What is private label and how does it work for coffee roasting services
Outsourcing of products and services increased in popularity during the 1990's as the broader manufacturing industry attempted to contain costs.
Today, outsourcing remains a popular option for many manufacturing industries to supply products and solution for our everyday life.
Back in the 1990's, most of the world's major economies were grappling with recovery from the 1987 stock market crash whilst the new innovation of the internet would profoundly change how we lived and worked, heralding in new modes of achieving productivity and efficiency.
It was also a period of significant political evolution for nations that had existed in limited trade environments, e.g. China and Asia, Russia and Eastern Europe. The USA continued it's success in economic growth as a key trade leader.
Technology was advancing in faster cycles and companies needed ways to grow rapidly and compete on a global stage. For many brands, rather than attempt to build capability in-house it made sense to source products and services from specialists. This enabled companies to keep tighter control on vital areas of speed, quality, risk and cost.
It's no wonder manufacturing goods will always be more efficient when there is greater scale and cheaper labor costs. In some cases the move by companies to outsource was driven by a desire for greater freedom, e.g. breaking unions, inefficient or protected work practices.
For special services such as Information Technology support, the skills and tools were typically owned by specialists and therefore mature and stable companies could outsource the provision of these services to achieve a desired quality and cost objective by leveraging the scale efficiencies of the subject matter 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.
Yet food manufacturing has been a late adopter to outsourcing trends as greater initial barriers from challenges in sourcing the right quality levels in produce, maintaining freshness, managing quality, dealing with consistency from variable seasonality remain constant challenges in food outsourcing.
With food products more acutely influenced by environmental conditions that drive supply and demand fluctuations, there are also high costs of transportation and food safety compliance requirements adding to the cost structures.
Most global food companies continue to invest in their brands by ensuring sufficient research and development generates regular improvements and innovations.
For a food company, intrinsic value is typically measured by brand growth, or the brand's relative position in the market (loyalty, share, competitors, influence, etc).
Food retailing - a dramatic power and market shift
During the 2000's, large supermarket companies in many developed countries systematically increased pressure on their suppliers to dramatically reduce costs and squeeze margins.
These negotiating programs allowed supermarkets to run discount promotions on branded products that would lead to attracting more consumers into their stores.
A simple honey pot technique to offer a deep discount on key, high-profile branded necessities that leads to driving more foot traffic to their store. Theory being that once customers are in the store they spend more on other items. At times, these were called "loss leader" campaigns.
An interesting fact about this type of marketing is the retailer (in this case the large supermarket) expects their contracted suppliers to fully fund the discounting programs through short-term discounts or rebates, yet the benefit generated ultimately ends up with the retailers increasing sales (and profit).
So here you have suppliers forced to pay for discounting promotions to increase volume on other products that were not part of the discount campaign for the benefit of the retailer (the store).
The constant pressure applied by retailers on suppliers continues until the point of a stalemate being reached on price and supply terms.
Of course you have seen it many times when popular, high-profile brands are temporarily removed or unavailable in certain retail outlets. This folks is generally never a fault of the supplier but more a case of the retailer attempting to extract more leverage from terms.
Ultimately, aggressive tactics and strategies end with the original food supplier brand having the most to lose - both in customers, margins and volumes.
Another strategy used by big retailers to counter negotiating power of a popular brand is for the retailers to develop a competing private label offering.
Often this private label (or sometimes referred to as Home Brand) attempts to match the same quality at a cheaper price. In the worst cases it almost appears as a blatant copy with strikingly similar artwork and styling.
More than a few of these "rip off clones" have ended up as court cases in the legal system.
Supermarkets wield their power by leveraging prime shelve space in promoting their own private label products and relegate well-known market leading brand products out of direct eyesight.
In most cases, the private label products are manufactured by a 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 near monopoly control on many food product distribution channels due to the displacement of the corner store and competitive offerings.
Retailing of many essential products needed in the home has been dominated by a handful of companies - Coles, Woolworths and Aldi.
The smaller retailers such as IGA, Foodworks and CostCo are less influential, except in certain geographical areas.
Unfortunately, the level of dominance by retailers also extends to many beverages, fresh produce and other products such as alcohol.
Since 2013, large Australian supermarkets have continued to increase their focus on private label products.
Quietly lifting their sales ratios from the mid 20% in 2010 to figure over 45% inside of 5 years and with targets in the 60's for their private label portfolios.
This no doubt is intended to emulate the success of overseas counterparts - UK and European retailers.
Supermarkets with a high penetration of private label products can extract more profit margin and can control the market for each of those products or categories. It means they will set the terms for price and no brand can negotiate. As consumers we will have to pay whatever they ask in pricing.
Whilst there have been intermittent backlashes over private label offerings the sneaky Supermarkets have developed strategies called Phantom Brands - an 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 and it's their primary go-to-market strategy having registered hundreds of phantom brands.
Sometimes, it is a brand where the supermarket or retailer is either a part of full owner.
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.
Owning food manufacturing businesses in Australia seems to be 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 ?
Australian coffee drinkers have a sophisticated and developed palate and this means the standard expected or demanded by coffee drinkers remains high.
Australian cafes are well accepted as being best in the world with a clear quality leadership and impressive levels of consistency. Experts from Europe and the US often visit Australia to study and learn from our constantly evolving coffee culture.
The reason for coffee's domestic success is due to Australian coffee roasting companies being brave, talented and innovative. It's born from a highly saturated and competitive local market where you must perform at your best or die !
Roasting coffee beans is challenging in Australia with more than 2,500 brands all battling for the same relatively small pie of customers.
With Australian coffee drinkers having such high expectations of their brews they are well informed about quality and freshness. It's no surprise that many coffee enthusiasts worked out that coffee in supermarkets is really quite stale and generally inferior tasting brews.
True coffee lovers make an extra effort to source better products in Australia - they simply will not put up with average or rubbish coffee at all.
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.
Imported Coffee brands disappearing from Australia
It seemed to take a long time before Imported coffee brands would admit defeat.
Back in 2015 there was a rather embarrassing about face by most of the imported coffee brands with almost all of them changing over night to a locally roasted offering instead of shipping stale products from Europe.
It was like a contagion as the once stoic Italian brands with their defiant believe that only Italy could roast coffee, when one brand blinked they all folded almost immediately.
Fact was, the style of coffee roasted in Italy was not entirely suitable for the Australian coffee drinker. Often with higher levels of robusta and designed for short-black espresso, it was not only stale but lacked the acidity and sweetness craved by Australian coffee drinkers.
Fast forward to the 2020's and it's rare to see a coffee brand selling in Australia that's imported from overseas. Literally every brand is acutely aware of an marketing freshness as a critical aspect of their roasted in Australia.
Ironically, many of these mass-market brands fail to take into account most of their coffee has been sitting on a shelf for too long and it's really stale.
You see coffee degrades the moment it's roasted and that staling process continues to occur inside of an unopened, sealed bag !
Most Australian-based specialty coffee roasters have a completely different mindset to freshness compared to suppliers in the retail segment.
Specialty coffee roasters are always thinking about "how can I get a better bean, or how do I beat my competitors with a superior tasting coffee".
But that's not how all Australian coffee companies think. For a general rule of thumb, larger the company, cheaper the mindset and probably staler the coffees.
Private label, or contract roasted coffee is produced to a specification - it has to for many reasons. That specification is agreed upfront between the customer (a brand or 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 differentials applied to each origin determined from supply and demand factors as well as transport and holding costs.
High differentials at specific origins are a normal part of the coffee pricing triangle as at any time of the year, one or more origins will be in supply deficit, driving up the differential and demand exceeds notional supply.
It's not unusual for raw coffee prices to swing more than 20+% in a month. In the autumn of 2021, the coffee index rose 65% in just 3 months.
Talking about price before cup profile is at cross purposes
Private label arrangements are generally established for both the producer (coffee roaster) and the retailer (brand) to maximize their profits. So both parties enter negotiations with the objective of the lowest price each party can tolerate.
By using the term "tolerating", we are talking here about what is the minimum cup quality the retailer (or brand) can get away with so as to satisfy their pricing and sales objectives. Margin needs to be made by both parties.
At times, the quality is not even a negotiation point, it's just assumed as a given.
As contract and private label coffee roasters ourselves, we know how this conversation starts - "what's your best price per kilo for XXX kilos ? and to be brutally honest that's an immediate red flag to us the prospect asking this question either has no idea what they are doing or is just kicking tires wanting rough numbers for their ideas or dreams.
Asking about price before taste, profile or cup outcomes is a tail wagging the dog.
How can you price something when there are 400+ possible options or combinations that vary by a factor of 300%.
"What's your best price" is in all honesty a ridiculous starting point for a coffee solution. Try asking a builder to give a price to construct a home with no plans, no soil surveys and no permits and no specifications - it's impossible.
Sure, indicating a budget gives a starting point, but until both parties are on the same page with quality or cup profile, then it's a waste of everyone's time. We understand the clients need help to get on that page.
Just like any business coffee roasters also need to maintain their operations in a viable manner so they can continue to work with a return that supports their company in the long term.
Ongoing expenses for equipment break downs, specialized cleaning, maintenance and capital investments for upgrades or replacements, etc. All manufacturers have cost surprises - these are situations which can never be priced into a "lowest cost" agreement.
Quality is the first important discussion point in any engagement. In fact it's the most influential factor affecting price or budget when it comes to roasted coffee.
Customers who want the best quality at the lowest price and the roaster that wants to maintain their operating margins so they can continue to trade into the future instead of running assets into the ground on razor thin returns.
Why transparency and robust discussions are the key to a good private label deal
A professional coffee roasting company knows their real (actual) costs required to keep their infrastructure and business running.
That might sound simplistic, but to put that into context, of the 2,500+ coffee brands in Australia, more than 90% are small businesses with limited resources and often they don't have a good handle on their real financials or they have never run large deals. In a nutshell, these small brands won't know all the full lifecycle costs involved.
An experienced coffee solutions provider will pitch a private label deal at a fair cost taking all available factors into consideration without attempting to be greedy.
In my 40 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 limited whilst the risk is always present the customer may go elsewhere.
Private label arrangements are indeed complex and delicate with everyone wanting a win it's important that both customers and suppliers work together in a unified objective and on a level platform in good faith.
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 also the quality outcomes and hence there needs to be careful parameters developed, defined and agreed before commencement of any term supply arrangement.
What about size and scale
Coffee roasting plants can be labor intensive with plenty of manual effort involved for unpacking, cleaning, weighing, mixing, batching, loading, degassing, packaging, delivery, etc.
Generally, the larger the plant, the more likely automation has been implemented and typically a lower price might be achieved on a per kilo basis.
However, there are well known facts about the size of a coffee roasting plant versus the cup quality with larger systems statistically proven to generate lower quality cup profiles - in other words, the coffee does not taste quite as good on bigger systems.
Whilst some boffins may argue this with discretionary science, the fact of the matter is this..........taste what's in the cup because quite frankly that's the only real and true test of quality - taste.
Automated plants may not adapt to the incredible range of variables experienced in coffee roasting life cycles. Having humans in the key parts of the process enables fine tuning of production variable to optimize outputs towards higher qualities.
The weather and season has a big role in changing the ways in which coffee behaves and responds inside of the roaster.
From our long-term experience and engineering background and it's also a consensus reached my many other highly experienced coffee professionals, we there is a view that 30kg to 120kg plants are the best sized sweet spot for superior tasting coffees.
Once you get above that 120kg plant size, there may be some compromises and trade-offs in cup character. Although the owners and operators of those plants will never admit it.
In a competitive coffee market, every single percent of improvement (quality) you can yield from the bean, roasting platform, quality management systems, 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 you bag......it's about how high can your score in quality and consistency.
Quality Systems don't make the best coffee
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 - but instead simple and common sense methods of ensuring critical items such as raw and finished products are handled with the utmost care to preserve quality.
We make no secret of our dislike for HACAAP consultants. Many have little or no experience in the coffee roasting segment and instead focus on paperwork - reams of paper trails designed to defend and protect against claims or liability. If it's been ticked off, then it means it's good.
A HACAAP consultant attending to our premises many years ago had zero experience in coffee roasting facilities, then proceeded to ask a series of really vague questions masquerading in a plea for help to prepare a series of questions that could be used on forms to "tick the boxes" and become accredited. We were obligated to attain this HACAAP certification by a client, yet the entire process was a bizarre waste of time. The HACAAP consultant gave us no value-add during and after the engagement, except the "sign off".
You many notice that many large coffee roasting contract providers have teams of people solely dedicated to QA. Yet these same companies go out and source the most atrocious qualities of coffee because they are purely price driven and forced to purchase at the lowest cost to make margin on their supply contracts.
In these cases, it really makes you wonder if they shrunk down the team of "box tickers" in QA department and diverted most of those savings into better quality raw ingredient to generate a far superior result in the cup (taste).
At Carlini, our 40 years of engineering, technical excellence and industry leading performance means we know every aspect of the coffee life-cycle inside-out.