Private labeling from company who also retails

[Denim Chicken]

So there's a company that sells a particularly common item and they offer private labeling. I would prefer this method since they are U.S.based and their product and everything is already developed and high quality. So if the margins work, would love to use them as my source and try a run on Amazon or my website. The problem is control.. They asked what retail method I would be selling through. They currently sell on Amazon. I am willing to not sell on Amazon and give them that channel and just sell on my website if they would agree to that especially since it will stop other competitors.
However, I'm worried about them finding out how much volume I'm doing and then going into my space and directly competing with me and dropping me anytime they want. They'd know my brand, name, website, and volume I'm doing AND control prices and manufacturing.

What's a good way to get around this problem?

The easiest answer is to make my own, but they have patents on some of the features and the product is the best. The R&D has been done. I also see Chinese knockoffs starting to show up with tweaks in the design to get around the patent. So it's either, team up with the US U.S. based company, use their high quality product and patents but give up control. Or, source from China and risk getting sued for product similar in design even though their patent doesn't cover everything. There are designs around it.

I don't understand how a company who sells retail in the US can offer private labeling, it seems a non compete must be set in place. Last thing, I am using this product for another category from which they are selling as I see another use for it. They may be ok with this if I purchase volume, or they may push me out and stop my manufacturing if they want to take it. They have the control unless there's a contract of some sort. Any thoughts on the best way to proceed?

 

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[David Young]

I work for a manufacturer who sells direct and also does some white label work. There a number of issues here that are worth considering.

In many ways we don't care whether the revenue comes from our own brand or through the white label as its all revenue in the end. We would typical sell to a distributor/ white label at a lower margin so there is something in it for them. However, this is off set by our reduced cost of sales.

If you are really concerned then be open and get any agreement in a contract.

However, there is a flip side to this- if you want to limit the supplier they might expect a minimum volume of sales. Furthermore, if the manufacture looks to take your business you could potentially change suppliers without the customer knowing.

Although there are economies of scale being an OEM, there can often be drawback that limit what you can offer to the market.
It is therefore important to offer something that the OEM can not. This could be selling in smaller quantities, holding local stock or providing technical support - some form of added value above that offered by the OEM.

I have seen examples where a good reseller is eventually bought out by the OEM!!