But in its new study, Deloitte said increasing private label sourcing is one way to win in the midst of this ever-shifting landscape.
“Private label—accounting for more than one in every $6 of spend in the Unites States—represents a significant opportunity for retailers to drive margin, differentiate products, and serve consumers’ wide and changing tastes,” the report noted. “Retailers looking to achieve results should continue to evaluate and grow their private label sourcing capabilities.”
There are five major trends making private label sourcing more important today:
- Omnichannel operating model – Increasing channels and growth of online merchants are driving margin pressures on national brands, but private label sourcing allows for development of more sophisticated offerings to combat that competition.
- Customer insights – Advanced analytics are improving the understanding of customers, and private label sourcing can let retailers leverage those insights and quickly develop product that meets constantly changing preferences.
- Regulatory pressures – Changes in the regulatory landscape will impact retail, though with private label sourcing, retailers can drive greater transparency that will better equip them to respond to requirements.
- Conscious consumerism – Consumers increasingly want the companies they buy from to provide a positive social and environmental impact, and with private labels, retailers can have greater control of a product, its origin and manufacturing so they can dictate their own impact.
- Innovating across the retail ecosystem – Companies are already reaching across the value chain and partnering to create beneficial initiatives, and private label sourcing drives retailers to build closer, more strategic relationships with manufacturers, which lends itself to better product efficiency and speed to market.
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Private label sourcing pressures
Private label product accounts for roughly 16.5% of all purchases, according to the report, and 36 percent of apparel retailers create private labels to offer lower priced assortment options at the same quality, while 28 percent do so for differentiation.
The top market pressures apparel retailers said they face today are demand for greater speed to market, raw material cost increases and/or volatility, demand for greater speed to market and rising production labor wages.
“Overall, the rising pressure to address speed to market and supply chain integrity considerations may indicate the beginning of a shift for private label, particularly as consumers are demanding products faster and with increased exposure to the sourcing process and integrity,” the report noted.
To combat some of these sourcing pressures, retailers are enhancing quality assurance programs, investing in innovation, R&D and collaboration with vendors, and using advanced planning and scheduling.
And in looking ahead, the number one thing retailers said they would soon employ, is reshoring production to domestic vendors.
Shifting sourcing strategies
“Retailers appear to be serious about reshoring, but many have not been successful,” the report noted. Just 50 percent of apparel and general merchandise retailers indicated success in reshoring, while 69 percent of grocery retailers said they have done well in buying domestically.
Low return on investment, a difficult labor market and challenging regulatory and operating requirements were among the top barriers to reshoring retailers cited.
“These barriers serve as a reminder that the decision to reshore cannot be made in a vacuum. A whole ecosystem must exist—skilled labor, supply chains, infrastructure, and a navigable regulatory regime—to facilitate success,” according to the report.
Retailers are steadily working to balance today’s pressures and their sourcing strategies are shifting to suit. In surveying actual and expected shifts in retailers’ source of supply, Deloitte found that China and Mexico are still stable sources, Vietnam is showing significant growth and it’s poised for more, and that while sourcing in Bangladesh, Cambodia, Indonesia and Thailand showed an uptick in the last couple of years, popularity for those places is expected to dip in the next two years.
Operating model upgrades
More than just shifting sourcing strategies, retailers are changing their operating models—making structural changes, investing in governance processes and technology—to manage sourcing.
Seventy percent of retailers surveyed said leveraging company employees to run their sourcing functions while just 12 percent said they are using third-party buying houses or supply chain management companies. In fact, 52 percent said they are moving away from using supply chain management companies.
But according to Deloitte, scale matters when eliminating the middle man.
“Disintermediating third-party brokers eliminates the fees paid for those relationships—5-8%, depending on the category—but they come with the cost of taking on the management of more aspects of the value chain,” according to the report. “Even where the cost is lower, some organizations choose to maintain relationships with third parties due to time and effort required to build capabilities internally.”
There’s no shortage of pressures plaguing retailers today, but Deloitte said private label sourcing is helping companies meet the demands of today’s market through greater assortment control, supply chain visibility and closer supplier partnerships.
“Retailers are facing significant shifts in their operating environment,” the report noted. “Private Label sourcing has the opportunity to play a significant role in retailers’ responses to these changes.”