Private Label Manufacturing: Keep Your Thumbs Through Your Belt Loops
An Associated Press piece came out yesterday that reports that Kroger makes about half of its 14,400 private label products in a network of 40 of its own factories. They have made their own peanut butter for many, many years. I've also been told that they make peanut butter for people other than themselves, including at least one branded product.
This vertical integration is an interesting business model for a major grocer. But for anybody contemplating doing private label work for Kroger, it has to be disconcerting at several levels. They'll insist on coming into your plant -- are they going to school on you, planning to build their own plant, and ultimately intending to compete with you? Are you a potential target for a purchase?
There have been rumors for years that large retailers will induce manufacturers to make large capital investments in order to ramp up to be able to produce large volume private label items. Once the producer is deeply in debt, they pull they work, drive the producer into bankruptcy, and either purchase the plant for pennies on the dollar, or allow a more favored supplier to buy it. (I've heard the same rumors surrounding contract packing done for major branded food manufacturers.)
As my grandfather always said, when the big boys come knocking, keep your thumbs through your belt loops.
Note: I haven't quoted the story or linked to the story because the AP has a new policy of charging by the word for quotations, and they also appear to refuse to provide permalinks. I hope that is working out for them.
When Spartan Tossed Us Out
We made private label peanut butter for Spartan Stores for around 40 years. In fact, when my Grandfather died in 1968, Spartan played a key role in keeping our business afloat by agreeing to pre-pay for peanut butter for a time to ease a cash flow crunch.
Fast forward to the late 80's or early 90's. The Spartan peanut butter buyer was visiting my father at our plant. After a tour and some conversation, my Dad and the buyer went out in the parking lot to get into my Dad's car to go to lunch. At the time, my Dad had a Mercedes Benz 190 -- their version of an economy sedan.
The buyer pointed at the car and said, "Is this your car?" My Dad said, "Yeah." The buyer said, "You shouldn't be driving a car this nice; that's my money in that car."
It is at that moment that my father knew that nothing mattered to Spartan except price. Shortly thereafter, Spartan went to another supplier.
I'm for competition and free markets as much the next person (well, almost as much), but Spartan tossed a long-time, high-quality, and local supplier (on whom they could easily check) for a penny or two a jar. Perhaps that was the correct decision for them and I trust their new suppliers have performed well over the years. But that decision, repeated by buyers across the grocery supply chain for a couple of decades now, put price far above every other consideration in buying decisions across the food industry. And steadily increased the temptation among manufacturers to get ahead by cutting corners.
The logical response by government would have been to step up surveillance of the food business. But we know what happened instead.