Everybody’s doing it.
Just as sure as nothing good follows such a statement when used to justify human behavior, the same is likely true in business.
As cash-strapped retailers clamor to combat digital disruption and shifting consumer-spending patterns, many have turned to private label brands as a means to overcome price wars with competitors.
Walmart, Target, JCPenney, Kohl’s and Nordstrom have all boosted their private label offerings in recent months — adding new brands, ditching old ones and reimagining existing in-house labels that lost their luster. Meanwhile, the grandfather of all digital disrupters, Amazon, has all but leaned on a private label roster to steer its foray into fashion.
“What has been consistent is that private label serves two purposes for a retailer: It helps with margin management and — particularly, in today’s environment — it helps with price comparison,” explained Katherine Black, principal of retail and consumer strategy at KPMG.
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Indeed, the Internet’s ability to create immense price transparency has aided bargain-hunting consumers who are able shop and compare items without leaving the comfort of their homes. As expected, when identical branded products are sold from retailer to retailer, price becomes the obvious differentiator. This often leaves retailers in a price-war-induced race to the bottom.
Although private labels have justifiably emerged as an effective tactic for firms to combat these issues, experts seem to agree that retail stores are in for a challenge as they seek to reap the benefits.
“Private label is inherently challenging for retailers to execute and that stems from the fact that they aren’t necessarily proven experts in developing content, sourcing and managing in the same way that true wholesale brands are,” explained B. Riley FBR analyst Jeff Van Sinderen. “Product content is arguably the biggest pitfall — and that includes styles and sizing. Managing quantities, inventory, initial markup and mark downs are also a challenge.”
As a result, although private label margins should be better than those of branded products, in practice, that’s not often the case, according to Van Sinderen.
What’s more, many retailers stumble down the rabbit hole of assumption when it comes to their in-house offerings.
“Retailers who are attracted to private label brands for margin management and for managing price transparency have to remember that the brand still has to be appealing to consumers for that strategy to work,” Black cautioned, noting that customers don’t simply want cheaper wares. “[Companies] really do need to treat [their private label offerings] like a brand, which has not always been the case.”
In the pursuit of the financial perks of private label, Black said overzealous retailers can give over too much shelf space to their in-house brands and ditch national names that are still relevant to certain customer segments.
“You need to know the customer [your private label brand] targets,” Black explained. “Your [in-house offerings] can’t be a replacement for every brand that’s out there — you have to know who you’re targeting and have that in mind as you build out your brand portfolio so you have something for all of your customers in the store.”
To that end, it’s critical that retailers also recognize that the quality of their in-house products will make the difference when it comes to how consumers ultimately choose to spend their money.
“Content is king,” said Van Sinderen. “Nobody wants bad product at any price and we have seen plenty of private label merchandise that has not lived up to consumer expectations. … If the content is strong, discounting can be less aggressive and that helps margins.”
And lest companies forget: Good product should be supported by high-quality marketing.
“Investing in the right marketing is important,” said Black. “Because retailers are getting co-opt and funding from their national brands, often times they leave out their private labels from their core marketing.”
She added, “But these brands have to be cultivated — they need a social strategy, appropriate trade strategy and the right amount of advertising to build a [following].”
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