What are private label agreements?
Private label products are food products that are manufactured by one company for sale under another company’s brand. A private label agreement governs the relationship between the manufacturer and the retailer.
Private label arrangements are easily distinguishable from other types of manufacturing agreements. Private label manufacturers produce their own recipe and formula for sale by an outside party. In other types of manufacturing agreements, the manufacturer produces a product to the retailers formulation or specification.
In a private label agreement it is important to address issues like proper food and nutrition labeling, food safety, food recall liability, and the intellectual property issues related to product formulation.
Why use private label agreements?
From the manufacturer’s perspective, private label agreements maximize production potential without the need to build retail markets for the product. A manufacturer can get the product on lots of shelves without having to bear the expense of building a mass market.
From the retailer’s perspective, margins on private label goods are better, which gives retailers more economic bargaining power with suppliers of national brands. Private label agreements give major retailers like Amazon the capability to rapidly expand product offerings with minimal investment (both capital and intellectual) in food processing and production.
- Maintaining solid control over intellectual properties like product formula.
- Marketing a misbranded product.
- Inadequate manufacturing practices that result in sick customers or product recalls.
- The basic risks inherent in any manufacturing or supply relationship – quality of goods, timing of delivery, price, and risk of loss.
What to include in your private label agreement
- The most important part of a private label agreement is an acknowledgement that the manufacturer retains ownership of the product recipe or formulation after the conclusion of the production run.
- A private label agreement should address which party bears responsibility for product recall expenses, accurate nutrition labeling, and recall management.
- The manufacturer needs to provide the marketer with a Specification Sheet for the product, which contains all of the important information about the product. The Specification Sheet should include product nutritional information, a list of all product ingredients, a list of any of the 8 major allergens, and information on any additional claims that can be made about the product like organic certification, gluten free manufacturing, and the like. The Specification is the manufacturer’s warranty for the product and is incorporated into the Private Label Agreement as such.
- The marketer of the product should have access to the food safety records of the manufacturer that pertain to the product. Total transparency is the goal. The manufacturer makes an implicit warranty to create the product in compliance with good manufacturing practices, and the Private Label Agreement makes these warranties explicit. Nevertheless, the duty to out a safe product in the market, and the marketer needs the ability to conduct thorough oversight on the manufacturer’s practices.
- The commercial features of the deal should be established by thorough and concise writing: how orders are submitted, manufacturing costs, delivery dates, and payment terms are just some of the basics that need to be addressed.
You can also check out our handy infographic on Private Label Manufacturing, which has a few more tips and tricks about creating a strong Private Label Agreement relationship with your manufacturer.
How We Can Help
We draft and negotiate agreements from either the perspective of manufacturers or purchasers.
Small manufacturers often do not have the bargaining power to draft or negotiate favorable terms for these agreements, and are driven by economic necessity to accept hard bargains. For manufacturers who accept these kinds of “take it or leave it” deals, we can perform a desk audit of the agreement to identify the liabilities assumed by the manufacturer, assess and prioritize the risks, then develop a risk mitigation strategy that meet the resource capabilities of the manufacturer.
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