Need Help with Sourcing Private Label Chocolate

Hello all,

I recently found this website and it is such an informative and great resource as I start my own chocolate endeavor. My partner and I are developing a premium dark chocolate bar that we are marketing to a very specific demographic. Since we are just starting out, we decided it would be easier to start with a private label product. Right now we are working with an established chocolatier who has quoted us a price of $1.68 for a 2.8 oz bar, just the chocolate itself and no packaging. How does this compare with other private label quotes? What are the ranges we should expect to pay?

Eileen -

There is not enough here to answer your question because we have no idea what chocolate you are using. The price above comes to about $9.60/lb for the chocolate. That probably means the company is paying no more than $3-4/lb which limits the range of suppliers. A 3x markup seems high but when you factor in losses due to chocolate being left in the machines and changeover, it really isn't. If you use this 3x rule of thumb and apply it to a variety of recipes, you'll see that changing the cost of the base chocolate (and ingredients) does to that side of the cost model.

What you REALLY want to know is the cost of taking a chocolate (ANY chocolate) and molding, wrapping, and packing it into boxes, ready to ship and sell.

I have heard prices ranging anywhere from 40 cents to $1.75/bar for labor associated with bar production, exclusive of the cost of ingredients and the packaging itself.

From there you can start playing with the chocolate being used (and any flavorings/inclusions/other ingredients) to get to the first rung for the pricing structure. You also have to ask questions about minimum runs. If you want only 100 bars to start, labor costs are going to be very high. Minimum runs are often in the 10,000+ range to start getting labor and related prices (including changeover costs) into the reasonable range. for the company doing the work.

Clay

Thanks so much for replying, what you posted was very helpful.

To answer your question, I believe the beans are sourced from Venezula and the bars are to contain at least 60% cacao. We are adding additional ingredients so the bars are a customized formulation so I assume that adds to the price. We are not using one of the company's stock. The company's own bars retail for $5-6 for a 2.8 oz bar.

These are run through a machine and not hand molded. We have a tiered pricing structure and the $1.68 was for a 8000 unit run. Packaging was an additional $0.12/bar.

If we expect to order more than 10,000 units should we expect or be able to negotiate a better price?

And yes, I would like to know what the production cost itself should be exclusive of packaging and ingredients.

Thanks in advance to everyone!

Eileen -

You have to do some math to figure out what works. At $1.68 plus $0.12, your cost of goods is $1.80. Is you run that through a multi-tier pricing model (what's your gross margin, what's a broker markup, what's a distributor markup (this gets you to the wholesale price), what's the retailer markup, then you arrive at a suggested retail price. Once you can model this you can figure out if any quote is too expensive.

I just did this exercise for someone and put together a spreadsheet to work on multi-year sales forecasting and gross profit margin projections. I've taken out all the extra stuff and left just the COGS and markup lines so you can play with them yourself to see how they interact.

Note that Gross Margin is not the same as markup and I've done that calculation properly. Also, I've assumed a three-tier sales strategy just so all the costs of distribution are factored in. I've noticed that companies that assume they're always going to be able to sell direct to the retailer or customer get crushed when they have to use a distributor because they've never thought about what those layers would do to their cost structure. You can set the percentages to be whatever you want (including 0%) to see how changes affect costs.

For those who don't care to download the spreadsheet, a $1.80 cost of goods, 30% gross margin (you earn $0.77/unit), 10% broker markup (36 cents), 20% distributor markup (79 cents), and 100% retailer markup results in a suggested retail price of $6.79. Going from 30% gross margin to 50% gross margin jacks up the retail price to $9.50.

Of course you don't need all those tiers and your markup and percentages may be different. However, I'd work with this structure so you understand exactly what you're earning (or giving away). In the beginning, if you sell direct to the retailer you get to keep the broker and wholesaler markups, raising your revenue per unit to $1.82 (a 50% gross margin, which is pretty good).

Clay

You are a tremendous resource, thankyou so much for the worksheet and information - extremely helpful.

Yes, in adding distributer margins, I'm quite concerned about overall gross margin. Is 30% a typical margin in this industry?

We plan to focus on online and affliate sales as much as possible. What percentage of total revenues can one expect from online sales chocolate retailers? What has been other's experiences for online sales of chocolate?

Thanks!!

Eileen -

There is no "typical." You need to look at YOUR cost structure and what you hope to achieve.

When it comes to sales mix, you can model different percentages of revenue from different sources in order to be able to determine what mix brings you to profitability. In many respects, this sort of modeling becomes self-fulfilling prophecy. Figure out what mix works for you and then plan your marketing and sales efforts accordingly.

There are no hard and fast rules other than if you underprice (often mistakenly) you will go out of business. You need to look at what you want to achieve, not look to others for guidance. What works for someone else might not work for you.