This article was published in the May 2023 issue of Pet Food Processing. Read it and other articles from this issue in our May digital edition.
The pet food and treat industry relies heavily on partnerships up and down the value chain, from ingredient sourcing all the way to retail. In this high-demand, heavily saturated market, it’s not uncommon for brands of all sizes to partner with a third-party manufacturer to create products and cut down on production costs, and there are several different ways to do so.
“There is absolutely no one size fits all perspective, but rather it comes back to the nature of the brand, the market size, the specifics of the product form and formulation, etc.,” said Nate Thomas, co-founder and partner at BSM Partners, Bentonville, Ark.
The difference between a white label, private label and co-manufacturing partnership boils down to how much control a reseller or brand owner has over the formulation and production of the finished product.
Mike Annis, partner, Husch Blackwell LLP, St. Louis, noted white label partnerships tend to involve more generic products sold through multiple retailers and are ideal for product manufacturers looking to maximize their economies of scale by selling marginal cost goods. White label manufacturers also benefit from selling the product without being responsible for overhead marketing expenses, which fall on the reseller.
There are, however, some drawbacks to white label partnerships from a reseller’s perspective, namely that a reseller lacks control over manufacturing and raw material sourcing processes. This downside can spawn into several disadvantages, including a lack of transparency and exposure to supply chain complications. White label partnerships typically put the reseller at the mercy of the manufacturer’s ability to source ingredients, produce products and ship them in a timely manner.
“Another disadvantage to a white label situation is that we see manufacturers make formulation changes that brands are often powerless to stop, and it can drive higher costs in requiring packaging changes and an inability to control the consumer reaction,” said Seth Kaufman, co-founder and partner at BSM Partners.
“The most important asset of any brand is the consumer relationship, and guarding that jealously is the right and necessary approach,” said Seth Kaufman of BSM Partners.
This lack of control — i.e., not owning your own formula or controlling ingredient inputs — is a “no-no” for brands working with private equities or outside investors, he added.
Private label and co-manufacturing arrangements are better for products that are more unique or differentiated, Annis noted, as they provide more control for a brand owner. In these types of partnerships, brand owners may specify certain product requirements such as quality controls, ingredient inputs and sources, and may even dictate how a product is manufactured, he added.
“The more the brand owner controls, the more the partnership looks like a co-packing arrangement,” Annis said.
Regardless of the nomenclature, the success — or failure — of such a partnership can be determined the minute ink meets paper in a formal contract. In each of these arrangements, it is crucial that manufacturers and brands allocate risks and responsibilities with clear intent in an effort to safeguard sensitive information, reputations and promises to consumers.
Covering your assets
At the crux of any good partnership is the concept of sharing resources for mutual benefit. However, having contractual provisions to protect these resources — whether they be intellectual or material — can make all the difference in the event of an adverse contingency and otherwise unsavory outcome.
From a legal perspective, intellectual property (IP) can be divided between four “buckets,” as Annis explained — patent rights, copyrights, trademarks and confidential information. Patent rights and copyrights are rigidly defined because the owner of those rights must register to pursue legal action against an individual or organization infringing upon them. Trademarks largely refer to branding, and those rights are defined by your use of the brand in commerce. Trademark rights also allow for, but do not require, registration through both state and federal pathways.
“The more the brand owner controls, the more the partnership looks like a co-packing arrangement,” said Mike Annis of Husch Blackwell.
The situation starts getting sticky when it comes to confidential information, which contains three categories in and of itself: proprietary information, confidential information and trade secrets.
The terms “proprietary” and “confidential” take on a more conceptual meaning depending on the situation at hand. For example, the proprietary nature of information can sometimes be arbitrary in the case that a manufacturer or brand owner owns something of value, but can provide no evidence to make that case, Annis said. Confidential is a term that is typically manufactured and defined in a contract, he added, in which a service or manufacturing process is declared “confidential” in contracting documents.
Herein lies the key difference between these two categories of confidential information and what Annis described as “the holy grail” — trade secrets. To legally quality as a “trade secret,” the information in question must have independent economic value and, in the hands of a competitor, could cause significant harm to a manufacturer or brand owner. This type of IP must be protected at all costs, and if trade secrets and other confidential know-how are shared in a partnership, they will need confidentiality provisions in the contract and, ideally, promises not to “reverse engineer” those trade secrets, Annis noted.
“A trade secret is something that is not well known — something that your competitor, if they were armed with that information, could turn into dollars readily,” he explained.
In the event that IP is created as a result of a partnership, the contract should address this in a provision that clearly defines which party owns which aspect of the IP, or if it will be jointly owned by both parties, Annis noted.
Indemnification clauses can address the allocation of risks and responsibilities as they relate to IP and product liability. Indemnity refers to compensation by one party to another for harm or loss.
“For example, the manufacturer — who controls the ingredients and methods of making — might indemnify the buyer against claims for patent infringement, while the buyer might indemnify the manufacturer against any claims raised that the sold product infringes another’s trademarks or copyright, as the buyer usually controls the packaging, labeling and advertising of the product to the consuming public,” Annis said.
“The most important aspect of a manufacturer-brand relationship is creating clear guidelines at the onset of relationship to cover all of these contingencies,” said Nate Thomas of BSM Partners.
Brand owners can leverage indemnity to protect themselves in terms of product liability, as well. To account for recalls or product defects, for example, a buyer should require the manufacturer to indemnify against any damages arising from the event, including financial obligations related to notifying and refunding consumers, Annis noted.
Questions of food safety and quality are typically controlled by the manufacturer, but provisions should be built into the contract to set minimum standards and protocols for ensuring safety and quality throughout the relationship. This should also include how and by whom products will be inspected before they are distributed.
Annis recommended that guidelines for supplier expectations — including product specifications and other key merits or benefits of the partnership on both sides — are baked into the contract to avoid finger pointing down the road. Likewise, recall and food safety plans should be in place from the get-go, and the terms of any contingency plans should be laid out contractually as well.
Setting the tone early
As the old adage goes, sometimes the best offense is a good defense.
“The most important aspect of a manufacturer-brand relationship is creating clear guidelines at the onset of relationship to cover all of these contingencies,” Thomas said. “…Having a structure and relationship to fall back on in order to ensure problems are addressed is critical, but it is almost always neglected in the rush to launch products.”
A solid partnership will be backed by a solid contract, operating on a “trust but verify” system supported by regular and clear communication. | Source: ©IRYNA – STOCK.ADOBE.COM
There are certain constructive elements, according to Thomas and Kaufman, that can help brand owners mitigate risk in these types of partnerships, including setting clear specifications, structured and periodic product evaluations, using pet food-focused manufacturing and safety standards, and conducting due diligence well before entering a partnership.
“We see many brands shortchange these efforts in the interest of costs, but we feel that the most important asset of any brand is the consumer relationship and guarding that jealously is the right and necessary approach,” Kaufman said.
Rather than waiting for the other shoe to drop and finding themselves on the wrong end of a lawsuit, brand owners would be wise to take their time conducting due diligence to find the right match and clearly define the terms of their partnerships in black and white.
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