The Right Mix: Brands vs. Private Labels

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The Right Mix: Brands vs. Private Labels

By Thomas J. Ryan, Contributing Author - 02/02/2004

Department stores are increasingly looking to ramp up private label penetration in order to enhance margins and provide greater differentiation on the selling floor. As they were in their beginnings in the '80s and '90s, private labels continue to be heavily featured in opening price point ranges in order to meet the shopper's demand for lower prices, or "value." But many of the major chains - especially as they become more adept at designing and sourcing fashion-oriented product - are looking at private labels to replace lagging national brands in moderate and better classifications.

"I think all retailers are constantly looking at their vendor matrix and ensuring that each vendor on that matrix is performing up to the standards that have been established for it," says Peggy Eskenasi, executive vice president of private brand and label development at Saks Inc.'s Department Store Group. "If [a vendor] doesn't measure up, [the stores] see it as an opportunity to replace it with a private brand or another national brand that has more potential."

At the same time, department stores recognize the risks of private label programs, including fashion missteps and the fact that they can't turn to the vendor to bring back product or negotiate a chargeback.

"It's an issue of how good you are at it," says Gary Gladding, executive vice president and general merchandise manager at Gottschalks. "If you pick the right merchandise and flow it correctly, it makes sense. But if you pick the wrong merchandise, fabric or color, then you've got a real problem."

Finally, department stores realize that having a plethora of established and up-and-coming brands is a major competitive advantage against specialty chains such as Gap and Ann Taylor, as well as the mass merchandisers such as Wal-Mart and Target. As such, national brands will likely continue to play a large role in their mix.

"Brands are nationally advertised and have the perception of quality and style that it takes years for private labels to [reach], if [they] ever [do]," says Gilbert Harrison, founder and chairman of Financo, financial advisors and consultants to the apparel industry.

Weighing the risks and benefits of private label programs is what, increasingly, keeps retail merchants awake at night. While much depends on each chain's ability to design and source private label product efficiently, the decision process for all chains involves a painstaking analysis of sell-throughs and profitability at each category level.

Some chains continue to play it safe, using private labels for opening price points and basic fashion items in less fashion-sensitive categories, such as sweaters, knits, pants and home furnishings. Others, with more advanced and widespread sourcing arms, such as Federated, JCPenney and a few other majors, are increasingly featuring private label in fashion-forward categories, such as juniors, young men's and kids, as well as in classifications such as intimate apparel and footwear, traditionally dominated by national brands.

Margins and differentiation drive choices

David Bassuk, principal and merchandising specialist at Kurt Salmon Associates, specializing in merchandising and private brand development, says department stores clearly have an incentive to expand private labels across categories because private label margins run between 6 percent and 10 percent higher, on average, than national brands. Also, private labels address consumer demand for differentiation.

"What consumer research shows is that shoppers are looking for newness and variety. They're tired of the same old thing," says Bassuk. "So retailers are looking to develop brands themselves and make that their competitive advantage."

Bassuk says decisions on whether to increase private label efforts are based on the continued perusal of weekly selling reports of brands in each category, especially analyzing margins and turnover. He also says retailers are increasingly looking at the percentage of products that are unique in each classification in order to reach a storewide goal of having greater proportions of exclusive product across the chain.

Additionally, Bassuk says retailers overall are placing more attention on the profitability of each brand, and are much less patient about supporting a national brand that draws traffic but loses money.

"There's not a lot of receptivity to brands that are losing money these days. Brands have to make profits or be shut down," he says.

Walter Loeb, veteran retail analyst and consultant at Loeb Associates, concurs that the profitability of the line on the selling floor is increasingly the major determinant that leads chains to eliminate brands or reduce their presence in stores in favor of private labels. With slower top-line sales, chains are particularly looking at the depth of markdowns required to sell-through a line, according to Loeb. And although back-office maneuvers such as chargebacks and margin guarantees provide some end-of-season relief for retailers and preserve vendor relationships, it's increasingly not enough to keep the brand on the shelf.

"Markdowns today are such a huge part of the business that any elimination of markdowns adds to the profitability of the store," says Loeb. "That leads to the whole question of price optimization because today people are looking to optimize the product and to have as [few] markdowns as possible."

Kenneth S. Lakin, chief executive of department store chain Boscov's, says that while higher margins are part of the motivation, the decision to use private label is largely driven by consumers' needs. He says Boscov's "purposely looks to fill gaps in consumer demand" with private labels, depending on the category. In some cases, Boscov's may bring in a private label as a lower-priced alternative to a national brand in order to meet shoppers' need for lower prices. In others, more stylized private label lines may replace "brands that are not delivering."

"Brands don't fill every person's equation of value all the time and that's the opportunity to bring in a private label," says Lakin.

Lakin also says private label allows chains to follow through on a hot trend. "You may have a dress that blew out in a season," Lakin explains. "The manufacturer moves onto the next thing and that style may be dead for them. But you want to repeat it because you still feel you have consumer demand. You can do that with a private label."

In the same vein, after noticing that key status jeans fly out the door when reduced to a certain price point during clearance season, Boscov's merchants might introduce a similar jean under a proprietary label at that price point.

"It's all about meeting customer demand at the market that for some reason had not been achieved," says Lakin. "Shoppers vote with their dollar every day."

Overall, Lakin expects that Boscov's will remain heavily branded. "Our customer seems to like brands as part of the value equation," he says. Private labels account for about 16 percent of sales, and Lakin expects they'll grow to about 20 percent.

Saks' Eskenasi says the demand for higher margins and greater differentiation drives the push toward private labels, but she says much depends on the category. For instance, she notes that Saks so far hasn't done much private label in dresses and juniors, but has found success in moderate missy sportswear. "It's a place where we're very successful in our sales, margins and turnover," says Eskenasi.

She adds that although retailers can drive private label penetration by introducing new and licensed brands, ultimately the future direction of both private labels and national brands is determined by sell-through rates. "I think each brand will seek its own level as it develops and based on its performance," says Eskenasi. Private brands account for approximately 15 percent of Saks' mix and should reach about 17.5 percent in a few years, she predicts.

Gladding says Gottchalks' private labels, which account for about 14 percent of sales, tend to focus on opening-to-moderate price points, though he also says it largely depends on the category.

"It's got to be a classification of merchandise that can support two to three layers of business," says Gladding. "An opening price-point private label, then a moderate brand, and maybe a step-up brand on top of that. But it has to be able to support at least two levels of business."

He notes, for example, that some categories are dominated by strong moderate brands so that an additional private label line isn't necessary. "We don't do private label women's coordinates, for example, because we have the Donners and Korets of the world there. Based on their expertise and their pricing, it wouldn't make any sense for me to do it."

Gladding also says some categories, such as dresses, which have a lifecycle of about eight weeks, tend to carry too high of a fashion risk for private labels. However, he says men's and women's sportswear, as well as soft home fashions and cook wear, provide ample opportunities for private labels.

"Typically where we do private label is in pretty predictable kinds of merchandise. The kind you sell year-in, year-out and [with which] you're not taking big fashion risks," says Gladding. "There's some trend risk, but you're not being real fast in terms of fabrics and silhouettes. Clearly, in terms of advantages, it gives you product differentiation vis-a-vis your competition and theoretically, you can provide as good or better quality at a lower price point and still have better margins."

Overall, Gladding says Gottschalks' private labels are designed to complement its national branded assortments rather then replace them.

"What we try to do in private label is offer an alternative but not necessarily gobble up the brand," observes Gladding. "We have lots of brands that are important and the customer accepts them. So it's a balancing act across every classification. And every store is going to blend it differently because of who their customer is and where they want to position themselves."

George Smith, general manager of brand management at the Bay division of Hudson's Bay Co., says Bay is foremost a "house of national brands," but looks at private labels and captive brands to provide differentiation.

"One of the key execution levers for the company is exclusives," says Smith. "If it is only available at the Bay, we can adopt an everyday fair price that allows the consumer to shop with confidence and we do not have to concern ourselves with competitive 50-percent-off tactics on an artificially-inflated suggested retail price."

Smith says finding the right assortment of brands and private labels is largely driven by consumer demand, and greatly depends on whether or not the brand is commodity driven, or more lifestyle-assortment focused.

"It is important to know which is which and to manage each of them very differently," says Smith. "In addition, our brand assortment travels through a lifecycle in the customer's eyes and knowing where a brand resides in the customer's mind affects how and what we offer, how we market it and how we present it. [Currently,] we feel the 25 [percent] to 30 percent blend of captive and private brands with a significant number of national brand exclusives will achieve our goals and satisfy the market's needs."

Onward toward fashion and creating destination brands

A more recent push for some of the major chains has been creating destination brands, which are replacing national brands, and also plunging deeper into fashion.

Federated, with INC and Charter Club among its private labels, and JCPenney, notably with its success with Arizona Jean Co., are seen as the frontrunners in creating star in-house brands. However, Dillard's, May and Saks also are putting major advertising campaigns behind their key proprietary brands, and also are providing their brands with better positioning and fixturing in the store.

"What you're getting now is well-designed, quality merchandise that's exclusive," says Loeb.

While these premier private labels are replacing tired national brands and adding differentiation, retailers also benefit by building sizeable volumes.

"Retailers really want brands that are over $200 million in size because that's when you're able to get a huge profit benefit," says Bassuk.

Boscov's Lakin also notes the advertising payback of running one brand across categories, such as using a common label across men's, young men's and boys'. "We want to gain some mass within the store because that helps the overall branding," says Lakin.

Part of the push toward building premier private labels involves moving further into fashion, particularly in areas such as juniors and special sizes. Kathy Bradley-Riley, senior vice president at Doneger Group, believes many department stores are experimenting more with fashion due to the recent strong fashion cycle in the market. "At this point, a lot of private label programs do contain fashion-right product. It's not necessarily fashion basics and not necessarily fashion cutting edge, but fashion-right," she says.

Bassuk believes the push into fashion comes as many private labels have graduated from being "filler product" on store shelves to brands in their own right. "They've broken through to become brands that consumers can totally relate to and that's when they become more fashion-oriented and differentiated," says Bassuk.

He also says the fashion-forward push reflects past successes and investments in design talent and sourcing capabilities.

"There's definitely a trend toward fashion for private brands," adds Bassuk. "They're going from traditionally four seasons per year to six to 12 seasons per year, meaning much more frequent introduction of fashion items."

As expected, moving into fashion only heightens the risks of private label programs. Financo's Harrison notes that even the Gap is still recovering after several fashion mishaps in the '90s alienated customers.

"The problem with fashion brands is that they may be in for a short period of time and the department store chains don't have the ability to change the assortment quickly the way the specialty chains do," says Harrison.

But Lakin says faster access to information is reducing fashion risk, and department store merchants are up to the challenge of delivering the best package of branded and private labels.

"The buyer's job is a hot seat position and it's always been a hot seat position," says Lakin. "They're bright, energetic and well-paid people who enjoy that kind of juggling act. You have to be flexible, and you're constantly looking at productivity issues and adjusting. Retail has always been [about] adjusting to changing conditions and to the extent we can do that, we can all survive."