Private labeling on the upswing

At what point does buying a name brand become less important than getting the best quality for the lowest price?

Sensibilities regarding that question probably differ widely, but if Novation's membership is an accurate reflection of the industry at large, it is being considered by purchasing decision makers with increasing regularity. The Irving, TX-based purchasing arm for VHA and UHC estimates that $1.5 billion will be spent aggregately on private label goods in 2003--a 50% climb since 1998.

Novation's NovaPlus private label program, which started in 1985 as VHA Plus, now represents about 7% of its total supply portfolio. Approximately 1,370 products carry the NovaPlus label, including wet pack products, blood pressure cuffs, dialysis kits, patient cleansing products, exam gloves, ventilators, operating room sponges and towels, blood gas kits, electrodes and patient footwear. Private label products are available for anesthesia, diagnostic imaging, orthopedics, respiratory, surgical, and general medical categories.

"In the face of lower reimbursement for government programs, a slow economy and almost 44 million Americans without health insurance, the nation's hospitals are struggling to make ends meet," said Jody Hatcher, Novation senior vice president. "The NovaPlus program ... helps their financial picture and also helps hold down the cost of healthcare." The fact that hospitals are under economic duress is nothing new, so there may not be a specific trigger for the upswing, other than private label products have matured and materials managers are increasingly realizing that there is real value in using them.

David Kaczmarek, vice president of the McFaul and Lyons Group, Horsham, PA, says he hasn't noticed an obvious migration toward private label purchasing, but added that it wouldn't surprise him, either.

"From a cost reduction standpoint, it makes sense because a private label is less costly than the big brands," he said. "It comes down to evaluating product quality."

Hatcher insists that all products under the NovaPlus label are scrutinized thoroughly at the manufacturing level before production is even considered.

"What we convey to our members is that the quality of our private label is as good or better than name brands," he said. "Before an agreement is reached, we conduct an audit of each manufacturer's processes. We conduct onsite visits and meet with their regulatory affairs people to ensure their adherence to good manufacturing processes."

Currently Novation has 78 contracts with 50 manufacturers to make NovaPlus products--32 for pharmaceutical products and 46 for med/surg supplies. The GPO determines the products it wants and sends out requests for proposal to manufacturers for bids.

"Our members identify and determine the appropriate products and bids are sent out asking manufacturers whether it makes sense as a private label," Hatcher said. "If so, we evaluate the bids and our member council makes a recommendation."

Contracts can either be exclusive or preferred, de pending on the type of product. Gloves, for instance, require multisource production because the inconsistent flow of latex can restrict one manufacturer from providing the necessary volume, he said.

Private label pioneer

Mundelein, IL-based Medline Industries has been associated with private label products since its inception 37 years ago. Although the Medline label is technically a "name brand," the private label tag stems back to the beginning when the company searched for an identity, said President Andy Mills.

"When the company formed in 1966, my father and uncle had to decide whether to be a manufacturer or distributor," he said. "They were leery about being a pure distributor, but at that time margins were better for distributors because of cost-plus reimbursement. Yet they felt that the distributors were at the whim of the manufacturers and that if the 3Ms and J&Js limited the number of their distributors, their business would be at risk. So they decided to control their own destiny."

Although the company started the practice of what has become known as private labeling right out of the gate, Mills said the term needs some clarification with regards to Medline's operation.

"Private label takes on a broader definition in terms of what we do," he said. "We've been lumped into a category that is referred to by stone in a derogatory manner. Although we have contracted to make products for other manufacturers, many of our brands originate with us and are patented. A number of these products happen to be market leaders."

Medline counts Novation and AmeriNet among its clientele as well as a growing list of mass merchandisers that are bolstering their inventories of over-the-counter medical products for the public. Despite the company's reputation for being a ubiquitous private label producer, Mills downplays that assertion.

"We're more vertically integrated than a pure private label manufacturer," he said.

Savings potential

Novation members purchasing through NovaPlus can expect to shave about 14% off their purchasing totals and that figure is nearly double the 8% savings provided just three years ago, Hatcher said.

"It's at a high point now, gradually trending upward," he said. "I would attribute that to the fact that we're consistently getting better pricing. Manufacturers are offering steeper discounts."

Medline's Mills confirmed that savings can actually reach 15%, but that there are variables involved.

"It depends on the product line and logistics," he said. "If they take deliveries in a container, they get a bigger discount rather than if they ask us to carry the stock and drop ship to them."

Of Novation's 2,400 members, approximately 70% are buying through the NovaPlus program. There are a couple of factors driving the popularity growth, Hatcher said, with the chief reason being "ownership" of the brand.

"By virtue of ownership, money is returned directly to members," he said. "They have a stake in private label."

Another reason is that members are becoming more intrigued by standardization, which is at the root of the NovaPlus name. When the program started, PLUS served as an acronym for "prices lowered utilizing standardization."

The program underwent some challenges as it evolved from its VHA Plus incarnation in the mid-80s, Hatcher said, especially in relation to ideas that didn't work well, like co-branding and products that didn't fit into the private label format, like anesthesia trays and chest tubes.

"Not all products make sense for private label," Hatcher conceded. "We identify the products that make the most sense for standardization and for the most part that formula has helped the program grow. But we've pruned, too. Some products just don't work especially clinical preference products that fall into a gray area."

Profit question

If customers can generate major savings from private label, what do the manufacturers get from it? How can they break even, let alone make a profit from such an arrangement? Some wonder ff manufacturers aren't capitalizing on the "private" part of the process.

"There is a bit of discomfort from materials folks with regard to the profit the private labeler makes," Kaczmarek said. "Costs are hidden. If the buyer saves a nickel, does the vendor make three limes the profit?"

Medline certainly doesn't, Mills insisted. "lf anything, private label is less profitable than our own brands," he said.

An advantage manufacturers cite with private label is lower overhead on their end. When buyers take ownership of the brand, they assume the sales and marketing responsibility for it, thus defraying some of the supplier's administrative expenses.

"Essentially we provide custom items they feel they will have more success selling to their members under their brand," Mills said. "Their programs work because they have loyal customers who want that brand. We can take out sales cost for that market by using their sales channels to reach it and we can make it for less that way. We make it for a price that doesn't include sales and marketing costs."

Yet despite no sales and marketing costs, Medline's private label margin is still thinner than for its house brand, Mills said.

"Our brands are now fairly well recognized in the marketplace," he said. "We're putting more resources and more R and D behind them. We're focusing on new cutting edge products rather than private label, which are established commodities."

In Brook-field, WI-based Triad Disposables' case, the advantage to private labeling is greater market share, said Mark Stecker, director of sales and marketing. Since becoming a NovaPlus vendor in 1989, the company has charted 14 consecutive years of sales growth and is one of the largest participating contributors to the program.

"It's been a long and successful relationship for both us, but it was a gamble at first," Stecker said. "We were a small manufacturer with little market share and embraced a concept that had virtually no presence in the marketplace. But both sides worked very hard to promote the brand and as a result gained a lot of recognition."

As any manufacturer will attest, building a loyal following for a particular brand is a formidable challenge. So it's no small sacrifice to allow a customer to essentially "take credit" for producing it, Stecker admits. Yet the strategy teas worked for Triad.

"While it's true that you're giving up your brand recognition to someone else, it has actually been a nice blend for us," he said. "Yes we promote the Triad brand, but at the same time, Novation has the sales and marketing resources we don't have. They have assisted us in gaining business for both our brand and theirs. We have access to a market we wouldn't otherwise have."

The '04 pipeline

Novation envisions a healthy influx of new private label products into the NovaPlus sys tem this year, an indication that member participation will continue to swell, Hatcher said. The GPO plans to add nine new med/surg product categories, including three that are new to the private label concept: embolism stockings, sterilization wraps and obstetric supplies.

The perception that private label goods are inferior and that only bulk items are pertinent is changing, Hatcher said, though he realizes that the stigma still exists.

"There are myriad reasons for it--the healthcare marketplace is very competitive and companies are pushing their own brands over private label," he said. "Materials managers and administrators have to work out what is best for their facilities."

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