PRINTABLE VERSION HERE

The IADS Academy programme, a 27 year-old tailor-made mentoring workshop open to our members’ high potentials only, promotes cooperation and future orientation. Over the years, the IADS Academy have trained 180+ executives from 28 companies in 21 countries, some of whom reached top positions in member and non-member companies (for IADS only, 3 CEOs and 1 COO in 2020).

Introduction: Private Labels are an everlasting question

Considered a key topic by the IADS member CEOs, the question of Private Label profitability is constantly on department stores’ minds since margin enhancement is the first reason to carry Private Labels. So, it was no easy task for the 2022 IADS Academy participants to answer a question that has been asked many times at all decision-making levels in their companies.

At the beginning of their 9-month journey, the Academy group reflected on 2 different Private Label models: John Lewis and Marks & Spencer. In parallel, the International University of Monaco (IUM) partnered with the IADS to offer insights about additional case studies: Target and Nordstrom. Having worked on the topic with Galeries Lafayette, the Kéa & Partners consulting company was invited to share their vision on the Private Labels business. Finally, the group reflected on their own organisations, figures, strengths, and weaknesses to decide the most important KPIs to consider. Starting from reviewing department store members’ businesses and collecting best practices, the group built their own vision for a more profitable Private Label business.

All participants were invited to present the result of their research during the IADS 63rd General Assembly held in Geneva, as the tipping point of the hard work put into the Academy program. It included hours of research, collaboration, and discussions in small groups, as well as online meetings, some of them involving the benevolent support of Mr Jérôme Gilg, the Academy Mentor, and Mr Peter King, the Academy Dean of Honour.

Taking a step back: getting a larger perspective on Private Labels

Case studies: John Lewis, Marks & Spencer, Nordstrom and Target

John Lewis’ Private Label business is regarded as a growth driver. Participants studied ‘Anyday’ own brand, which was recently expanded with prices 20% to 40% lower than John Lewis' other own brands. The label is seen as a step towards modernizing its branding as it intends to offer customers John Lewis’ quality at lower prices. John Lewis is usually perceived as a ‘rather expensive place to shop’, but research shows that Anyday's promotional effort (£500m were invested into pricing and promotion to change customer perception) seems to be working: 25% of Anyday shoppers are either new or reactivated customers, as well as younger, yet less wealthy shoppers. This strategy comes with risks, identified below:

-    The value push could damage the premium status and dilute the brand which used to be aspirational.

-    Anyday tries to reach a new segment of customers, which might leave the usual John Lewis shopper behind.

-    The strategy puts de facto John Lewis against a different set of competitors, such as Primark.

-    A wider range of price positioning holds the risk of losing margins.

-    Staffing levels and service standards will be more difficult to maintain in-store.

As a strategy built on cheap prices didn’t fully convince the participants, they also reviewed Marks & Spencer’s Private Labels which have been simplified and reduced to increase performance. With long-term efforts on brand building, their products are perceived to be high quality among competitors. Interestingly, the company also has a strategy of buying out existing brands (such as Jaeger) and onboarding third-party brands (such as Ted Baker and Superdry) to muscle their offer as well as to be more popular and fashionable. As for John Lewis, the product diversification strategy aims at covering all age groups, including younger segments. Results seem promising: third-party brands account for 4.1% of the clothing and home sales, bringing in £70m of revenue in 2021.

The IUM was tasked to work on Target and Nordstrom business cases and issued their conclusions:

-    Nordstrom should reward associates more for selling Private Labels over other brands. Also, IUM students proposed creating online community spaces where customers could be rewarded for engaging with Private Labels. Finally, students proposed to improve Private Labels by including differentiated collection and visual merchandising strategies for fall-winter and spring-summer.

-    Target: students discovered that price is no longer the primary factor for customers. Quality is gaining more importance in building customer loyalty and encouraging repeat purchases. IUM students highlighted the need for good communication and an updated presentation of Private Labels whether that is done through the product quality or within the store layout, such as using shop-in-shop formats.

Learning from transformation and strategy experts

Kéa & Partners was invited to share their vision on Private Labels in department stores. Alongside the challenge of meeting consumer demands and competing with global brands, running a Private Label means navigating difficulties in the supply chain, dealing with contradictory if not unclear objectives, and finding the ideal margin equation for creating value for the consumer and the company.

The share of Private Label sales share can vary but they are generally seen as a tactical component (10% of the total business), a major contribution (20% to 40%) and occasionally as a core business (from 40%). In any case, Kéa & Partners shared the 5 pillars identified to ensure Private Labels profitability:

1. Positioning & Strategy: clear-cut positioning based on target clients, offer, price, and style help differentiate from national brands. There is no set requirement for where to begin or whom to target, and the offer can vary by category and gaps in the market. A helpful tip is to create a target P&L along with realistic KPIs to optimize spending and determine at what stage and scale the Private Label will be relevant and profitable. The KPIs will direct the annual targets which will be defined by the operating model chosen.
2. Offer Structure & Timing: this pillar requires determining the operating model of the Private Label, be it permanent, seasonal, capsule, etc. This will help with managing the size of the offer, its depth and purchasing according to the segmentation that has been decided. Counterintuitively, Kéa & Partners promotes crafting a singular offer that is not based on emulating other brands. This could mean leaving out products that some deem as needed: essentials should be based on the first pillar and not common industry practices, assuming that a generic offer can diminish brand visibility.
3. Sourcing & Purchasing, with a focus on logistical organization. This is where retailers need to overcome MOQ limitations and develop long-lasting partnerships with suppliers. Mixing near and distant sourcing will determine purchasing or developing products based on the margin goals and rhythm. Sustainability needs to be accounted for within the sourcing strategy.
4. The Organisational Model, which is about exploring new models, leveraging activities and expertise in digital processes or through data. In terms of models, coopetition and integration are two possibilities. Either retailers will divide the teams and buyers between Private Labels and national/international brands, or integrate them so that the purchase and sourcing teams are only divided by, for example, product category.
5. Marketing Amplification & Execution: this requires setting up the merchandising strategy as well as a marketing plan. In this case, for example, a capsule collection would influence event size and dates as well as how and to whom the collection is marketed. According to research, 5% of product references account for 20% of sales volumes meaning pushing that 5% could determine the overall success of a collection.

Digging in: Analysing their own Private Labels

Review of the Private Labels organisations

As mentioned by Kéa & Partners, coopetition and integration are 2 possibilities reflected in the IADS members’ organisations. At Galeries Lafayette, a new coopetition organisation has given more agility to the department: national brand buyers are buying the Private Label collections, representing a strong push for Private Labels to be more attractive, efficient and in step with trends. It also means a lighter team, with designers working outside of the company (freelancers and/or outside agencies). Breuninger Private Labels are organised in the same way with buying responsibility separated from the product development (only the Mrs & Hugs brand has a different organisation with shared development and buying responsibilities).

At Manor, each product category (womenswear, menswear…) has its own team including buying responsibility, product management, style, planning, sourcing, merchandising and visual merchandising. At El Palacio de Hierro, the Private Label director manages a team of category managers, each of them responsible for a Private Label: with their team, they are responsible for the strategy and execution as well as buying, planning and allocation. At El Corte Inglés, a category manager is responsible for several brands in the category. This executive manages a head of design who is responsible for a brand manager per Private Label. A brand manager is in charge of the buyer(s) negotiating with suppliers, merchandiser(s), planner(s) and designer(s). At Magasin du Nord, the design and sourcing department is managing all product categories. Each of them includes a buying manager and a merchandiser.

Comparing figures and sorting out KPIs

Participants shared key Private Label figures. Once carefully anonymized by the IADS, the idea was to compare and analyse them to find out the most important KPIs for profitability. The Academy group came to several conclusions:

-    Regarding markups and gross margin levels, a high markup is not a consequence of high volumes whereas low markups are a consequence of low volumes. A high markup (over 4.0), combined with entry-level to middle-range retail prices (€17-75), generates the best gross margins and the lowest discounts. On average, gross margins are 69% for the most profitable brands (62.9%-73.5%) and 49% for the worst ones (29%-62%). The number of pieces produced and sold is significantly higher for the brands with the highest gross margins. Markups are on average 4.22 for the best brands and 2.83 for the worst ones despite higher average full prices: it indicates that, even though they charge higher prices than average, their markups are still significantly lower to keep prices interesting for consumers.

-    When it comes to SKU efficiency, a smaller number of SKU won’t guarantee it. Having more colours in one reference may have a positive impact on turnover, thanks to the ‘Colorama’ effect for instance: one brand tends to confirm this assumption with an 11.7 multiplying coefficient and a 75% sell-thru. At least, having on average 5 colours per style guarantees the success of a collection. The number of SKUs is on average 5 times higher for the brands with the highest gross margin. Also, the turnover per SKU is 5 times higher for these brands (€6,565) compared to the worst ones.

-    When having a closer look at retail prices and discount rates, participants found out that there is no point in having a discount rate over 30-35% as it doesn't lead to a better sell-through. The best brands are limiting their discount rates to 26% on average. Retail prices should not exceed a certain point to be attractive to consumers, but it could be interesting to test elevated prices in Women’s Fashion for example: a wide range of prices could possibly lead to less price sensitivity. However, a very accessible range may lead to more dynamic SKUs and a higher turnover per SKU. Finally, brands with the highest gross margins have better sell-through rates (74.8%) and an average full price 46% lower than the worst brands (€39 vs. €72).

Following the conclusions above, participants proposed actions to be reviewed and possibly included in the final answer to the CEO question:

-    Reduce the number of references while maintaining a certain volume of SKUs.

-    Increase retail prices a bit (if they remain competitive), keeping in mind that an average lower full price can ensure a good sell-through and limits discounting to a healthy point, which in turn drives a higher gross margin.

-    Focus on the exit margin.

Creating their own vision: Private Labels will keep you going, Private Brands will keep you growing

The Academy’s overarching theme centred around the importance to transform Private Labels into real, independent brands. Department stores have the reputation and resources, so they benefit from competitive advantages. But, what’s missing?

Dealing with the internal ‘monsters’

After having identified the external threats to their existing Private Label business, the Academy participants focused on the internal ones (‘monsters’ as they called them) that need to be overcome.

Price positioning was listed as the first internal monster. It has become a critical topic with the current high inflation rates forcing department stores to increase their retail prices, at a time when customers are more price sensitive. This trend could also question the medium- and long-term investments necessary to build a healthy Private Label business, especially knowing department stores are fully responsible for every stage of the Private Label operations, making the risk greater.

Also, all participants from the start of the program shared one common challenge: misalignment inside their respective companies. This threat was immediately considered very important by the group as marketing and merchandising teams can face issues regarding priorities, budgeting, and scale. A cultural shift is necessary to get all departments on the same page.

The Academy’s proposed key actions to improve profitability

Participants really stressed the idea of allocating more marketing and advertising budget to Private Labels as they require visibility and their own storytelling. On top of enhancing the brand’s awareness, investing in marketing would increase the top line, boost sell-through rates and contribute to lowering the actual discount rate, ultimately leading to a higher margin in value. In the end, participants advocated for marketing departments to be seen as a profit centre rather than a cost centre.

Despite the difficulties Private Labels are facing, they have a good margin level when compared to other business models that can be found in department stores. In a comparative P&L, participants concluded that Private Labels offer the second-best EBITDA at 35.6% of sales (after the consignment model having an estimated EBITDA of 40% of sales). The concession model is 27% and the wholesale model is 23.9%. Private Labels have an estimated average net margin of 50-55%, just below the consignment model at 56-58%. Wholesale estimated average net margin is 40-45% and concession is 25-28%.

Participants established a ‘core focus’ program to improve profitability: it includes sourcing, assortment, positioning, and net margin as key pillars to be paired with KPIs to be closely monitored. The group acknowledged the difficulty of providing a fixed number per KPI when each company has different goals and scales. For example, they decided that 5 sourcing countries per product category could represent an average ideal number for healthy and controlled sourcing, considering many supply chain issues spurred on by COVID-19. Having backups is one way to provide more agility, however, the number of suppliers may vary per company, label, and category. Having compared how the recent supply chain issues impacted their business, the group set a target of 30% of SKUs produced in near-import countries to dilute the risk linked to producing in China and improve lead time.

Changing a Private Label into a brand also includes making the strategy visible on the shop floor. To that end, they advocate creating a difference between the assortment broadness (what customers see) and assortment depth (what the inventory looks like): the idea is to make the collection’s ‘candies’ (fashionable products such as a trendy pink jacket for instance) as visible as basics to attract customers who will ultimately buy the commercial and basic part of the collection.

A key point also showed when reviewing the Private Label anonymized figures: there is no need to be too cheap. Participants consider that prices should be 10% lower than comparable brands, not cheaper. Also taking cues from the figures, they set a discount rate of 28% to reach a minimum 90% sell-through rate after sales. This implies the need to carefully monitor the promotion strategy and calendar by killing the slow sellers at the beginning of the season (discounting them by 30%). All of these actions could allow Private Labels to reach a minimum 50% net margin.

Also, a true Private Label will become a driver of sustainability to promote responsible products, develop a sustainable selling environment, and ensure the working conditions in its production countries. Ultimately, Private Labels can have a competitive advantage as they often have higher standards than national brands: they should increase their capacity to communicate more proactively on these higher standards. Consequently, they could become a driver for traffic, transformation, loyalty and for the generational shift that department stores are hoping for by attracting more Gen Z consumers, who are expected to represent 28% of the world’s income in 2030.

Best practices from members 

When it comes to muscling the offer and attracting Gen Z, an interesting example came from Magasin du Nord’s collaboration with Trine Kjaer, a major Danish influencer. With a small capsule of 11 styles priced at €40-120 and 2,500 pieces produced, the sell-through rate reached 50% in 2 days, a net margin of 64% in 3 weeks and total net sales of €95,000. But most of all, 54% of the customers were new customers and the number of online searches increased 5 times, reaching 15,000 searches.

For El Corte Inglés, the example of their partnership with La Redoute (owned by the Galeries Lafayette Group) shows how integrating an outside marketplace can improve sales and profitability. In 2021, the department store’s Private Labels and other brands reached €5.5m on the La Redoute marketplace. Monthly fees (including commissions, set up and platform integration) are €55,000. Such results are positive, though there was no clear decision from participants about selling Private Labels through marketplace platforms. While it is an exciting proposition, using marketplaces could dilute the brand and lower margins. Reputational risks are also a factor when adding new selling channels outside of a group’s activity. This avenue also requires additional investment and organisation, making it an aspiration and not a qualification for a successful Private Label.

The importance of creating a visual identity was also something stated by Kéa & Partners and IUM students regarding the Target business case. This is backed up by one member example: Manor is currently working this way by developing shop-in-shop fixtures to give a true flare to their Private Labels. While it’s an ongoing process for fashion categories, the results have already proved efficient when it comes to home categories (bed and bath linen, tableware) as discussed during the IADS Merchandising Meeting dedicated to Private Labels held in December 2022. They have been reorganised with a more efficient display. Manor created new event zones and reworked the navigation by material (types of cotton, linen…) as the first decision criteria, and then by colour. A material testing zone, also known as an ‘education point’, is available. Beds demonstrating bed linen are more systematically displayed.

Conclusion: Private Label profitability is a complex combination of positioning, planning, marketing, closely monitored KPIs and faith

The question of Private Label profitability is likely to keep on going in department stores in the years to come. There are many reasons for companies to expand their offering through Private Labels, especially as inflation ramps up, leading many consumers to choose store-brand products over international and national brands. While each department store will need to adapt its plan, the insights provided by the IADS Academy offer a way to reassess the Private Label model. Setting KPIs for the ideal quantity of SKUs, for sourcing, planning, margins and discount rate can help with tailoring the offer and capturing their full value ahead of other brands. As the Academy Participants, IUM students and Kéa & Partners highlighted, having a unique offer that is specifically aligned with the department store is a great way to attract customers, meaning there is no perfect formula, only guidelines for creating an ecosystem to support Private Labels.

For the 27th edition of the IADS Academy, it was no easy task to define a toolkit for this increasingly important business endeavour. Each participant confronted the CEO’s question with involvement and seriousness, getting to step back from daily operations to learn from different department stores. Having the opportunity to work together across the world helped participants understand other visions, develop team spirit while expanding their network of peers facing similar missions.

Credits: IADS (Christine Montard)