NEW YORK — In mass market retailing, private labels might deliver fatter margins, but brands still pull customers into the store, according to retail executives and analysts.
The tug of war between private label and branded merchandise is perhaps more pronounced in the mass market than in any other, because intense bottom-line pressure causes severe scrutiny of profit margins and inventory management.
To some stores, private label remains the necessary ingredient for building margins, but for others, brands have become the key to image-building, especially in apparel.
Retail executives note that as the $202 billion mass market has boomed since the mid-Eighties, some stores — like Sears and ShopKo — have become more sophisticated in their approach to brands, especially over the last year-and-a-half. Others — like Kmart — have stood firm with their private label programs.
Key growth areas for mass market brands include sportswear, foundations and trendier fashion. Areas where private label is holding its own include commodities like T-shirts, tank tops, turtlenecks and other basics, where there is less fashion risk.
Observers note that brands help build a store’s identity and define its niche with consumers, whether they’re powerhouse national brands like Chic/HIS or dominant private labels, like Kmart’s Jaclyn Smith in apparel.
Stocking national brands means mass retailers can take advantage of the manufacturer’s advertising and image. But this exposure has a down side: Some of these costs get passed along and therefore the cost of outside brands can be high. As a result, many mass merchants have sunk tremendous effort and capital into developing their own labels.
Private label merchandise is a bigger player in areas like health and beauty aids, carbonated beverages, cleaning products and food. According to the Private Label Manufacturers Association, dog food was the top private label product in 1993 at mass market discounters, with sales of $283 million. The highest-scoring apparel category was hosiery, which ranked eighth, with sales of $61 million at discounters last year.
Even with the focus on in-house brands as a way to improve margins and maintain better cost controls, apparel — particularly fashion merchandise — is more difficult to saturate with private label.
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Carl Steidtmann, chief economist for the Management Horizons division of Price Waterhouse, said the reason most mass merchants have developed their own labels is simply for bigger margin.
“There’s a much higher gross margin with private label than with outside brands,” he said, “although there’s a much higher risk, too.”
Perhaps the best example of an apparel private label nurtured by a discounter is Kmart’s Jaclyn Smith collection, which is marketed in sportswear, accessories, hosiery and perfume.
In a survey conducted last year by WWD, the Jaclyn Smith brand was the 27th-most-recognized women’s apparel brand in the U.S. It is the jewel in Kmart’s stable of private labels. The discounter, the nation’s second-largest retailer — Wal-Mart is the largest — claims that 30 million American women wear Jaclyn Smith products.
“Jaclyn Smith definitely brings people in,” said Rick Pellino, divisional vice president for women’s wear at Kmart. “But it’s important to have the right mix of brands and private label in the right categories. You can’t live without the national brands.”
Denim is one area that remains a branded business, observers concur. Pellino said Chic, for example, is a key branded jean across the U.S., and customers come to Kmart for that brand. Other key brands at Kmart in jeans are Brittania and Sasson.
Intimate apparel and lingerie are other categories where brands are critical, Pellino said. In intimate apparel, key brands include Hanes Her Way, Playtex, Just My Size and Bestform.
“In areas where fit is especially important, [national] brands have the potential to be more significant,” he said.
Women’s sportswear, particularly casual and career-oriented separates, is another area where private label can dominate, Pellino said. Similarly, trendy fashions and quick-turn merchandise do not need to be branded.
Pellino said 70 percent of Kmart’s women’s sportswear is private label, including its Jaclyn Smith and B.E. lines. The company also offers private label merchandise in denim with its Denim Republic label, although this is a small percentage of its denim offerings. In active and bodywear, Kmart promotes its Rachel McLish for The Body Co. brand.
“The denim business is still mostly branded,” agreed Steidtmann. He cited the major players — Levi Strauss, Guess and Lee — as continuing to dominate the business, although he said the market is reaching maturity.
In contrast to Kmart’s philosophy, ShopKo has spent 18 months slashing the amount of its private label in favor of brands, according to Skip Chustz, senior vice president of apparel. ShopKo has also narrowed its vendor structure to focus on key brands.
He said ShopKo has reduced its private label by 40 to 50 percent because it is not equipped with a full design staff.
“We’ve also found that dealing with long lead times and off-shore sourcing is not in our best interest,” he said. “Brands can respond better to fast changes.”
Chustz said the vendor base was also cut by 20 to 25 percent so ShopKo could become a more important account to the manufacturers with which it does business.
Areas where the company still maintains private label are in basics, like T-shirts and tank tops — “categories where there’s not a lot of volatility in assortment and not a lot of fashion risk,” Chustz added.
Certain brands, particularly in women’s and men’s bottoms and in children’s wear, have a franchise with the customer. Chustz said these brands have gained the confidence of the consumer, and they are a drawing card. Among key brands at ShopKo are Chic/HIS, Brittania, Trends, Memphis, Wrangler, Rider, Tapestry and Cape Cod.
Robert Mettler, president of the apparel division of the Sears Merchandise Group, said the company is making “good progress” toward having the right proportion of brands to private label. Sears has said it has an overall goal of 50 percent private label and 50 percent brands. Sears’ mix has been 60 percent private label and 40 percent brands. That is a storewide ratio, and certain categories, like hard goods, might have more private label than others.
“The junior business is 90 percent branded, mainly because it’s so fast-paced, fashion-driven and item-driven,” he said, adding that because of the fast turn, dresses is another area where most of the merchandise is branded.
But private label has its strengths. The value, quality and distinctiveness private label offers can help develop an important association with customers. In-house labels, like Jaclyn Smith, or Sam’s American Choice, Wal-Mart’s powerful grocery line, often develop as high a profile as some national brands. “The days when private label just meant margin are over,” Mettler said.
“If the brand has an enormous following, you have to determine the value of stocking it versus a private label.” Examples include Levi’s, Dockers and Lee, which are key draws at Sears.
Mettler said some of Sears’ main private labels in women’s sportswear are Middlebrook Park and Carriage Court. He concluded that brands have to earn their stripes, and producers must continue to deliver quality merchandise.
“If a manufacturer thinks that sales are guaranteed based on history, he is mistaken,” he said.
Marjorie Barnes, vice president of fashion and product development for Caldor Corp., said the retailer focuses on offering the customer the right item, in terms of fashion, quality and price, whether it is from a national brand or a private label.
“We have fine-tuned our branded assortments over the past three years, but we haven’t made any effort to increase our private label assortments. They have remained fairly steady,” she said.
The ratio of branded to private merchandise varies by category, and even by season, she noted, because it depends on what the company can purchase on the outside versus how it can source on its own.
She concurred that jeans and foundations are two areas where brands play a key role. Among Caldor’s important brands are Rider, Chic and Brittania jeans, and Fruit of the Loom, Hanes and Vassarette in innerwear.
Key house brands at Caldor are Sarah Morgan, Flying Colors and Laura Tyler in separates.
“Sometimes we leave it to a national brand to provide a trendy, fashion item, but other times we can do it faster ourselves,” she said. Caldor will most often source directly on items “where we feel most comfortable that we know exactly what the customer wants.”
For example, the company runs a private label turtleneck program that Barnes said is a top quality cotton and spandex item, in fashion colors, and sells very well.
She noted that the company generally tries not to duplicate branded and private label merchandise, to avoid a two-tier pricing war within the store.
One consultant said brands are crucial for mass merchants because they help build credibility. “By definition, mass marketers distribute to the bulk or mass population,” said R. Fulton Macdonald, president of International Business Development Corp. “To give retailers credibility, they need to select and edit the best products at the best possible prices. They must also provide strong brands that have already been accepted by the masses as valuable or desirable. Here, the mass merchant relies on the one-two punch of brand image building, coupled with consumer acceptance.”
He said brands make the editing step easier for mass retailers, because the qualities of the brand have been presold to the consumer.