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*Improving Private Labels’ profitability is crucial to the department store business and is a top-of-mind priority for CEOs (this is why the 2022 Academy worked on this topic). Two major strong trends can be seen here:

-    Organisations (including the supply chain) have been reviewed and changed to be more cost-efficient as well as more agile.

-    Secondly, whether they are under an umbrella brand or not, Private Label portfolios have been reshuffled, which often resulted in the discontinuation of some brands to maintain margins, but also in opportunistic ventures.

Besides these 2 major sources of optimization, new questions are emerging lately. Improving branding and awareness is key to developing the business. The pricing strategy offers 2 different directions: the lower-price path, or a possible premiumization of Private Labels which is increasingly considered to grow margins. In addition, department stores and retailers sit on a data treasure as they know who’s buying what, where and how. With the emergence of the retail media business, it seems data could be leveraged to improve Private Labels’ efficiency and relevancy. However, some questions remain, and the Private Label digital strategy and the communication on CSR efforts are among the most important ones.*

Transforming Private Label organisation towards cost optimisation and production efficiency

Changing the model: ‘Coopetition’ and ‘Integration’?

There’s no one-size-fits-all model when it comes to Private Labels. Retailers rely on a variety of operating models, ranging from highly centralized organizations with dedicated resources (including brand management, product design, sourcing, marketing, and consumer insights) to decentralized operating models in which merchandising teams own much of the strategy and execution. The organisation question comes down to 2 organisational options:

•    Coopetition: the Private Label team is in charge of sourcing, style and product development, while the buying function is taken care of by the buying team in charge of national and international brand purchasing.

•    Integration: the buying responsibility is part of the Private Labels team’s duties.

The benefits of the ‘Coopetition’ model: the example of an IADS member

In 2021-22, an IADS member changed its organisation from Integration to Coopetition with several significant benefits:

•    The team downsized from 58 FTEs to 28. As an example, the kidswear team was reduced from 12 to 6,5 FTE thanks to management responsibility mutualised with another product category and fewer people in sourcing. Also, the buying responsibility went to buyers in charge of national brands. Finally, designers are now working freelance.

•    More efficiency at the design level thanks to a collaboration with a local creative intelligence agency defining clear creative directions for the season. Also, designers are now freelancers and are more eager to bring relevancy to the table.

•    National brand buyers are providing detailed and accurate feedback to challenge the product’s appeal.

Reorganising the supply chain: finding the balance between a more secure production and higher retail prices

In January 2021, the IADS offered to participants to compare their production schemes. At the time of this research, members’ production lead time (from offer definition kick-off to first date in-store) ranged between 37 and 61 weeks. With the Covid-19 impact on China, the war in Ukraine, and the energy shortage, department stores had to rethink their production schemes as explained in the IADS Merchandising dedicated to Private Labels end of 2022. Their main initiatives include production planning starting earlier, which saves up to 2 months on the production lead time. Also, nearshoring in the Euromed zone allow some members to save up to 8 weeks: however, it comes at a price, as production costs can vary by as much as +3% when switching from China to Euromed, while they can decrease by -4 to -8% in other South East Asian countries (but raising new operational and logistic questions). In any case, reliance on Chinese suppliers was reduced, sometimes by up to 6%, in favour of South East Asian countries (+6%) and the Euromed zone (+1.5%) to improve lead time and dilute the risk linked to producing in China. Finally, raw materials are 100% booked in advance with members committing to suppliers and paying later. As a result, compared to 2019, members had to increase their retail prices from 5% to 27% to secure margins.

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Optimizing the Private Label portfolio: downsizing, product efficiency, and a dose of opportunism

Cancelling brands is efficient

Cancelling inefficient brands is a widespread strategy coming with 2 options. The first one is about working under a single umbrella brand to avoid product overlapping and product gaps. For instance, Manor cancelled brands to only operate a Manor-labelled transversal brand. Despite a very different size and scale of the business, Magasin du Nord now also operates under a store umbrella brand. Both retailers see the umbrella brand as an opportunity to enhance the store brand itself. Knowing that having several brands requires dedicated investments, a single umbrella brand is also considered a way to be more cost-efficient. On its side, Galeries Lafayette reduced its brand portfolio to focus on one umbrella brand but kept an additional brand in womenswear, menswear and kidswear.

The second option is about relying on several Private Labels. IADS members such as El Corte Inglés and El Palacio de Hierro are not working with a single umbrella brand but with different brands, each of them having a clear DNA and a focus on a specific consumer group. Still, El Corte Inglés reduced from 41 brands in 2019 to 21 in 2022 to increase the initial margin, secure EOS sell-through close to 100% and a minimal turnover per label per year. At El Palacio de Hierro, 3 brands (out of 6) accounted for over 75% of sales. As a result, 2 inefficient womenswear brands were discontinued.

Favouring a mono-product strategy

As discussed with member IADS-1, mono-product categories have proved to be more easily profitable (men’s shirts, women’s soft accessories, cashmere sweaters, and linen during summer). SKU efficiency is key here, and a smaller number of them doesn’t mean success: to a certain extent, having fewer references and more colours in one reference has a positive impact on turnover (with an average of 5 colours). Also, the 2022 IADS Academy group analysed members’ anonymised figures: they found out that the number of SKUs is on average 5 times higher for the brands with the highest gross margin.

Expansion through opportunistic additional business

Agile expansion of Private Labels could possibly rely on product trends. Surfing the huge athleisure wave, Target’s brand All in Motion launched in 2020 is a good example: a year after it launched, the label achieved the company's goal of generating USD 1 billion in its first year. It was developed in-house, with an eye toward sustainability, quality, inclusivity, and consistent with the “more for less” Target mantra.

Buying out existing brands is also an interesting option favoured by Marks & Spencer. First, they reduced the number of Private Labels. Now, the company is buying out existing brands (such as Jaeger) to muscle its offer. Results seem promising: third-party brands account for 4.1% of the clothing and home sales, bringing in GBP 70m of revenue in 2021.

At some point, acquiring a brand and operating it collectively or developing one together was considered by some IADS members. In that regard, the example of Farfetch acquiring New Guards Group (Heron Preston, Opening Ceremony…) and the cosmetic brand Violet Grey is interesting but raises questions. The brand price point should be quite low to fit all department store members but right now such brands are facing huge difficulties as they can’t scale up to become omnichannel. Besides, even though customers are increasingly attracted to the same international brands, cultural differences still exist with the products local customers might favour.

Leveraging Private Labels: branding, pricing strategy and… data?

Brand image: building awareness to attract younger customers

When it comes to muscling the brand image and attracting Gen Z, partnering with external brands or influencers can be a winning strategy. Several examples are interesting to look at. Magasin du Nord had a collaboration with a major Danish influencer: a capsule of 11 styles priced at EUR 40-120 led to an impressive sell-through rate and net margin as well as important net sales. 54% of the customers were new customers and the number of online searches increased 5 times. Also, Fred Segal can represent an example of ultimate Private Label branding: benefiting from a certain coolness, the US lifestyle retailer betted on printing the store name and logo of its first Private Label t-shirts and hoodies (retailing at USD 390). Also, JCPenney recently partnered with the infamous brand Juicy Couture at a time when it was on trend again.

Pricing strategy: going low or going up, that is the question

Price has always been a key component in the success of Private Labels. John Lewis’ Anyday brand, positioned 20% to 40% lower than John Lewis' other own brands, recently expanded to reach new, younger customers. Promotional efforts worth GBP 500m (including the opening of an experiential free-standing store) seem to be working: 25% of Anyday shoppers are either new or reactivated customers, as well as younger, yet less wealthy shoppers. However, this strategy comes with the risk to fight de facto against powerful low-price competitors such as Primark. On its side, El Corte Inglés’ ambition is to transform some of its lower-price Private Labels into real brands. To continue with this strategy, UNIT (entry price vertical RTW and accessories brand) will soon launch brick-and-mortar stores in malls, close to Primark stores.

On another hand, premiumization includes higher price point, elevated marketing tactics and sustainability. Overall, consumers think that Private Labels are extremely good value for money which doesn’t mean being the cheapest they can be. Besides, for less powerful department stores, there is no interest in trying to be the cheapest. The price of the Private Labels is no longer the primary factor for some customers. This is the case at Target, where product quality is gaining more importance than price in building customer loyalty. Some retailers already tackled the idea of a premiumized Private Label: with Monoprix Gourmet‘s success (700 products), Monoprix (the French urban “variety” store) shows that the key factor is not about being the cheapest but offering quality to urbanites willing to pay more. In 2022, Printemps introduced a make-over of its Private Label fashion lines (men’s, women’s RTW and accessories). The Private Label was rebranded Saison 1865 (from the year the department store was created), hence decorrelating the store name. The claim is to offer transgenerational wardrobe essentials with excellent value for money and sustainable options. This premiumization comes with a 15% retail price increase overarched by a sustainable claim, more elaborated communication and marketing, which could help in building a true identity for the Private Label./nbsp]

Some IADS members’ department stores are already tackling higher price segments: Breuninger’s Ms & Hugs is successful with EUR 250 dresses for instance, and Manor performs well with rather high-priced items such as cashmere coats at EUR 600. Manor, Galeries Lafayette and El Palacio de Hierro are considering launching a premium Private Label, knowing that premium might have different meanings and price points from one department store to another. For instance, at Galeries Lafayette, the price point would be similar to Sandro’s and the inspiration would take cues from premium consumer aspirations (responsible, slow life, craftmanship). On its side, Manor would favour quality basics using fabrics such as Supima cotton.

Is data the next big lever for Private Labels?

Farfetch’s decision to launch a Private Label (dubbed There Was One, offering minimalist basics for women priced between USD 95 and USD 2,000) was informed by consumer shopping data. Data showed that since the start of the pandemic, shoppers were investing in long-lasting and sustainable pieces. Among the key factors to Private Label success, Alix Partners mentions that customers’ insights should be injected into all steps of product development processes. Firstly, this should be eased by the access retailers have to their own customers’ data through their various payment and loyalty schemes. This strategy already proved its efficiency: Amazon is famous for leveraging data to build several of its Private Labels, sometimes to the dismay of marketplace sellers. Secondly, retailers and department stores are currently entering the retail media business, putting store data at the brands’ disposal through dedicated platforms. This could serve the Private Label business as well as other brands.

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Private Label success is a complex combination of an effective and agile organisation, the right portfolio articulation, positioning, planning, and a dose of opportunism. While ensuring Private Label profitability and relevance remains a never-ending concern for department stores, additional levers for growth – if not all new – could be considered. Among them, doubling down efforts on branding and brand awareness could help create a true identity able to attract the younger generations, much needed to rejuvenate the customer base. The right pricing strategy is also key: in that perspective, department stores are assessing the possibility of a premium Private Label, which could be an additional way to grow the business and increase margins. While the latter has not proved to be broadly efficient yet, using sales and consumer data increasingly grows as a way to develop retailers’ businesses. The possibilities offered by new retail media ventures could be expanded to benefit Private Labels.

Also, additional questions are still unanswered. The digital strategy for Private Labels appears to be a work in progress for many department stores. It seems most members are not differentiating their online and offline product offers and didn’t truly build omnichannel strategies yet. Some department stores are more advanced though: for instance, El Corte Inglés’ Private Labels have their own landing page on El Corte Inglés’ website. This might lead the company to eventually create a specific website for each Private Label in the future. Also, Manor’s website promotes and prioritizes Private Labels products as soon as they are strong enough: this is the case with cashmere and ‘essentials’ sections putting Manor products first.

Another tricky question is about department stores' CSR efforts in Private Labels. Often more ambitious than national brands, department stores face issues when it comes to communicating information to customers: they have a hard time deciding on a “communication” umbrella efficient both offline and online. Risks for department stores are to appear as they are lacking credibility and of course, they could be accused of greenwashing. Overall, department stores didn’t find yet the right balance between providing precise information and being simple, honest, catchy and inspirational (including for their international consumers).*

Credits: IADS (Christine Montard)