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La Mill Specialty Coffee's
"Privately Formulated" coffee awaits distribution.
Speaking "Privately" About
Private Label

BY TIMOTHY J. CASTLE

The Private Label coffee and tea business is private in more ways than one. Getting people to talk about the business they do in this arena is extremely difficult. The bigger the player, it seems, the less likely they are to talk. The reason for this is very obvious - there’s a lot at stake. A company desirous of selling coffee and tea under their own, private, label already has, almost by definition, a great deal of existing, positive brand equity. As such, their chances of selling a lot of product are pretty good but there’s one thing they need to make sure they maintain their credibility. If the company actually roasting the coffee or importing and blending the tea starts taking credit for the products that they’re privately labeling then their clients will suffer - and everyone loses (except, perhaps, for the competition).

A few people did talk to us about their private label business but, naturally, they addressed themselves more to the dynamics of the industry than the specifics of who they were selling what to.

According to Michael Beech, founder of Raven’s Brew in Ketchikan, Alaska, the majority of his private label customers are businesses adding coffee to their product line. Beech adds, "It starts as a tentative position for these people. They aren’t sure what they’re getting into and are convinced that people are making millions of dollars selling coffee. They very often have a name or a label idea but no knowledge of specialty coffee and how to handle or market the product. We have to explain to them how important freshness is in coffee, and try to educate them as best as we can regarding specialty coffee. We guide them in developing a label, and work with our graphic designer, and then treat them like any other wholesale account. Their labels are their property, and we set it up so either of us can walk away at a moment’s notice." Beech’s business, obviously, serves not so much the big national chains as it does local marketers who want to extend their product lines and reap further benefit from the investment they’ve made in their existing brand.

In what is very telling that Beech mentioned, almost in passing, that a great deal of his time protecting his own brand equity. Raven’s Brew has such distinctive label art that Beech finds more and more of his time is spent protecting and pursuing copyright infringements. He replies, "You have to be so very careful regarding copyrights. So many times it is naivete; however, you have to vigorously pursue anyone taking or copying your copyrighted logo."

While it may not be the "coin of the realm," brand equity - the image and recognition of the brand and the premium people are willing to pay for it - is the shorthand consumers use to quickly identify products and services that they will likely find acceptable or even satisfying. Shopping on the basis of brands may not be as dumb as it sounds; in fact, it may even be instinctual. This phenomenon is not exclusive to humans but occurs pretty much universally throughout the animal and, yes, even the plant kingdom. Apples ripen, after all, not when the tree thinks it would be most nutritious for the animals eating them but when the seeds inside the apple are ready to be disseminated in order to propagate future generations of apple trees. The ripe, attractive color is the signal that the transaction (the work of seed-spreading in exchange for delicious, nutritious fruit) is ready to be completed. If the apple is not "as advertised" dissatisfied animals will look elsewhere for future nutritional needs and the apple tree may have to work on a more satisfying product for its "customers." The image of a large round, red ball, in the case of the classic apple, for instance, does not tell the animal (or human, for that matter) that the apple is sweet, high in caloric value and nutritious. All it says is that the apple is round and red, suggesting that it may be very similar to the previous round red things found hanging from apple trees in the past. Humans, animals, and plants only have so much time to get the work of life done - they need the shorthand of effective packaging to either attract customers or to identify products they are likely to want, and want again. It makes perfect sense, then, for a marketer with a recognizable brand to want to use it to sell as many things as possible to those people who have already learned to trust that marketer’s brand. Private labeling allows the marketer to do this as quickly and as easily as possible, without investing in the necessary plant, equipment or expertise.

Whose brand is better, more recognizable, more trustworthy, is really the question in the market place right now. Private labelers are allowing retailers to tell their suppliers, "Listen, we used to think that you had more credibility than us when it came to selling coffee or tea, but it turns out that a lot of our customers are just as happy to buy a high quality coffee or tea from us as they are you. So, if you want to keep your product on our shelves, anywhere near eye level, you’re going to have to share a little more of your profits with us." This is one of the big parts of the private label dynamics, of course, that its mere existence has given retailers a negotiating edge that their branded goods suppliers would have wished they never got. It should be noted that while the "plain wrap" products of the seventies are what started this trend the commitment to quality in the private label brand, first made famous by the "President’s Choice" private label brand at Loblaws in Canada is what gave the private label business its real push. High quality private label products gave the consumer the choice of a good quality branded product at a higher price or a competitively priced private label product of at least equal quality (often better). If the consumer was willing to trust the retailer (and an awful lot were) then the private label product was the obvious choice. Manufacturers of branded, packaged, heavily marketed goods have, of course, held their ground but not at some expense and not without having to keep their prices with the privately labeled competition.

La Mill Specialty Coffee's
"Privately Formulated" coffee awaits distribution.
Although La Mill Specialty Coffee does a great deal of "private formulation" they avoid private labeling for their customers. Mark Arathoon, director of operations explains, "What we do is custom formulation; we sit down with the customer, cup different origin teas and customize a tea blend that complements their taste and preferences. It is important to have the customer sell something they like rather than a product that is given to them."

ABC Tea in Baldwin Park, CA is a tea packager and a private labeler from the old school. According to Thomas Shu, "All of our customers would be considered private label. We package the tea and the customer handles labels and marketing, and yes, business is growing." Shu, after all, is not looking to sell his product to everyone, just to the ones that need the services he provides.

A leading U.K. operator described the U.K. private label market as "driven by economies of scale." With few coffee and tea retailers willing to invest the money and technology into roasting and packing equipment, the roasting and packaging falls to a handful of large companies.

He adds that the competitiveness and relatively small size of the U.K. market has fueled the strength of the private label category. Furthermore, private label is one of the few things whose quality a retailer can control and better quality adds to the retailer’s reputation - it’s a key differential between the competing firms. Therefore retailers have competed on the basis of quality and price all under the halo of their own brand. "The U.K. market for coffee is dominated by instant coffee, accounting for around 85% of the total market. Consequently the U.K. retail ground coffee market is quite small at 10k tonnes with around 85% of market volume sold through the top 5 or 6 grocery retailers. With private label at 55% of the total U.K. market combined with a large number of U.K. and European brands/sku’s this makes the fixture quite crowded and relatively few brands can afford to invest in serious advertising and promotions. The quality and presentation of U.K. private label products is also generally high with many at similar or better quality than the branded equivalent. Private label coffees include 100% Arabica blends, in soft pack format with valves to ensure product freshness and in the three largest grocery chains private label single estate coffees can also be found. The Roast & Ground Coffee sector is still relatively underdeveloped in the U.K. with only around 25% household penetration so there is room for slow but steady growth as consumers develop a taste for quality coffee in the home."

"Looking at tea, the U.K. is still one of the world’s largest consumers of black tea at around 95k tons per annum in the retail sector. Nowadays around 85% of volume is in teabags with brands accounting for 65% led by Tetley and PG Tips (Lipton) who have recently launched their pyramid tea bag in a special paper to give a 45 second infusion. Private label is more price orientated in tea than in ground coffee with a high level of promotions all year round."

"By European and U.S. standards U.K .private label tea quality is nevertheless quite high and at the same time U.K. consumers generally prefer more tea in the bag -usually 80’s at 250gm in a round bag."

"With major grocery retailers currently lining up to buy the U.K. Safeway chain, the retail scene looks set to be even more competitive. Private label therefore takes on a key role in helping to differentiate retail outlets. This is especially important during periods of everyday low priceactivity on the key brands when private label can also help sustain margins."

One industry participant in the private label sector drew a distinction between two types of private label business; she also underlined the competitive nature of the business today. "The private label business is so very competitive," says Avril Forest, purchasing agent of Lindsey Coffee Company in Scottsdale, AZ, "and with coffee as a ‘mature’ industry without the growth of previous years, it is getting tougher. About 20% of our business is private label." She adds, "you have to remember that there are different definitions of private label in tea and coffee. There is the situation where you put your product into your own bag with another company’s logo - major hotel chains and nationwide fast food, for example. Then there is the half way situation, your product into their packaging, say in a small local coffeehouse or restaurant." The packaging equipment is such a large capital outlay that creative companies find ways to maximize their potential.

While the fight between private label products and nationally marketed brands is a pitched one, it is also a battle best left without a victor because the struggle itself keeps prices low, and products better. Not that either side is in danger of winning, either. National brands are still very strong and account for a substantial majority of shelf space in grocery stores and even club stores. But the presence of private label brands, given the good quality many of them now offer at the competitive levels at which they are priced, keeps everyone else on their toes. And although the greater good of the market place is probably not of chief concern to any of the participants, this may be the result of today’s vibrant private label industry. But just try to get anyone to talk about it!

Timothy J. Castle is the president of Castle Communications, a company specializing in marketing and public relations for the coffee and tea industries. He is also the co-author (with Joan Nielsen) of The Great Coffee Book and the author of The Perfect Cup. He may be reached at: (310) 479-7370 or via E-mail at: qahwah@aol.com.


Tea & Coffee - August/September, 2003
Tea & Coffee's Business Classifieds!

Tea Fair - China


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