Should manufacturers produce goods for DOB's?

One of the questions all company manager sask concerns the opportunity to work for distributor’s brands. This question is even more urgent today, since with the shrinking of the shelf space allocated to branded industrialists, their economic model is under threat. How can they maintain the volumes that create profitability?

Those industrialists in favor of producing DOB goods advance the following arguments:

  • It relieves the burden of fixed costs.
  • It allows them to benefit from economies of scale.
  • It may be intrinsically profitable, since there is no need for marketing, communication, or sales force.
  • If they do not do it, their competitors will.

In contrast, those who oppose it are right to argue that it will undermine the long-term legitimacy of the company’s own brands, since the industrialist will not be capable of producing a bad product. For a while the product Olympia manufactured for Careful superior to the comparable product of the brand itself. An examination of the figures in the cheese sector also shows that the most profitable cheese maker is Belo, which sell sonly branded products (Laughing Cow, Minicab, Leered, etc).

Rather than drawing up a pointless balance sheet for and against, it is worth turning to research in this case. HEC has carried out several specific studies on this important theme for companies in all sectors, under the direction of M Anti (Anti, 1996). The selected criterion is operational profitability compared with turnover, and the sample comprised 167 cases drawn from numerous mass-consumption sectors. What does this research have to teach us?

  • The profitability level is maximal when the policy is the result of a voluntary strategy (9per cent) and not an opportunistic reaction to a short-term demand (5. 19 per cent) or survival strategy (6. 53 per cent).
  • The profitability level also depends on the underlying motivations: it is at its highest when the company is seeking to create genuine partnership with distributors, in order to defend already strong brands (7. 90per cent). If the brands are weak and the DOB manufacturing approach is an attempt to save them, the profitability in the sample is less (3. 50 per cent).
  • The profitability is maximal if this is the dominant or even exclusive activity of the industrialist (7. 51 per cent).
  • The profitability is maximal if the market is not a commodity market (7. 64 per cent).
  • The profitability is weakened by the fact that the industrialist does not make distinction between its brand and the distributor’s brand it is producing: this is an important point, since many industrialists distinguish between the two only through the packaging, in order to make the most of the economies of scale and long production runs.
  • The profitability is better when the manufacturer works with distributors that promote quality.

What can we draw from this HEC research data? Whether or not to manufacture distributor’s brand products is a strategic choice, and should be analyses as such.

Should they do it? Refusal to do so is clearly the result of a long-term vision: Procter &Gamble, Gillette and Al’Boreal all invest too much in research to wish to share the benefits they reap from it. They reserve the first fruits for their own brands, within a structured portfolio.

Which companies should do it? There is no correlation between any classic company description and profitability in DOB production: rather, profitability is linked to the manner in which it is implemented.

In which segments should they operate?The least commodities possible, those where there is still innovation.

Which distributors should they work with?Here, too, selectivity in the choice of distributors proves to be rewarding in terms of profitability over turnover.

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