Private Label

Walk into a pharmacy in Wuse and look at the shelf of paracetamol. Six boxes, six names, three factories. Walk into any supermarket in Lekki and look at the bottled water, the tissue, the sugar, the disinfectant. Some of the names on those packages belong to companies that own plants. Most do not. They belong to companies that own nothing but a name, a specification, a relationship with a factory, and the shelf space they have fought for.

The consumer does not know this and would not care if she did. She has never met the factory. She has no contract with the factory. If the disinfectant burns her hands, she will not go looking for the plant in Sango Ota. She will look at the bottle, and she will find one name there, and she will hold that name responsible.

The name on the bottle did not make the bottle.
The name on the bottle answers for it anyway.

That sentence is the whole of private labelling, and everything else in this sub-cluster is an elaboration of it. Twelve essays follow this one, each taking a single consequence apart. This one does something narrower and more necessary: it describes the arrangement itself, names the parties to it, and shows where the arrangement is load-bearing and where it is held together by assumption.

It decides nothing. It opens everything.

A private-label transaction has a simple shape. A seller — a retailer, a distributor, a founder with a market and no plant — commissions a manufacturer to produce goods to a specification, and sells those goods under a name the seller controls. The manufacturer is paid for production. The seller keeps the margin between the production cost and the shelf price, and keeps the relationship with the customer.

What makes it interesting is not the shape but the invisibility. In an ordinary distribution arrangement, the manufacturer’s name is on the product and the distributor is a channel; everyone knows who made the thing. In private label, the manufacturer is deliberately erased from the face of the product. The consumer is not merely uninformed about the factory. She is invited to believe that no factory exists apart from the name she can see.

This erasure is lawful, ordinary and commercially rational. It is also the source of every complication that follows, because the law does not always accept the erasure that the packaging performs. Regulators want to know who actually made the goods. Courts want to know who actually promised what. The consumer, meanwhile, believes exactly what the label told her to believe, and her belief has legal consequences of its own.

There are several arrangements in this family and they are routinely spoken of as though they were one. Private label proper, where the seller specifies and the factory builds to that specification. White label, where the factory has already built a product and offers to put any buyer’s name on it. Contract manufacturing, where the specification and often the formula are unambiguously the buyer’s and the factory is a pair of hands. Original equipment manufacture, a term borrowed from an industry with different conventions and applied here loosely enough to mean almost nothing. These are four different allocations of ownership, and choosing the wrong word in a contract is how founders discover, years later, that they specified nothing and own nothing. The first essay in this sub-cluster exists to separate them.

Ask a founder who is in her private-label arrangement and she will say two people: herself and the factory. That is who negotiated, that is who signed, and that is who argues when a batch is late. It is also why the arrangement fails in ways she did not anticipate, because there are four parties in the transaction and only two of them are in the contract.

Two signatures, four parties. The contract governs the relationship between the first two and is largely irrelevant to the second two. A founder who negotiates only the first relationship has secured perhaps half of her position, and it is not the half that will hurt her.

The consumer does not buy from the factory. She buys from the name, and the name must answer.

It would be easy, and dishonest, to present private labelling as a trap. It is not a trap. It is one of the most efficient structures available to a business without capital, and the case for it should be made plainly before its risks are catalogued.

A plant is expensive, slow to build, expensive to license, and expensive to idle. A brand is cheap to start and, if it works, disproportionately valuable. Private labelling separates the two, so that a person with a market can serve that market without spending four years and several hundred million naira learning to manufacture. It converts a capital problem into a commercial one, which is the kind of problem a founder can actually solve.

It also permits speed. A specification agreed in March can be on a shelf in September. Product lines can be tested and abandoned without stranded assets. A seller can carry twelve products from five factories and would never have built five plants.

And it scales in the direction of the thing that actually appreciates. The factory’s margin is a manufacturing margin, competed down over time and tied to its capacity. The seller’s margin is a brand margin, and if the name comes to mean something it will support prices the underlying goods could never support alone. Over twenty years the plant may be worth what plants are worth. The name may be worth many times that, or nothing, depending almost entirely on whether the questions in this sub-cluster were answered early.

What the arrangement costs is control. The seller is renting the capability that makes her product possible, and rented capability can be withdrawn, repriced, or offered to a competitor. Every essay that follows is, in one way or another, about converting rented capability into owned position — or about deciding deliberately not to, and pricing that decision correctly.

The pillar of this series argues that a brand is not a thing but a bundle of separate rights held by separate owners. Private label is the sharpest possible demonstration, because the bundle is split across two businesses by design.

Consider a single jar of cream on a Nigerian shelf and ask, of each element, who holds it.

The name is a trademark, and it should be the seller’s, registered in the correct class, before the first order is placed. It frequently is not, and the founder discovers this when the factory registers it first, or when a competitor does, or when a buyer’s lawyer asks.

The artwork on the jar is an artistic work, and its copyright belongs at first instance to whoever drew it — a freelance designer, an agency, a nephew with a laptop. Payment does not transfer it. Only an assignment does, in writing, signed.

The shape of the jar may be an industrial design, registrable only if it was registered before it was shown to the world, which means the founder’s own launch usually destroyed the right before anyone knew it existed. Or the jar may be a stock item the factory buys by the thousand, in which case there is nothing there to own and a competitor may use the identical jar tomorrow.

The formulation is the hardest and the most contested. If the founder brought it, it is hers and should be recorded as hers. If the factory’s chemist developed it — which is the common case — it is the factory’s, and the founder has been building a brand on top of an asset she cannot take with her. There is no register for this. There is only what the contract says, and silence in the contract favours the party holding the laboratory notebook.

The regulatory registration sits with whoever applied for it, and the practical effect of that choice is disproportionate to the attention it usually receives.

The goodwill — the reason a customer reaches past the cheaper jar — is the seller’s, and it is the only element in the bundle the factory can never take. It is also the element that cannot be filed anywhere, cannot be sold on its own, and evaporates if the product’s quality changes without the seller noticing.

Six elements, two businesses, and no natural rule allocating them. Every allocation is a decision, and the decisions are made either deliberately in a contract or accidentally by default.

Return to the four parties. The contract binds two of them. The other two — the regulator and the consumer — arrive with their own rules and their own indifference to what was negotiated.

The seam between the contract and the regulator is administrative and quiet until it is not. A registration held by the factory is convenient at launch, because the factory already knows the process and has the file open. It becomes a constraint at exactly the moment the seller most needs freedom: when quality falls, when price rises, when the factory begins serving a competitor, or when the seller wants to move production. Whether a registration can be transferred, and on what terms, is a question worth asking before it is urgent rather than after.

The seam between the contract and the consumer is louder and more expensive. A defective product injures someone. She reads the label, and she proceeds against the name she finds there. The seller’s contract with the factory may contain an indemnity, and that indemnity may be excellent, and it will still not prevent the claim from being brought against the seller — it will only, at best, allow the seller to recover afterwards from a factory that may or may not be solvent and may or may not still exist. An indemnity is a right to be reimbursed. It is not a shield.

Beyond the individual claim there is the regulatory and reputational consequence, which no indemnity addresses at all. A recall is announced under the seller’s name. The press reports the seller’s name. The customers who leave are the seller’s customers. The factory, invisible throughout, remains invisible.

This is the true asymmetry of private labelling. The seller has purchased the visible upside of manufacturing and inherited the visible downside of it, while retaining direct control over neither.

Every private-label relationship ends. It ends because the factory raises prices, or because quality drifts, or because the seller outgrows the plant’s capacity, or because a better factory appears, or because the relationship simply sours in the ordinary way of commercial relationships. The question is not whether the seller will one day want to move. The question is what she will be able to take with her.

If the formulation is the factory’s, she cannot take the product. She can take the name to a new factory and ask them to make something similar, and her customers will notice the difference, and the goodwill she spent nine years building will be spent explaining it.

If the moulds were paid for by the seller but held by the factory, and the contract is silent on ownership, she will discover that the physical possession of tooling is a strong negotiating position.

If the regulatory registration stands in the factory’s name, she may be starting the regulatory process again, from the beginning, with a product she has been selling for a decade.

If the artwork was never assigned, the new factory’s printer will ask for print-ready files that the old factory’s designer holds.

None of these are exotic disasters. They are the ordinary end of an ordinary arrangement, made expensive by clauses that were not written because, at the moment of signing, everyone was optimistic and nobody wanted to discuss leaving. The essay on changing manufacturers in this sub-cluster is devoted to the exit, and its argument is simple: the exit is negotiated at the beginning or it is not negotiated at all.

The series puts six questions to every commercial object it examines. Put them to the jar of cream and the whole sub-cluster falls out of them.

What is the visible commercial object? A jar on a shelf bearing a name, a claim and a price. What legal rights exist beneath it? A trademark, a copyright in artwork, a possible design right, a confidential formulation, a regulatory registration and an accumulated goodwill. Who owns those rights? Split across at least three parties, usually without anyone having decided so. Who controls their use? The factory controls production; the seller controls the name; neither controls the other’s half. Who bears responsibility when it fails? The name on the label, first and publicly, whatever the contract says. And can the asset survive, transfer or generate income independently? Only to the extent that the previous five answers were arranged deliberately.

That last question is the one that determines whether the founder has a business or an asset. A business earns while she runs it. An asset can be sold, borrowed against, licensed and inherited. The difference between them, in this trade, is roughly a dozen clauses and one set of registrations, most of which cost less at the outset than a single production run.

What follows takes them one at a time.

Whoever’s name is on the label has made the promise. The only question is whether he also owns the means of keeping it.

This publication is educational and analytical. It describes how legal and commercial structures work; it does not advise on any particular matter, and nothing here should be relied upon as advice on a reader’s own affairs. The author holds commercial interests in the brand-building and private-label sector examined by this series.