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Kohl’s New Strategy: Emphasize National Over Private Brands

In what appears to be a dramatic departure from a two-decades-long love affair with its own private label brands, Kohl’s has reportedly decided to refocus marketing emphasis on marquee national brands like Nike and Levi’s.

Kohl’s has been compelled to push national brands because its private labels have suffered by comparison. According to a recent consumer study issued by Kantar Media, the percentage of Kohl’s shoppers who prefer its own brands has declined from 10.8% in 2007 to just 7.8% in 2011. For the third quarter specifically, in which the retailer saw its store sales dip 18%, only 9.5% of its most frequent shoppers reported favoring its own private brands, considerably lower than the 10.8% registered by J.C. Penney or the 16.2% enjoyed by Macy’s.

UBS analyst, Michael Binetti, speaking to the Wall Street Journal, said, “The biggest strategic mistake for Kohl’s has been pushing the penetration of its private brands from 30% in 2007 to over 50% in 2011. By contrast, Kohl’s consumer has been clearly telling the company that it doesn’t like the private/exclusive label merchandise in stores for years.”

Apparently following the opposite approach of J.C. Penney, which has been aggressively pushing its own, cheaper private label products, Kohl’s is redesigning its stores to showcase the national brands it carries. For example, Kohl’s will be featuring a completely revamped beauty section, drawing attention to brands like Lorac.

Kohl’s about-face is garnering attention since conventional wisdom recommends that a retailer favor its own private brands which are generally much more profitable and fetch superior gross margins. National brands, however, can be easier to sell since they better consumer recognition and powerful marketing campaigns boosting them.

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And Kohl’s needs a sales lift after a sluggish third quarter. The retailer reported a quarterly profit of $177 million or $0.81 per share down from $215 million or $0.91 per share for Q3 in 2012, failing to satisfy analysts’ expected earnings of $0.86 per share for the quarter. Also, the company’s net sales dropped 1 percent to $4.44 billion from last year’s $4.49 billion. Industry experts had forecast $4.55 billion.

And many experts have expressed anxiety that it might hurt Kohl’s to pivot away from more profitable private brands just in advance of a holiday sales season everyone is expecting will further reduce margins. In fact, a recent Morgan Stanley report implicates  Kohl’s competitor J.C. Penney as a cause of the coming holiday shopping malaise. Their much anticipated maelstrom of promotional offers might trigger a chain of comparable discounts from their competitors, forcing down gross margins for the entire industry. The study likened the domino effect to the hitting of a “panic button,” which sends anxious reverberations across the entire soft-line retail sector. “We predict JCP will offer extremely deep discounts early in the season…putting pressure on other retailers to do the same,” the report said.

Still, others wonder if Kohl’s turnaround strategy will inspire an industry wide revision of the preference for private brands.