To support their private label expansion, retailers are looking to improve their product development skills by beefing up internal design staffs and sourcing capabilities. Although many still use U.S. buying offices and private label or branded vendors to procure proprietary brands, more are buying direct from global contractors and setting up extensive foreign offices to better communicate with them.
As expected, cost is a main driver in their desire to buy directly. "If you can source it yourself, you obviously get more margin," says Janet Cunningham, manager at Kurt Salmon Associates.
But Rick Darling, president of sourcing giant Li & Fung USA, says the primary objective of department stores is to create vertically integrated branded organizations, such as those of specialty stores like Gap and The Limited. This is a natural evolution as they take more responsibility for building their private labels, says Darling, who observes: "If they take control of the brand, the next logical step is taking control of production."
Retailers say cost is only part of the sourcing equation. "We have a lot of moving parts - trends, design, brand management, quality, sourcing - and we're making big improvements in each area, all with the effort to be first to the customer with affordable fashion and quality in our private brands," Peter McGraph, JCPenney's senior vice president and director of product development, said at an analysts meeting in April.
Large retailers such as JCPenney have the most sophisticated sourcing capabilities. JCPenney, which operates 21 sourcing offices worldwide, has "significantly strengthened" design capabilities during the past 18 months to be quicker to market with trend-right merchandise, McGraph told analysts. As part of the process, the company evaluated 1,800 global mills and selected slightly more than 100 to meet its sourcing needs "today and into the year 2005," McGraph said. It has also established a new fabric team to do fabric research and development worldwide. So far, lead times have been reduced by 33 percent, he said.
On the department store front, the Federated Merchandising Group orchestrates the private label development for Federated's divisions, although some private labels at Bloomingdale's are sourced through the Associated Merchandising Corp. (AMC), the buying office acquired by Target Corp. in 1998.
May Department Stores employs approximately 850 worldwide in its sourcing division, with offices in St. Louis, MO; New York City; and 10 countries.
Dillard's works with agents overseas through product development teams located in Little Rock, AR, and the Dallas/Fort Worth, TX, area, and continues to grow its internal design staff. "We believe outside design talent is crucial, and that's been the area that we're really working hard on in growing these private labels of our own," Dillard's CFO James Freeman told analysts during the firm's fourth-quarter conference call.
The Saks Department Store Group (DSG) has significantly increased its internal design staff during the past five years, and it principally uses the AMC for sourcing. "They [AMC offices] are in the overseas markets, and they're working with our vendors to help ensure they meet our specifications," says Peggy Eskenasi, executive vice president of private brand development for Saks DSG.
Saks turns to U.S. private label importers for value-added components. "They might have a design capability we lack or product capability that we were unable to develop ourselves," says Eskenasi.
At Goody's Family Clothing, about 75 percent of private label production is arranged through agents in the Orient, while the remainder is handled by U.S. private label importers. Although going direct typically offers higher margins, importers often have greater buying leverage, says Donna Lerner, co-vice president of product development, Goody's. "Sometimes we may only want 4,000 pieces, and the domestic importer will be buying 50,000, so they can get a better price because they have the volume," says Lerner, adding that the retailers' buyers are working to establish quick-turn programs to help eliminate inventory risks.
Gottschalks uses primarily U.S. importers to source its private label goods. Typically, the importers are doing similar programs for other retailers, and their lines are tweaked to create something unique for Gottschalks. "We're not designers," says Gary Gladding, executive vice president and general merchandise manager at Gottschalks. "You want to find someone who does this for a living."
As retailers take more control over their sourcing supply chains, U.S. private label vendors are challenged to become more efficient at merchandising and product development, such as in bringing innovative fabric and silhouette concepts to the table. Cost also is a major issue as more retailers are aggressively bidding online through reverse auctions for private label contracts, especially for basics.
Robert Rothbaum, vice president at private label vendor Val D'Or, says he believes retailers will require all private label vendors to have Web-based systems for retail sourcing and buying groups to access to monitor the status of development projects and production orders. "Their quality requirements are getting tighter and more stringent with each season," says Rothbaum. "At the same time, they are requiring lower and lower prices from vendors to be able to offer consumers significant value at retail."
- Thomas J. Ryan