What is private label and how it works for coffee roasting services
Outsourcing of products and services became popular in the 1990’s in the manufacturing industry and continues today in ever increasing areas of everyday life.
In the 1990’s era, the world’s economies were grappling with many competing forces – economic recovery from the 1987 stock market crash, the birth of the internet and it’s enabling benefits that profoundly changed almost everything in how we live and work. There were political evolution of nations that had existed in limited trade environments for a long time, e.g. China and Asia, Russia and Eastern Europe as well as the continued success of the USA as a key trade leader.
Technology was advancing in faster cycles and companies needed ways to grow rapidly and compete on a global stage. Rather than attempt to build the capability in-house, it made sense to source products and services from specialists or to keep a tighter control on vital areas of speed, quality, risk and cost.
It made sense that manufacturing of goods were more efficient when there was greater scale and cheaper labor costs. In some cases the move to outsource was driven by a desire for greater freedom, e.g. breaking unions, inefficient or protected work practices.
For special services, example Information Technology support, the skills and tools were owned by specialists and therefore mature and stable companies could outsource the provision of these services to achieve their desired quality and cost objectives from leveraging the scale efficiencies of experts.
The greatest shift of manufacturing effort has been from historically developed countries like Europe and USA into the areas of China, South East Asia and India.
Food manufacturing was a later industry to ride the outsourcing wave as there were greater initial barriers from challenges in sourcing the right produce, maintaining freshness, managing quality, dealing with consistency from variable seasonality, impact upon the environment causing supply and demand price fluctuations, the high costs of transportation and most importantly navigating the always complex local distribution arrangements (e.g. supermarkets or large customers with negotiating power).
Global food companies continued to invest in their brands, along with constant research and development to release improvements and innovations. For a food company, the intrinsic value is typically measured by the brand growth, or the brand’s relative position in the market (loyalty, share, etc).
Food retailing – a dramatic power and market shift
During the 2000’s, large supermarket companies in developed countries systematically increased their pressure on their suppliers to reduce costs and squeeze their margins. These negotiating programs allowed supermarkets to run discount promotions on branded products to attract more consumers into their stores – using the honey pot of a deep discount on a key, high-profile branded necessity to drive more foot traffic to their store and pickup even greater spend from their customers.
The interesting aspect about this type of marketing was the retailer expected their contracted suppliers to fully fund the discounting programs through short-term discounts or rebates, yet the benefit primarily generated was for the retailers increased sales. In other words, the suppliers were forced to pay for the discounting to increase volume.
This constant pressure continues on leading brands until the point of a relative stalemate being reached on price and supply terms. We have seen many times popular and high profile brands being temporarily removed or unavailable in retail outlets – this is generally not the fault of the supplier, but more a case of the retailer attempting to extract more leverage from terms.
There have been some brands playing hardball, e.g. Coca Cola, Arnotts, etc. taking a position of risking market share and volume in the short term. Sometimes this affected the retailer (supermarket) as customers would do their shopping in the supermarket’s direct competitor. Ultimately, these tactics and strategies always end with the food brand generally having the most to lose – both in customer, margins and volumes.
To counteract the negotiating power of a popular brand, retailers/supermarkets develop a competing private label offering that attempted to match the quality at a cheaper price – in some cases it would almost appear as a blatant copy with similar artwork and styling. Supermarkets would also leverage their prime shelve space to their own private label products and relegate the well-known market leading brand product out of direct eyesight.
In many cases, some of these private label products were manufactured by the well-known branded company using similar, or even identical ingredients and quality but packaged in generic or differentiated packaging to suit the requirements of the Supermarket.
In Australia, Supermarkets have a monopoly control on most food product distribution due to the displacement of the corner store and competitive offerings. Retailing of essential products needed in the home is basically dominated by a handful of companies – Coles, Woolworths and now Aldi. The smaller IGA, Foodworks and CostCo are less influential, except in certain geographical areas. Unfortunately, this level of dominance also extends to many beverages, fresh produce and other products such as alcohol, fuel, etc.
Since 2013, the large Australian supermarkets have increased their focus on private label products – lifting their sales ratios from around the mid 20% in 2010 to figure over 45% inside of 5 years – these are very general figures as the stats can be skewed many ways and I’m sure the supermarkets are not publicly announcing the real numbers for fear of unsettling their suppliers.
Ultimately, Australian supermarkets will look to reach a target of 60%+ private label control across their entire portfolio – which emulates the success of their overseas counterparts – UK and European retailers. Running their business with such high penetration of their own private label products means they extract more profit margin and can control the market for each of those products – they set the terms for the price and no brand can negotiate.
There has been a slight backlash over private label offerings and the sneaky Supermarkets have developed strategies called Phantom Brands – giving the illusion that it’s not a private label but a distinct company supplying the supermarket. Dig a little deeper and you discover that many of these phantom brands are in fact fully owned by the supermarkets. Aldi in particular are adept at deploying this strategy.
Impact of private label killing market competition
During 2015 and 2016 we witnessed a number of industries suffer the debilitating effects of the supermarket private label price war. In mid 2016, the dairy industry was on it’s knees from a sustained low farm gate price that has been described as criminal and cruel upon the farmers.
The bread industry has also suffered from cheap prices being paid and deemed baking operations now commercially unprofitable. No doubt we will see this continue – BBQ chickens was a recent initiative, minced beef and we will see more across fresh produce as the supermarkets gain increased ownership of the entire supply chain.
A leading food equipment supplier in Sydney recently told us informally that most of his long-term food brand customers that purchased and operated systems and plants for the purposes of food manufacturing in Australia, specifically to supply supermarkets have recently decided to stop further investments due to the market powers of the Supermarkets. It’s their collective view that owning food manufacturing businesses were no longer viable due to increased imports from low-cost countries as private label and contract food manufacturers to the supermarkets become the major offering.
With the increases in imported foods – specifically foods that could have been processed in Australia, local food manufacturing is shrinking and the quality declines as does the freshness.
How does that affect roasted coffee ?
The good news is that coffee, for the moment, is one of those complex beasts that can span an entire spectrum from epic failure to sensational success. Once you become accustomed to great coffee you cannot put up with mediocre.
Australia has a sophisticated coffee palate – the standard of Australian cafes is the best in the world and well accepted that Australia leads the world in coffee quality and consistency. Experts from Europe and the US often visit Australia to study and learn from our impressive coffee culture.
The reason for our domestic success has been due to Australian coffee roasting companies being brave, talented and innovative. It’s born from a highly saturated and competitive local market – perform at your best or die ! Roasting coffee beans is challenging in Australia with more than 1,200 brands battling for customers – the boundaries need to keep being challenged.
Australian coffee drinkers also have high expectations for their brew – they want quality and freshness. Australian coffee drinkers are also remarkably well informed – long ago they worked out that coffee in supermarkets is by and large really quite stale and generally lower grade quality.
A coffee lover will make an extra effort to source a better product in Australia – they simply will not put up with average or rubbish for very long.
The demand for quality coffee has created and maintained a fragmented market – no single entity controls or influences the Australian coffee market – even Nestle with their Nespresso investments they have only a relatively small share of the overall coffee market in Australia.
Because freshness is so important, companies like Melbourne’s mycuppa.com.au have for more than 8 years been the leaders in online supply of premium fresh roasted coffees to Australian coffee consumers. Their business model appears simple from the outside, but behind the scenes it’s a complex world of frantic activity roasting coffee fresh every day for shipment directly to the customers door.
Imported Coffee brands
In 2015, we witnessed a massive about face by most of the imported coffee brands here in Australia. In some respects, this change in marketing was a major embarrassment for many of these imported brands as it completely invalidated all of their previous consumer messaging – actually, it was like applying a blow torch to everything they had said for the last 30 years !
Here is how it played out – for 40 years these predominantly Italian-based companies had been banging on and on about how espresso was originally invented in Italy and only Italian coffee roasters knew the secrets to the skill of providing a quality coffee experience. They marketed their products with images of beautiful people and associated all the glamour and fashion to their brands – movie stars, famous people, horse racing, tennis, etc……sure, it’s got nothing to do with coffee but everything to do with showing off !
What most people did not realize is that the coffee industry in Italy and most of Europe (except Scandinavia) had been trapped in a massive time warp for the last 50+ years – nothing had changed……even the way they constructed their blends, sourced their beans and roasted the coffee remained exactly the same – where was the innovation or the improvement ?
They continued to use container after container of cheap, low grade arabica and robusta coffee and then packaged these products with a disappointingly false promise that it was the “very best in the world”.
We can’t lay the blame of the coffee quality time warp to the Italian coffee companies – the reason was wider than that because coffee in Italy had been regulated for a very long time – the cost of an espresso is fixed and therefore there is no room to experiment or innovate – everything is about saving a cent – that becomes the mindset and culture for their coffee which is a stark contrast to your typical Australian-based specialty coffee roaster who thinks “how can I get a better bean, or how do I beat my competitors with a better tasting coffee”.
Imported coffee brands started to market their “locally roasted” products recently after years and years of their local importing agents warning them that the imported product was not sitting well with customers and competition was fierce. This was in direct response to their years of denial that coffee can last for 2 years on a shelf – e.g. they finally got the message that Australian consumers were too smart for buy stale coffee.
Now, a locally roasted product might help them overcome part of the “freshness” debate, but you have to really also question if it’s indeed a quality product. Because it is locally roasted does not translate into the same comparative quality as a specialty grade offering.
There is far more to coffee than labels and promises. The sourcing is extremely important, as is the skill of the person roasting the coffee. These two factor combine to produce the quality of the roasted coffee beans. How they are treated or managed by barista or consumers to product a brew is an entirely different discussion.
Private label, or contract roasted coffee is produced to a specification. That specification is agreed upon between the customer (being the label) and the supplier (the coffee roaster).
Raw coffee has volatile pricing due to the impact of the global C-Index, the currency valuation of the Aussie dollar compared to the US and of course from origin shortages that can result in high differentials between supply and demand. It’s not unusual for raw coffee prices to swing more than 20+% in a year.
So back to the private label for the overseas coffee brand. The Brand will obviously attempt to maximize their profit so they enter a negotiation with the objective of the lowest price with the Australian roaster. As contract and private label coffee roasters ourselves, we know how this conversation starts – what’s your best price per kilo for XXX kilos ?
This roaster wants to maintain his business in a profitable manner so he ensures the work he undertakes is also profitable to support his business in the long term and responds accordingly.
Under this arrangement, both parties are focusing acutely on price and cost – where does quality come into the equation ?….is it even a feature of the discussion ?
Generally, quality is a discussion and negotiation point – in fact it’s the customer who wants the best quality at the lowest price and the roaster that wants to maintain their operating margins so they can continue to trade.
In order to secure better pricing on the local roasting, the overseas brand may have to commit to a higher volume, or bigger batches roasted less often – so there is some scale efficiency and price reduction opportunities when large continuous volumes are processed, however, the mistake most people make here is that a roasting company is doing nothing or can dedicate resources and capacity to a job…….which is often not the case.
In effect, the overseas brand many be acquiring and warehousing the locally roasted coffee for a longer period of time and potentially selling a stale product to the local Australian market – have they really achieved anything in terms of quality and freshness from branding their product “Now Locally Roasted in Australia” ?.
Why transparency and robust discussions are the key to a good private label deal
A professional coffee roasting company knows their real (actual) costs to keep their infrastructure and business running. Typically, they will pitch the private label deal with a fair cost taking all those factors into consideration without attempting to be greedy as it’s generally a volume-based opportunity.
In my 25 years or being involved in outsourcing and private label contracts across many industries, private label (or contract manufacturing) is never a license to print money for the company supplying or delivering the contracted outcomes – like any manufacturer you can achieve better margins selling your own retail product. In some cases, private label manufacturing is barely able to pay costs and profits are rare.
Private label arrangements are complex and at times quite delicate. Everyone wants a win and it’s important in these engagements that both the customer and the supplier are working together in a unified objective.
The two biggest stumbling blocks in private label coffee roasting negotiations is over the quality grade of the raw coffees and the volatility of raw coffee pricing.
Raw coffee choices materially affect the cost profile and the subsequent quality outcome and hence there needs to be careful parameters developed, defined and agreed before commencement of any term supply arrangement.
A common issue that can arise in private label coffee roasting arrangement is timely payments for supplied goods and services. There is a certain culture in the hospitality industry within Australia of holding out payments until the last possible moment. Unfortunately, this creates unnecessary pressure and stress on both parties and in particular the supplier (coffee roaster) may halt further deliverables until the outstanding payments are made, or may raise the price to cover credit risk or recovery.
There needs to be consideration that coffee companies are already paying for raw materials many months in advance to when the materials are roasted and shipped.
Most coffee roasting companies have been in the industry for some time and experience all the good, the bad and the ugly. Typically, the risk of debt management may add some initial cost, buffer or margin to the contracted price, so it’s important this detail is well understood by both parties during the negotiation and agreement stages.
What about size and scale
Coffee roasting plants are labor intensive – there is a lot of manual effort involved in unpacking, cleaning, weighing, mixing, batching, loading, degassing, packaging, delivery, etc. Generally, the larger the plant, the more likely automation will be implemented and typically a lower price might be achieved on a price per kilo basis.
However, there are well known facts about the size of a coffee roasting plant versus the cup quality. The larger the system, the lower the quality. Whilst some boffins may argue this with unproven science, the fact of the matter is this……….taste what’s in the cup ?
Automated plants are not always adapting to the incredible list of variables experienced in the roasting lifecycle. Having humans in the key parts of the process enables fine tuning of production variable to optimise the outputs to higher qualities.
From our long-term experience and engineering background, we have arrived at the view that 30kg plants are the precise sweet spot for specialty grade quality coffee. Once you get above that size, there are compromises and trade-offs in cup character. I will happily put my coffee from either of our 30kg plants up against any 60kg, 90kg or 120kg plant for a taste “bake-off”.
In a competitive coffee market, every single percent of improvement (quality) you can yield from the bean, the roaster, the quality management systems, the packaging and storage practices, etc. all contribute to producing a superior grade product.
Coffee roasting is not about how many kilos of coffee per hour can you bag……it’s about how high can your score in quality and consistency.
Some of the largest companies have the most quality credentials. Is it because they can afford to have someone sit in a room for weeks and months drawing up documents and submitting them for accreditation ?
When it comes to coffee quality, there are some fundamental principles that are required to be built and implemented to ensure quality is maintained – these are not paper-based, ISO-9000 or HACAAP approved – they are the common sense areas of ensuring the raw and finished products are handled with the utmost care to preserve quality.
It’s ironic that a HACAAP consultant attending to our premises had zero experience in coffee roasting facilities, then proceeded to ask for help in preparing a series of questions that could be used on forms to “tick the boxes” to become accredited.
At Carlini, our 35 years of engineering, technical excellence and industry leading performance means we know every aspect of the coffee life-cycle inside-out. It’s the reason we have picked up 30 medals in the last 7 years at the toughest coffee roasting competitions.