Comment by adrianmonk | Hacker News Reader

Comment by adrianmonk | Hacker News Reader

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I don't understand the section on how the economics work.

This French vodka maker doesn't quit selling vodka under their own brand. They just also sell some as Kirkland. So don't they have to keep doing a bunch of marketing so that their brand-name vodka keeps selling in all the other stores? How do they save any money on marketing?

I would guess the real reason it works is that it opens up a market of people who wouldn't buy name-brand vodka at (say) $29.99/bottle but will buy Kirkland vodka at $19.99/bottle, yet without cannibalizing their ability to keep selling it (in other stores and in Costco) to people who are currently paying $29.99.

Or another theory is that many Costco buyers aren't vodka experts, so there is some degree of randomness to how they pick vodka. If there are 10 brands of vodka, selling under the Kirkland brand and their own means they are 2 of the 10 brands instead of 1 of the 10, so to the extent that people pick randomly, they get picked twice as often. (It's like buying two raffle tickets.) A similar effect would apply to people who cycle through brands of vodka.

Also if company A is unwilling to supply a white label version, then perhaps company b will instead. Better to make money selling a white label then not make money because you didn’t.

Imagine you sell 10M units of vodka per year.

if your goal is to sell 20 million more bottles of vodka, you could use your existing unit economics and marketing campaigns to scale to 20M additional units

OR

you could manufacture 20M units with a different label and ship them to costco, investing no additional money on marketing for that effort in exchange for a lower wholesale price.

He is working out marketing costs per item sold. The marketing costs for the white brand is almost 0, since Costco does it.

Yeah, that must be what the article means to say. I think I was just stuck on phrasing like "brands don’t have to spend nearly as much money on marketing".

I'm not sure I'm convinced that per-unit is a great way to analyze marketing costs since if you air a TV ad, it reaches a segment, so to me it seems more like an annual cost or something. But I do get what it's saying now.

The underlying theory behind marketing is that more marketing = more sales. With the exception of brand-building marketing (like CSX railroad sponsoring the PBS news hour), which is more aimed at boosting stock prices, product marketing is generally based on a cost per impression, with impressions converting to sales at some fixed rate.

This is all to say that marketing costs are budgeted as incremental costs of sales. So, if you find a way to sell more product without increasing your marketing budget, that’s basically free money.

But if those sales are displacing sales of your own products, which is the premise of the article, is it really free money?

Depends on if the money saved on marketing and gained by white label sales (if the bottle cost more than $19.99 to make they probably wouldn't do so) minus the money from lost sales to the white label. The site below lists most 5ths (750ml) at under 3 pounds or under US$4, even for top shelf. Say that is doubled by transit costs or tripled after marketing/etc to about $12, it's still about half the white label cost so I'd argue they don't lose money making bottles for Costco.

For marketing, let's assume that cost of maintaining the relationship and dealmaking is written off and 0. If you consider Costco/Kirkland marketing at least in terms of buyer awareness it may be a net gain as for $0 they get that Kirkland trust.

For white label, they may split production/sipping costs with Costco or just provide the final bottle with split profit. Either way, each bottle may return 50-60% as profit or about $12. I can't find anything in detail on how brands split profits or if Costco takes a flat cut though so let's say 50% cut to Costco

I also didn't find anything quick on if white label sales cut into private label but as the white label is only Costco I'd guess the impact is not severe and if the private label is known might even be a boost at outside liquor stores. Even with

For their own sales, take a bottle cost of $30 - $12 to produce for a net of $18. For white label, $12/2 or $6 in profit. So perhaps their private label is 3x the profit ($18 vs $6) so as long as the white label sales don't eat more than 1/3 of the private label sales (and I'd say across the nation it won't) then they come out ahead. But either way they make money and have a huge partner with massive sales to produce for which I'd take as a win for long term revenue stability.

https://www.lovebrewing.co.uk/guides/still-spirits-liqueurs/...

The tl;dr; is that some profit is better than no profit (selling the white labeled money garners some profit vs. no profit if the manufacturer decides to not do the white labeling). The lower profit margins is made up for by higher volume.

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