market share (cannibalization), then both companies may find an agreement whereby the specialized manufacturer supplies the goods to the other.
The methods to reduce cannibalization are general marketing practices such as dedicated distribution channels, different image and customer perceptions of the brands, pricing, and separate regional presences.
The same basic concepts apply to the service industry (e.g., customer services helplines).
Private labels may be behind the decision of some companies to enter the market with products that are quite different, but somehow associable, with those that have made them famous (e.g., apparel companies launching perfumes, car companies launching watches).
Private labels may be extremely profitable for companies with a dominant market share and for certain products that enjoy high customer recognition.
Safety and quality
As sophisticated technologies become widespread (and even subsidized) in emerging countries, sourcing of a wide range of products can be made at a very low cost.
These same products may have prices that allow for net margins to account up to several times the cost of the goods sold.
Customers may be unaware of this business practice and may be paying higher prices for products that differ little from others with less famous brands.
On the other hand, some companies do provide additional guarantees to these products offering better quality, customer support, and additional services.
Private label products are generally sold in many countries, so it is essential that all products are of high quality and comply with all the relevant single or global market standards, including sustainability and environmental impacts.
This can be done by performing certification and audits, inspections, hygiene monitoring, and testing of food, beverages, and packaging.
Use by small companies
The use of private-label products by small companies has grown. Small companies usually do not have any input in the recipes or packaging of the products they buy.
They buy from a speciality food company that uses their recipes and simply labels for the individual retail store. Small companies do this for advertising benefits.
For example, if John’s Farm Market sells jams or salsas, each time the consumer uses the product they are reminded of their visit to John’s Farm Market, where they will have to return to repurchase it.
The brand also benefits when products are gifted, as this allows the gift recipient to become another potential customer.
In recent years, Amazon has been a popular channel for small companies to launch a private label product, where almost 500k products are released on a daily basis, many of which are private label products.
By leveraging Amazon’s FBA infrastructure, small companies can launch private-label brands without having to invest in any storing facilities. The advantage of selling a private label product on Amazon is full control over a product listing page and no buy box, competitors.