What Costco’s ‘Kirkland Signature’ private label tells us about the Woolworths-Beyers Chocolates debacle

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JIMMY MOYAHA: Over the last couple of days there has been a lot in the news said around the Woolies-Beyers Chocolates debacle.

For those who don’t know, a quick snapshot summary here is that there was a bit of a dispute from Woolworths’ perspective relating to one of their suppliers in the form of Beyers Chocolates [henceforth ‘Beyers’], when Beyers elected to start supplying competitors of Woolworths in the form of Checkers and Pick n Pay.

This agreement that was in place between Woolworths and Beyers dates back a little over 30 years, so an agreement that has been in place for quite some time.

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Nevertheless, we find ourselves in a situation where Beyers is now filing for liquidation. The agreement and relationship between it and Woolworths has gone a little sour and we have lessons we can learn from all of this.

We’re going to be taking a look at those lessons in a bit more detail with the chief investment officer at First Avenue Investment Management, Hlelo Giyose.

Hlelo joins me on the line now to see what we make of this. Hlelo, lovely having you on the show. Thanks so much for taking the time. Before we get into some of these important lessons, your initial thoughts on how this relationship has disintegrated?

HLELO GIYOSE: Well, first of all, thank you for having me on the line, Jimmy. I appreciate that very much. I also want to say that I think it’s a tragedy, obviously, for an entrepreneur to lose an old, long-successful business and for the people who lose their jobs.

I’d like to share some nuances about this, but just a caution: I am not a party to any of the contractual arrangements between Beyers and Woolworths. I know nothing about that contract, either instinctively or intuitively.

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We just have lessons from abroad that we can apply. I think here the big point is that there is a maturing of the capitalist system in the country that has to occur.

There’s a company called Costco in the United States, which runs the largest consumer brand in the world – I think about $80 billion worth of revenue – in something called Kirkland Signature.

Costco is a retailer, a food retailer, and they do exactly what Woolworths does. They go to companies, the best companies in the world. They go to Starbucks, they go to Procter & Gamble, and say, ‘Give us your coffee, and we’ll private-label brand it as Kirkland Signature’ – which is their product. They go to Procter & Gamble and say, ‘Give us Pampers’ and they private-label it under their Kirkland Signature.

Why does Starbucks, a large global firm, allow itself to package its coffee under a different brand called Kirkland?

They do that because Costco says to them: ‘We will buy as much of your capacity as possible. You will never have your machines running idle. We’ll take up your capacity, and in return for that, you’ll give us a good price. And our job is to turn that around and sell it to our customers under this brand and pass on the price savings to you.’

So the difference here is that Costco goes to really, really well-branded and accepted and high-quality companies to get their product to the market.

Whereas Woolworths has gone to Beyers Chocolates – or maybe, shall we say, 34 years ago, Beyers came to Woolworths without any name to their brand, without anything and said: ‘Hey, can we brand something with you? Can we co-brand something with you and ride on your coattails?’

And Woolworths said: ‘Sure, let’s co-develop a recipe. We’ll pay for your capacity, we’ll fund you.’

It’s by all measures very successful – R364 million worth of revenue.

Woolworths made this business. Costco did not make Starbucks.

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I think Beyers has it the other way round. They should really be thoughtful about how Woolworths stepped out of the breach and took the contract away.

Pick n Pay and Checkers did not tell Beyers: ‘Okay, we’ll take that capacity too, we’ll step in where Woolworths has stepped out.’

Now why is that so? It is because the exclusivity with Woolworths had such brand power to it that without it the products are not worth replicating.

They were worth something when they were being sold by Woolworths under a stronger brand. They’re worth nothing now without the halo power of Woolworths.

So I think Beyers had it backwards here, and I think it’s just a simple understanding of: ‘I went to Checkers and Pick n Pay, who certainly filled up my second factory; but when I lost my main line of business they are not there for me. No one is there for me. I’m a suboptimal business’.

And that’s really the difference between a more mature market-based system, capitalist system and an immature one.

I think Beyers just has to improve its perspective on this matter.

JIMMY MOYAHA: Hlelo, let’s take a look at the private-label side of things. This is not the only private-label model that operates. These aren’t the only companies that operate private-label models in South Africa.

We know that the likes of Checkers and Pick n Pay themselves have their own private labels, private labelling for businesses that are fairly unknown as Beyers may have been at the time. I imagine Woolies might have had their own branding and naming challenges to go through as well.

But the value and the advantage of strategic partnerships, especially when it relates to a private label, was so often focused on wanting to own the name, own the brand, [only] then to realise along the way that ‘we’re not actually building the business, we’re just building an empty brand here’.

HLELO GIYOSE: Yes, that’s a great point, by the way, that a lot of the private labels that you see in stores are actually worthless.

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This one is worth a lot of money, as I said – R364 million in revenue. And it has been built over so many years of customers walking into Woolworths.

As Woolworths opens up new stores, new distribution points across South Africa and across southern Africa, Beyers gets to serve those customers who come on the basis of that trademark, that brand, that intellectual capital, that recipe development.

And not to underplay, by the way, not to forget that that sponsoring bears the ability to add more equipment, more machinery, more jobs.

If you’re riding on the coattails of an investment that always is making and marketing and advertising and branding, just be sure, sure, sure that if you are willing to diversify your business away from Woolworths, the person to whom you’re diversifying it has to be there if Woolworths says: ‘Thank you, but no thanks. I wanted exclusivity with you.’

By contrast, by the way, Costco does not need exclusivity with Starbucks.

Starbucks still sells all over the world, okay, because Starbucks is already a well-branded article. Starbucks just wants to make sure that it doesn’t have add-on capacity that Costco didn’t build.

In this case, the entire capacity and the ability to even want to expand has been built on the foundation of Woolworths’s success or custom with Beyers. And I just think Beyers has it backwards.

JIMMY MOYAHA: There are some important lessons to be learned around value proposition, what it is that various companies bring to the table in these conversations, and perhaps thinking about things in the long term and hedging your bets.

We’ll leave the conversation on that note. Chief investment officer at First Avenue Investment Management Hlelo Giyose joined us to take a look at the Woolworths-Beyers Chocolates debacle and the lessons we can learn from it.

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