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The Secret and Lucrative Private Label Tea Market
By Randy Altman

Almost completely unknown to the public, but making increasing profit for various tea companies, is the option of private label marketing. This profitable and sought-after sector of the market is examined and revealed.

Private label is one of the highest profit-margin sectors of the trade. The basic concept is relatively simple. A tea company provides the product to a second business, and the second business markets the tea as its own product. Complexities quickly enter the picture, however, as many details must be worked out, ranging from who prints the teabag tags to how much tea is needed. Of particular interest, private label is the most jealously guarded club in the entire tea trade.

Good Profits, Venues and Customers
The good profits from private label derive from the fact that the deals are at the wholesale level and presumably reliable as repeat customers. Venues that are sold to can be large chains with many outlets. A single deal can result in sales to numerous stores, restaurants, hotels and the like. The retail consumer, the end-state user, thinks the tea is a proprietary imbuement of the establishment he or she is involved. This is direct positive public relations to the venue, providing another branding image. There is the corresponding disadvantage to the tea company, because they usually remain anonymous, out of view from the public.

The G. S. Haly Company is based in Redwood City, California and is headed by Mike Spillane, who has more than 30 years of experience in the trade, has attained true expertise, and his leadership position allows him to objectively evaluate today’s situation. In the past year, his private label sales have doubled by volume. Part of his success includes customers that are large department stores. His prediction for the trade in 2007 is an increase in bottled private label.

Spillane’s business model is an organization with near-perfect efficiency. His economy-of-scale is remarkable; he now has four employees. This is down from 5, only because one got pregnant and quit. He turns down business that does not fit his organization. Very few tea companies would turn down any significant business. Too many in the trade have more employees while simultaneously generating less revenue.

G. S. Haly generally has a minimum requirement of purchase of 500-lbs for its wholesale work, including private label. This is much higher than most other companies’ minimum requirement. Haly has the orientation of a broker, which is not common in the U.S. One example of this business model is Haly’s subcontracting the teabagging and tea tag printing. Haly owns no tea bagging machines. As a consequence, machines used to fill orders from this company include Constanta, IMA and Tecnomeccanica. The end-state branding images, such as tea tag printing or box printing, Spillane calls, “custom markings.”

He said the smaller orders may be devoid of certain custom marking, resulting in, for example, tea tags that remain blank. One of his main subcontractors is American Packaging.

Spillane states that he has about 30 private label clients. He says those outside the tea business do not understand just how large this number is. Thirty is genuinely an impressive amount. Mike adds that most lines have one or two herbal products. When asked what makes for a good relationship between tea company and a private label client, he replied that “honesty” with the client involves explaining the potential difficulties they are heading for. Spillane emphasized the “complexity” of the relationship must be manifested to the client. He also said private label is a “challenge” and that this should also be made clear to the customer. Another tip he gives for success is to bring together all the “players” in the relationship.

Spillane’s recipe for victory in this competitive field includes dealing with as few intermediate companies as possible. For a paper company, he tends to stick with Dexter, which itself is a leader in its field. He notes that even the tea boxes sold for retail will be different sizes. This variation depends primarily on the type or setting of the machine used. Spillane said he wants his packers to run their machines 18 hours a day, for approximately two shifts. The double shift justifies the cost and proves economy-of-scale attainment, which he feels suits the clients that are large department stores.

The private label process has its uncertainties, and currently perhaps the main problem is late arrival of the product to the end-state customer. This can happen to the best tea company at times, because of the complexities involved. Spillane notes another potential trend that could pose a problem for some U.S. business: packing offshore is cheaper, and now such non-U.S. products are of higher quality than formerly. Two good signs for U.S. packers are that those contemplating offshore utilization must deal with larger lead-time and less hands-on oversight. Those packing private label by subcontracting must weigh these pros and cons about where to perform their work.

SpecialTeas of Stratford, Connecticut is another company pushing private label. As the name implies, SpecialTeas focuses on the premium to super-premium types of teas, which they refer to as “gourmet teas.” Yes, even this niche is ripe for private label. The owner, Jurgen Link, started the company in 1996. The company now has a fine web page touting its private label, under the section heading “wholesale catalog,” and displaying their registered Trademark “Searching the World for the Finest Teas.”

SpecialTeas offers a wide range of Darjeeling teas and other elite items, plus four other categories: Functional infusions, Spice Mélanges, Fruit Blends, and Flavored & Scented teas. Their business is by necessity specialized, meaning clients are generally limited to specialty teashops with one, two or three stores. This results in a paradoxically larger number of clients than one might expect. Link states that they have 75 regular private label customers, and perhaps a total of 100 start-ups that order only once or twice and then fold.

SpecialTeas first started private labeling in 1998, giving it some good history in the niche. They in-house package the product on a highly customized machine. Link states, “everything was changed” on the machine, which originally failed to meet their requirements such as run time and changeover time. Due to this original failure, Link would not name the machine manufacturer. The company has no minimum size for a private label order, but now tries more diligently to weed out those stores likely to fail or stop ordering within the year.

Jurgen’s complete handling of the private label process makes for what he terms a “time-intense” interaction with every client. His response to what makes for a good relationship with a client, elicited, “understanding them, understanding their goals.” He pointed to the need for quality control over years of service to each customer. As a specialty enterprise, he said tea gardens’ own quality of output can change with the seasons, as one variable. Also, many of Link’s clients are opening up teashops, and so are new to the tea business, thus needing extra time for counseling and education. Taking all these factors into consideration, SpecialTeas has a larger number of employees — 31 to be precise. This employee count represents an impressive growth for SpecialTeas.

Link also explains what he cannot do for private label customers. Even though he has no minimum, he turns down orders that tend to require manual loading or “hand-packing.” For example, if a customer wants 48 2-ounce teabags per box, this order cannot be automated, and thus will be refused. SpecialTeas of course prefers larger orders, and seeks clients with a minimum requirement of 100 kilograms. Another variable in deciding to take on a customer is the number of different teas they order. Link would gladly private label an order for 6 or 12 teas, if he thinks that the client will result in a long-term business relationship. Like G. S. Haly, SpecialTeas emphasized for this article that private label was a sideline operation, not their main orientation.

Harney: All About Quality and Service
Of course, any article on private label should mention Harney & Sons. They were among the very first specialty company to private label, in 1986, with their ultra-prestigious and successful Williams-Sonoma. Harney still has the Williams-Sonoma account, but not as private label, as purely Harney labeled. Harney is one of the largest specialty tea companies in the world, operating 3 IMA’s, 5 Fuso’s and 2 Frasier & Son machines. Harney has downsized staff from 100 to 85, while increasing production and weeding out the less-productive workers. Just one of their clients is the bookstore Barnes & Noble, with over 750 stores. John Harney was willing to mention a few other private label clients, even though most executives will not “go on the record” about any such clients for fear of poaching from competitors. The Harney group is very secure. A fine example is the ice tea sold to Saint Ives in Gainesville, Georgia, a coffee roaster. The superior volume to this client is one to two pallets each month. Saint Ives redistributes some of the tea to restaurants in the area. Harney private labels ice tea to about six southern coffee roasters. The economy-of-scale, plus the long-term aspect of these business relations, can be very good.

The statistic for the amount of tea drunk as ice tea in America is usually given as 80%, and Harney utilizes this demographic. He states that ice tea “keeps the machines busy,” and by this he means the product helps cover the expense of the equipment. As for recent acquisitions of private label customers, new to 2007 is the Historic Royal Palaces, London. Also tremendously impressive is the Frick Museum, and a favorite client of Harney, the Inn at Little Washington, Virginia.

Harney has no official minimum, but the customer if small or a start-up must provide their own designing and printing of labels. Harney says that “it is not worth it for 1,000 labels” if it is a one-shot deal. The company will provide the cans, if the client is willing to use the standard types. Harney says that they are able to use specially-shaped cans, but the customer must supply these. Harney has about 25 private label customers, and these are generally regular, repeated clients. He advises those thinking of going into private label to avoid wasting money on manufacturing their own cans and labels, as they may get stuck with the stock if the client goes broke and never receives the order.

What is probably unusual with Harney and private labeling is that for most of these products, the company imprints “Harney & Sons” somewhere on the item, and this is the best of both worlds. Harney has a two-point summary of good business practice for private label: “give them the quality you promise” and “give them good service even, if you are busy.” The wide variety of machines owned by Harney allow them to provide products in bag size for wholesale use in high volume. The Frasier & Son machine alone can make 1-ounce bags for restaurant use and larger bags for equipment that dispenses tea.

As Private Labeling Continues to Grow
Qtrade International claims to be the largest importer of organic tea into the U.S., and a leader in Fair Trade teas. It deals some of the largest amounts of high quality tea — period. Owner, Manik Jayakumar, seems to have been everywhere in the world tea is grown, often with official government duties. Due to this he knows thoroughly the global tea trade, and is able to answer almost any question.

For the most part, Qtrade uses sub-contractors for packaging in their private label business. Jayakumar gives good news, predicting that this sector’s growing trend will continue. Qtrade has eight employees, and adds more staff temporarily during time of heavy-workload. Although the company operates regularly at the container-load level, it is relatively new to private label, starting in 2005. Again, this is such a secure company that they would name a few private label clients. Two nation-wide clients are Numi Tea and Zhena’s Gypsy Tea, the latter sold in the Whole Foods chain.

For a long time, Qtrade had a minimum order of one chest, a selection that can be chosen from among 300 teas, which Qtrade states is the biggest selection in the U.S. Jayakumar says they now sell smaller amounts because they have found that some of the smaller enterprises have grown and become larger regular clients. Looking once more at the future, Jayakumar points to more inroads in offshore packaged tea by both China and India.

Private label performs many functions of benefit to the global tea trade. This sector provides a good profit margin for many businesses. As more imbibers identify with on-site brand images, they may develop a stronger attachment to the tea product, thus increasing sales. The niche of private label is still growing, and so far the result has been an increase in clients for companies. Some wonder when the ceiling will be hit; resulting in a market shakeout, as too many companies who have never done private label enter the sector. It may be that those tea enterprises that consistently provide high-quality tea and service will continue to thrive, but may have to work harder in the future to keep their clients.

About the Author: Randy Altman has advised the United Nations and other transnational organizations, and has held directorships at various non-profit corporations.

Tea & Coffee - April, 2007
Modern Process Equipment

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