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How Retailers are Balancing Private-Label Profits and Pitfalls

Today the focus at retail is on achieving greater foot traffic and healthier margins, and increasingly retailers are relying on private label as the vehicle to help get them there. From grocery stores to department stores, retailers are putting more resources behind developing, launching and marketing their assortment of house brands.

But just because the industry at large is doubling down on private label doesn’t mean the venture is without its challenges. In beefing up these assortments, retailers must also ensure that risks are managed, the latest technology is adopted, and the brands are correctly targeted to their specific consumers.

Getting into the private-label game starts with determining which category and industry they want to invest in, deciding on whether they’d like to develop products in-house (which requires building robust design teams) or outsource the work to an apparel group, and most importantly, determining what to name and how to market their in-house brands, according to NPD Group chief retail analyst Marshal Cohen.

Cohen points to chains like Target, Kohl’s, and even discount retailers like Steinmart as leaders in the field. Additionally, Revolve Clothing, which acquired private-label incubator Alliance Apparel in 2015, is busy preparing for an upcoming initial public offering after developing its business primarily as an e-commerce apparel seller keen on influencer marketing and, accordingly, a slew of millennial-focused in-house brands. And of course, there’s Amazon, which is expected to hit $7.5 billion in private-label apparel sales this year, according to Coresight Research. The online behemoth has reportedly launched the Amazon Accelerator Program as a means of recruiting manufacturers to create products for its house labels.

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“The quality [of private label] has improved as has brand recognition,” says Bruce Zeitlin, president of Creative Apparel Solutions, which handles private label for retailers like Amazon. “The day of the licensee seems ancient and less relevant than it did 20 years ago, and private label allows retailers to have better control of their merchandise destinies at the best possible profitability.”

In other words, they have to have a game plan, says Alixpartners managing director Murali Gokki. “The strategy needs to be well defined for the retailer first,” he said, adding the first step is to determine the relationship between house brands and national labels. If the house collections will be supplemental products, outsourcing might be the route to go. In that case, he said, the margin payoff will be limited, but if the goods do the job of drawing the consumer, it’s still a win.

For retailers that are more invested and looking at private label as key brands in their organization, Gokki said retailers must focus on building out the necessary infrastructure. “It’s not just about product lifecycle management where you’re looking at building the concept to shelf or website,” he said. “It’s also about merchandise and consumer analytics and connecting the two to make sure you are investing in the right product and driving the right value for the consumer.”

With these insights, it becomes easier for retailers to see the “white spaces” that exist in the market, he added.

Ultimately, the principles of building a brand are the same whether it’s a retailer’s own or a national label, and it starts with the consumer. “Target has done this brilliantly. It [knows] it needs to be informed by crystal clear customer insights. What do they watch, who do they follow on Instagram, and which brands do they aspire to own?” said Elizabeth Shobert director of marketing and digital strategy at data analytics firm StyleSage.

Shobert added that knowing your shoppers in this way helps to mitigate the risks associated with developing private-label collections.

Jackie Wilson, founder and chief executive of the American Fashion Network, which designs and manufactures a host of private-label brands, said retailers have to deliver on the fit, quality, and aesthetic consumers expect.

“Sometimes you get a dog, or sometimes the fit is off. [Retailers] have to make-up the losses if something doesn’t sell with private label, so they do it on their initial markup,” Wilson said. “That essentially allows them to prepay for the markdowns if something doesn’t sell, but there are fewer markdowns because you’re really catering to the customer you know if buying the private label.”

To compensate for the added risks of pursuing private-label brands, retailers are beefing up the technology they use throughout the process. As Wilson explains, 3-D design is one way to increase margins after the initial, hefty investment in the tech. The technology would reduce the number of samples needed to procure an order, cut down on shipping costs, determine color assortments, and increase margins on both the manufacturing and sales sides. In other words: “3-D imaging is going to change the face of the private-label business,” Wilson says.

New tools like these are just one way retailers are increasing margins through private label. For Macy’s, those collections have been incubators for the company’s speed initiative. The department store chain revamped its entire merchandising structure last year based on tests the company ran in its private-label programs that showed smaller, cross-functional teams were more efficient. Today CEO and Chairman Jeff Gennette credits the changes with shortening the supply chain, speeding up decision making and boosting margins.

To get similar results, Gokki said retailers must put in the work to develop the processes and people necessary to execute a successful private-label campaign.

“Private-label collections do tend to take on a lot more risk from an inventory standpoint, and that’s an area where retailers really need to look at their systems and how sophisticated they are and how reliable their forecasts are and their expectations of margins through the lifecycle of the products,” Gokki said.

Ultimately, retail trends, like fashion trends, come in cycles, and Cohen said this one will have winners and losers.

“The thing no one talks about is what happens as so many retailers are focusing on developing private label, not all of them are going to be winners,” Cohen said. “More than half of them are going to be aggressive at clearing out and getting rid of private product, and that’s the untold story that hasn’t occurred yet but where we’re headed soon.”