Private Labels: Strong, Strategic & Growing
By Thomas J. Ryan, Contributing Author
Retailers have gotten very serious about their private labels, especially in the past year, and it seems their private brands are finally getting some respect.
From Target Stores' signing of exclusive licensing deals with Seventh Avenue designers such as Gene Meyer, Isaac Mizrahi and Cynthia Rowley to Federated Department Stores' hiring of Heather Mills, model, human rights activist and recent bride of Paul McCartney, as spokesmodel for I.N.C. International Concepts, private brands are making headlines. There also is Sears' blockbuster acquisition of Lands' End, JCPenney's exclusive licensing deal with Bisou Bisou for women's apparel and Wal-Mart's launch of the George career collection in what many in the fashion press saw as its entry into "cheap chic" fashion.
But most of the changes in private label initiatives have been more subtle, such as giving proprietary brands better floor space and promoting them more in weekly circulars. Many department stores are narrowing their stable of private labels while putting a major emphasis on key ones. Moving away from an item-driven business, private brands are being created to communicate quality, style and value for the entire store. More private brand managers are charged with making sure the brand's message is consistent across categories and seasons, with the goal of creating destination brands.
"Retailers are just maturing in the private label business," says Jeff Rives, president and CEO at private label producer Rives Apparel International. "They're treating them more like national brands and investing in them more like brands."
"They're putting in processes to create a total brand strategy," adds Jeanne Atkinson, president of Global Marketing Strategies, which specializes in apparel exports.
On the design side, stores are making commitments to improve the quality of merchandise and delivery. Many of the larger chains are increasingly sourcing directly from Asia for not only cost savings, but also to gain greater control of fabric and design specifications, as well as distribution. And they're leaning on private label vendors for better service and prices.
"Retailers are now providing more specific requirements in their requests, demanding an assortment that includes fashionable, quality products at the best possible prices," says David Yarbrough, vice president of Horizon Group, the private label division of Haggar Clothing Co. "Sourcing from overseas, developing consumer-driven packaging and shipping on time are key success drivers for private label vendors."
The bottom line: More private brands are being treated like national brands, from their labeling to their advertising to their in-store display.
"The success of the private programs is based on their perceived value and the consumer's perception that [these are products] worth investing in," says Marshall Cohen, co-president of NPD Fashionworld.
"You want the customer to feel that it is a national brand," says Gary Gladding, executive vice president and general merchandise manager at the Gottschalks department store chain. "You can come up with a good quality product that doesn't execute because you have done a lousy job with marketing and in-store presentation. It's all about execution."
Drivers of Private Branding
The impetus behind private label programs has been principally the same since R.H. Macy & Co. shocked the vendor community by growing its private label assortments to about a quarter of sales by the close of the eighties. Closed out by competitors such as Bloomingdale's from obtaining the top designer brands, Macy's launched its own brands, such as Morgan Taylor, Charter Club and Jennifer Moore, to provide a clear point of differentiation in the market while also securing significantly fatter merchandising margins than it could with national brands.
"Ultimately, we are looking to create more brand equity in the company," says Peggy Eskenasi, executive vice president of private brand development at Saks Inc.'s Department Store Group (DSG). "Private labels allow you to differentiate yourself from the competition, and you can generate more favorable margins by often working directly with factories. It also gives you the ability to control the design and product you are putting on the selling floor."
What's driving the renewed push to private label is debatable. Some observers believe stores are emboldened by private label successes, such as Mossimo and Faded Glory in the mass channel. Others say proprietary brands are desperately needed to offset homogenous brands across the department store selling floor.
Cohen says the upgraded apparel assortments at discounters are forcing department stores to depend on strong private labels to promote value. "By offering basic and semi-basic product with higher margins, they can afford to promote more often, and without that option, consumers will shop elsewhere in the mall to get similar product for a lot less," says Cohen.
Still, problems crop up when private brands are in direct competition with designer and national brands, adds Cohen. "Stores are relying very heavily on promoting to entice the consumer, and when you erode your margin through markdowns, even private label programs can't sustain enough margin to handle the competition and price deflation cycle," he says.
A bigger problem for department stores seems to be the under-performance of many national brands, which is forcing chains to look internally for better product.
Harry Bernard, executive vice president and chief marketing officer in the San Francisco, CA-based apparel consulting firm Colton Bernard, says most decisions at retail are based on margins, and if a national brand isn't holding up its margin in its category, the merchant will often look to replace it with a higher-margin exclusive label, or a private label. "The minute a brand loses its destination status, it becomes vulnerable," says Bernard.
Nonetheless, the bankruptcy of Macy's by 1992 underscores that private label programs can be risky, especially when brands are developed too fast or fashion miscues feed a rash of markdowns. That's why many retailers are expected to take a slow approach to adding brands and introducing them to new categories.
"For people who do it well, it provides a platform for creating merchandise that differentiates them from the competition," says Mark Minsky, senior vice president of merchandising at Doneger Group, the buying office and fashion merchandising consulting firm. "For those who are not successful, all it [becomes] is tertiary or secondary brands."
R. Fulton McDonald, president at International Business Development, a consulting firm, says stores are prone to repeat mistakes, such as making private label goods too fashion forward. "Retail stores are best at merchandising, but they often stink at designing," says McDonald. "Any private label effort has got to be managed extremely intelligently to be successful. You either stick to basics or add some fashion basics. It's still got to be branded product that provides the fashion leadership."
To succeed with private labels, retailers must secure product as good or better in quality than branded product and price it "noticeably cheaper" than national brands to provide the perception of savings, McDonald says.
Goals for Private Label Growth
Despite the risks, most department store chains have committed to building private labels. Saks' DSG has hiked its private label assortment to 12 percent since getting started in private branding in the mid-1990s. Its key brands include Relativity and Studioworks in women's wear, Consensus and Sezani in men's wear, Urit in kids' wear and Living Quarters in home fashions.
"We're looking to grow the penetration as quickly as we can over the next few years, but we want to do it in a reasonable, intelligent and profitable manner," says Eskenasi. "We are touching all businesses except cosmetics, dresses and juniors. Down the road, cosmetics will be the next frontier for us, followed by juniors, but we want to have a good strategy before we enter [those categories]."
A major initiative for Saks has been signing exclusive deals for brands such as Laura Ashley, Jane Seymour, Ruff Hewn and FAO Schwartz. "The feeling is that these brands have pre-existing equity and are immediately recognizable to the customer," Eskenasi says, adding that many of the exclusive brands will be supported by magazine advertising and Web sites.
Saks' immediate goal is to have private labels represent between 18 percent to 20 percent of sales, but Eskenasi says it may go higher depending on the success of the exclusive lines.
Dillard's ramped up its private label mix to 18.2 percent of sales in 2002 from 15 percent in 2001. Julie Bull, director of investor relations, says part of the department store chain's push reflects an effort to provide lower-priced product to customers "as they have become more value conscious."
The potential for higher margins also is a factor, but Bull says a key tenant of the drive is to replace under-performing national brands. "[We want] to have the best merchandise mix. It's a constant analysis," she says.
Key private brands at Dillard's include Preston and York, Roundtree & Yorke and the exclusive Daniel Cremieux, along with recent additions such as the better women's label Catherine Kelly and the Roundtree & Yorke Outfitters active lines. "We're working overtime on building awareness for our brands," says Bull.
May Department Stores is planning to expand private labels from 17 percent of sales to 21 percent in the intermediate term and 25 percent in the long term. In 2002, the firm launched two major labels, Be (later renamed Identity) and i.e., as well as its first national TV campaign promoting its proprietary brands. "Let me emphasize we are not only building the dominance of our proprietary labels, we're also moving to offer true proprietary brands," Gene Kahn, May's chairman and chief executive, said at the time.
Federated, which has been at the forefront of private branding with established labels such as Alfani, Charter Club and I.N.C., grew its private label brands to 16.4 percent of sales in 2002 from 15.9 percent in 2001. Its long-stated goal is to have private labels reach about 20 percent of sales. Last fall, it added the American Rag young men's and juniors label as an exclusive through Tarrant Apparel Group. "Offering exclusive product is one of the cornerstones of Federated's successful reinvent strategy - whether through merchandise we develop ourselves or product we offer in partnership with others," Terry Lundgren, Federated's president and CEO, has stated to the press.
Goody's Family Clothing, which touts private brands such as Baby Crew, Goodclothes, Ivy Crew, Mountain Lake for Women and RMG Chairmen's Collection, did about 21 percent in private label business last year, up from 19 percent in 2001. The retailer is exploring private label expansion into women's accessories, lingerie, handbags and hosiery. Donna Lerner, co-vice president of product development, says that while national brands "will always be very important to us," private labels encourage customer loyalty. "Everybody can go to market and buy the same [branded] things," observes Lerner. "[Private labels help] us to be different in providing a creative advantage and also provide a measure of meeting or exceeding quality expectations."
Gottschalks expects private label sales to grow to 14 percent this year from 12 percent in 2002 because of the launch of its GK children's collection. Other key brands include Shaver Lake and Sarah Bentley. Gladding says private label goods will eventually rise to between 15 percent to 16 percent of sales, but this will be a slow evolution as the chain finds the right balance. "Our customers know the brands, and we need the brands, so it's not an issue of us running away from brands. The issue is getting the right mix," says Gladding.
Nordstrom's private labels represent 17 percent to 18 percent of sales, and the chain has told Wall Street they could grow to represent 20 percent to 22 percent.
Moderate department store chains and discounters carry a heavier portion of private labels because they may not be able to obtain many national brands. Discounters also use private labels for fashion product and to upgrade their image. JCPenney, which does between 40 percent to 45 percent of its apparel sales in private label, is renowned for private label innovation, such as the development of the latest in wrinkle-free private brand shirts and the successful establishment of brands such as Arizona, Delicates, Stafford and JCPenney Home. Penney is launching an exclusive label this year with Bisou Bisou as well as the True Beauty by Emme plus-sized line, and emphasizing its private labels in ads.
Sears Roebuck & Co. has long been looking for some apparel brands to complement its hard line private brands such as Craftsman, Kenmore and DieHard. Last year's purchase of Lands' End and introduction of Covington, Sears' first exclusive brand that extends across the men's, women's and kids' categories, is expected to help. "We strive to have the best blend of national brands that our customer wants to buy, but it's equally important to have proprietary brands to exemplify the looks and quality Sears has to offer," says Lee Antonio, Sears' director of public relations.
In the discount channel, Target's "cheap chic" style regularly earns raves for its private labels, such as Cherokee and Merona, as well as its high-profile brand partnerships, such as Mossimo, Stephen Sprouse and Todd Oldham. "By making it hip to buy cheap, Target has set itself apart from competitors like Wal-Mart by targeting an upscale, young and trend-conscious customer base that had previously avoided the discount scene," says Peter Benedict of CIBC Oppenheimer.
Wal-Mart launched its private label apparel initiative in 1993, developing the Kathie Lee, Catalina, White Stag, Basic Equipment and Faded Glory lines. Its Mary Kate & Ashley kids' line has been a hit since its launch in 2001, while George, an updated career line acquired when it merged with U.K. retailer Asda, continues to exceed expectations. "We have worked hard for several years now to be on trend in terms of quality and timing," says Melissa Berryhill, a Wal-Mart spokeswoman.
The success of Kmart's turnaround effort could hinge in part on the success of its apparel and soft goods private labels, including such mainstays as Martha Stewart Everyday, Jaclyn Smith, Kathy Ireland, Route 66 and Sesame Street. Last year, it added Disney apparel for children and Joe Boxer apparel, accessories and home furnishings. It is launching Thalia brand juniors' and women's lines geared to the Hispanic market.
What Is the Impact on Brands?
With all of this private label expansion, a big question is: What does it mean for branded vendors, especially in the department store channel?
Many believe department stores need brands for fashion leadership. "The national brands are always going to provide the innovation in design and fabrications. That's what sets them apart," says Doneger's Minsky.
This fashion leadership could be the key differential to help department stores stem market share losses to chains and discount stores. "If they're not getting quality fashion leadership, then department stores are doomed," says McDonald.
Others point to retailers' increasing sourcing savvy as the bigger threat to brands. "Retailers have succeeded in challenging the brand's manufacturing cost structure, which has led to a questioning of the brand's equity at the consumer level," says Robert Rothbaum, vice president at Val D'Or, the branded and private label apparel vendor. "By offering an increasingly fashionable variety of lower-cost private label alternatives to the end customer, the retailer has gone from the brand's most important customer to now its most feared competitor."
The consensus is that brands as well as traditional private label importers will be challenged to keep their design and product development capabilities a step ahead of the stores. "If the brands don't have product that's better than the stores', there's no reason to be," concludes Rick Darling, president of Li & Fung USA.
THOMAS J. RYAN served as a financial writer and editor for 10 years at Fairchild Publications, covering business issues of the apparel/retail industry for Women's Wear Daily (WWD) and Daily News Record (DNR). He is a free-lance business writer and columnist, and his work has appeared in Ale Street News, Footwear News, Multex.com, Sporting Goods Business and wwd.com. He can be reached at 212-598-9902; e-mail: email@example.com