TSH 19: Is it better to start a brand, or buy from brands?

To be a house of brands, or to build a brand. That is the question of the day. I score the options below.

Reading time 2 mins.

Whether you're an existing online retailer, or hoping to start a business, this question often comes up. 

A house of brands, or a multi-brand retailer, is someone who buys wholesale from other brands, and sells to consumers - a middleman basically.

Selling your own brand is exactly that - You create a brand, and sell products with your brand or logo on them. You can do this by either coming up with a product idea, engineering and making it yourself (with an product designer and manufacturer), totally from scratch, or by finding manufacturers, and having them print your logo on products. Manufacturers who do this will often refer to this as 'private label' or 'OEM' which stands for original equipment manufacturer. 

Tip: When you're looking for suppliers on Alibaba, Made in China, etc., ask them if they'll make private label or OEM orders.

There are pros and cons to both strategies, so let's break them down:

Early traction:

When you buy products from a brand, and resell them, you often get a decent conversion rate pretty quickly, because the trust is already there.

For example if a new online store opens up selling Nike shoes, I know my size in Nike, I know the quality of the brand, so I'm happy to make a purchase. 

Whereas if you start a new brand of shoes (which I did in 2007), people need to learn about the brand, the quality, the sizes, and so on, before making a decision. Hence, the uptake is usually slower, especially in the early days.

Winner: Buying from brands.

From a profit margin perspective, creating your own brand wins out just about every time. When you buy from brands, there's an extra layer that needs to clip the ticket (the wholesaler, or middleman) and take a share of the sale. The manufacturer needs to make money, the brand you're buying from does, and then there's you.

When you start a brand, and deal with the manufacturer, you're cutting out that middle man. Put into dollars and cents, you're looking at about a 20% better gross profit margin when you deal with a manufacturer directly.

Going above a middleman, directly to a manufacturer, is also referred to as going vertically up the supply chain.

Winner: Building your own brand.

When it comes to the fastest growth, this can be a tricky one to separate the two approaches. Stocking well regarded brands can increase your conversion rates, but the lower margins mean you generally trade off the good conversion rate for a smaller marketing budget, which can stifle your growth a bit. A new business (or any business) needs a decent marketing budget to find new customers and grow - the better margins of the private label brand can mean you have the wiggle room to spend a little more on marketing, which especially in the early days, can be critical in gaining market share.

Winner: Draw.

Unique selling points (USPs):

When it comes to working out what makes your online store different, selling the same products as everyone else can make it hard to stand out. There are some businesses that do this through offering super fast shipping, or a flexible returns policy, or great customer service, however standing out without a unique product can be hard. Building your own brand or products well, can allow you to build something that fills a gap - for example maybe your brand sells the only product on the market, or the only one that's waterproof, or other such bells and whistles. Building a moat around your own brand can be easier, with your own great products. Work out your USPs here. 

Winner: Own brand

Overall Profit

While some multi brand retailers scale to huge heights, and maintain killer profit margins, like Culture Kings for example, there are many more examples of multi-brand retailers struggling to bring home good profits. In my experience, a multi-brand online store would be doing very well to reach a 15% net profit margin, whereas some of the private label brands I work with are doing up to 40% net profit margins. 

Winner: Own brand

Initial cash outlay and cashflow: 

This is a tricky one. Buying from manufacturers (good ones anyway) you're likely to have reasonably high MOQs (minimum order quantities), which can suck up your working capital pretty quickly. When you're buying wholesale from brands, you can usually order very small "packs", for example I used to wholesale packs of seven shoes to retail stores. In some cases you could actually get wholesale purchase orders with no MOQs.

On the flip side, you're paying a higher unit price. Of course it depends on the products you're selling, but I think all in all, it's slightly cheaper to start an online store that's selling known brands, due to the lower MOQs - but that is being somewhat offset by the fact that offshore suppliers have reduced their MOQs over the last 10 years.

When you're dealing with manufacturers, many of them are offshore, so you're also likely to need to hold a bit of stock to allow for manufacturing lead times and international freight, whereas buying from well known brands, who usually offer a 'stock service' (meaning they hold stock) you can usually get smaller amounts of stock more frequently, and usually on at least 30 day payment terms, so you don't have to stock up, which is better for cashflow. Ordering small amounts frequently, and just in time, is better for your cashflow, than ordering large amounts and hoping to break even over time. 

Winner: Buying brands

So, there's the score card; 3-2 in favour of starting your own brand. Although there are plenty of pros to selling established brands, they're probably outweighed by the main pro - the higher profits, which is what my experience tells me matters, and what my experience also says has the better success rate (in terms of wealth building for the founders). That's not to say I discourage multi brands sellers - I work with plenty, and they're going great!

Both strategies can work - in fact many multi brand retailers also start their own private label, after getting the data on what products work. That way they have some portion of their revenue coming from higher margin products - smart!

Overall, there's no right or wrong, the principles of success remain the same. Remember my 50/30/20 rule, and how you need to adjust the ratios to be profitable, if you are planning to sell other brands. 

 Until next week,

Paul

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