Private-Label Makeover: Amazon, Wal-Mart, Target Threaten Name Brands

October 27, 2017

Investor’s Business Daily | October 27, 2017 –  On any given morning, you could smooth out your Pinzon Egyptian cotton sheets before tossing on a Goodthreads poplin dress shirt, Franklin Tailored sharkskin-gray suit and a pair of Franklin & Freeman penny loafers. Breakfast might be a bowl of 365 Every Day organic quick oats and Wickedly Prime dry-roasted almonds with a cup of Happy Belly organic Fair Trade coffee, as you lean back into your Strathwood chaise lounge.

Despite not bearing Amazon’s (AMZN) signature arched arrow, they’re all part of an army of more than 30 private labels that belong to the increasingly ubiquitous e-commerce behemoth, a bounty waiting to be innocently discovered online as modern shoppers ditch old-school name brands and seek out stuff that’s cool but cheap.

Meanwhile, Wal-Mart (WMT), Target (TGT) and other Amazon rivals also have been rushing out new, re-imagined house brands, as a flurry of private-label innovation and a shift in consumer habits challenge the value of a traditional name brand. For chains that find the right balance between their own labels and outside ones, long-moribund shares could see life again. But while private labels have been hiding in plain sight for decades, the current surge could deliver another jolt to the retail sector, if national brands lose ground and prices fall further.

“With the advent of Amazon and the ‘everything store,’ you can pretty much get a national brand that you want, anywhere,” said Kantar Retail analyst Tiffany Hogan. “So I think we’re seeing another swell in private-label development, being used less as a fill-in strategy, which is how many of them probably started,” and more of an offensive play.

It’s already a massive business for supermarkets, drug chains and mass-merchandise stores, with sales hitting a record high of $118.4 billion in 2015, according to the Private Label Manufacturers Association. And so far in 2017, private-label manufacturing sourcing has grown 26% vs. the prior-year period, according to ThomasNet data, with notable pops in cosmetics and pharmaceuticals.

‘Not Your Father’s Private Label’

Today, what might have once prompted mockery at a school cafeteria is emerging from a makeover. Back in the day, store brands were meant to emulate well-known national names, offering what was perceived as a lower quality but cheaper option, rather than a distinct alternative on par with the bigger brands. Instead of red-and-white soda cans plastered with knockoff-style logos, there are now a lot more products like Whole Foods’ 365 brand cola, proudly crafted with pure cane sugar and filtered carbonated water.

For a retailer, owning a brand means margins are higher, prices are more competitive, and customers can’t get the products anywhere else. At Amazon alone, the private-label market represents a $1 billion gross-profit opportunity, Morgan Stanley has estimated. Plus, there’s greater control over product creation and speed to market, said Hogan.

And companies are taking advantage of that control, crafting unique images meant to resonate with consumers’ hearts and not just their wallets.

“I am not a person who has or probably would ever get a tattoo, but if I were going to get one, I would want it to be the design on our coffee bag,” says Liza Landsman, president of Jet.com, the e-commerce player acquired last year by Wal-Mart. “I just think it’s really beautiful.”

She’s talking about the creature on the cover of one of Jet.com’s newly launched Uniquely J in-house products, an intricately inked Peruvian tiger. And it’s not hard to see why: It looks more like a hipster’s sleeve tattoo than a coffee container.

Uniquely J’s slim-but-growing collection of 50 or so items — salsa, avocado oil, sandwich bags, toilet paper — don’t all sport edgy tigers. Some have cartoon bears and walruses. All are aimed at consumers of the “metro-millennial lifestyle,” and mark a pivot from the private-label game plan of old.

“Over the last few years, the attitude toward private label among consumers has really evolved, and I think that’s in response to the fact that it’s not your father’s private label anymore, that so much innovation and product and packaging and design is happening in that space that there (are) ample opportunities to bring really interesting offerings to market,” said Landsman.

Target Rediscovers ‘Tar-Zhay’

Attitudes were much different in the early 1980s. Back then, high-end designer Halston inked a billion-dollar deal to create a lower-priced version of its apparel for J.C. Penney (JCP). But brand dilution was so frowned upon back then that Bergdorf Goodman expelled the Halston brand altogether from its upscale stores

In the 1990s, Target launched brands like Archer Farms and teamed up with architect Michael Graves for an exclusive designer partnership. Those efforts, plus in-house brands like Merona and Mossimo, which are now being retired, were better received and earned Target a devoted following among shoppers looking for reasonably fashionable but affordable items.

“That was cool,” said Jim Holbrook, CEO of private-label retail services firm Daymon. “It was exclusive, you could only get it at Target; it was well designed, and at an affordable price. And to me that was sort of the advent of the differentiating strategy.”

Target now wants to win back customers who knew and loved the “Tar-zhay” of yesteryear. It’s in the process of debuting no fewer than a dozen brands, all either clothes or furnishing, including A New Day (womenswear), Goodfellow (menswear), Project 62 (home décor), Joylab (athleisure) and Hearth and Hand with Magnolia, a home and lifestyle label created in conjunction with HGTV stars Chip and Joanna Gaines.

They hope to replicate the success of Cat & Jack, the company’s shining example of what a good private label can accomplish. The cheery, on-trend kids clothing raked in $2 billion just in its first year, a remarkable feat for a debut in a home and apparel category that brings in $26 billion annually for Target — over a third of its total revenue.

“Target kind of lost their way for a couple years, but (CEO) Brian Cornell’s done a great job refocusing them on kids’ apparel, home and launching of all these” private-label brands, said Edward Jones analyst Brian Yarbrough of Target’s chief, who took the helm in 2014.

And Macy’s (M) — which has a well-regarded stable of 20 or so exclusives like the Martha Stewart Collection — plans to grow its private and exclusive brands to 40% from 29% of the business by 2020, saying they help stem store traffic losses at its department stores.

But Kohl’s (KSS) recent private-label venture offers a warning. The department store had pushed its private labels but upset the balance between major brands and in-house offerings, weighing on sales. That showed management that national brands still matter, Yarbrough said. The department store has since focused more in the other direction, partnering with Under Armour (UAA), for instance.

“Now, the risk is, for some retailers, you don’t want to go too far,” he said.

In other words, shoppers like a healthy smattering of unique store brands, so long as they can still find household names like Nike (NKE) or Coca-Cola (KO) on shelves.

Cutting The Brand Name ‘Tax’

For 20- and 30-somethings who came of age during the Great Recession, however, brands may matter even less than ever, amid their existential hunt for authenticity and uniqueness.

The online store Brandless, for example, is a curated selection of groceries, household and personal care items that sell for a straightforward $3 apiece but come without what the startup’s CEO, Tina Sharkey, has termed the “Brand Tax,” i.e. marketing costs and the “false narrative of cartoon characters and actors” on packaging.

Brandless doesn’t sell any Starbucks. Instead, it offers a chocolate-colored bag of organic, fair-trade cold brew, simply labeled “Cold Brew Coffee Bag.” Other items are similar. No Kleenex, just “Facial Tissue.” No Chapstick, only “Lip Balm.”

They could be mistaken for cheap generics, but the company proudly touts merchandise that is carefully sourced and “non-GMO, sometimes organic, fair trade, kosher, gluten-free, no added sugar and more.”

“I think people would tell you that millennials are exponentially more open to buying brands they didn’t grow up with and trying things that speak to their values, are affordable, are not wedded to things that were necessarily at their table for years,” said Sharkey. “So I think there’s a huge openness (to new brands) and openness to private label.”

Therein lies a challenge to companies’ exclusive offerings, however. Modern millennial shoppers aren’t brand loyal, so they’re game to skip big-name labels in favor of private brands. But companies are banking on the hope that their unique products will cultivate some modicum of loyalty, or at least one or two return trips.

Amazon Is Just Getting Started

Loyalty is what Amazon knows well as it tries to lure more subscribers to its Prime ecosystem with its own house brands, which includes a number of womenswear lines, not to mention its popular Amazon Basics and Amazon Essentials for tchotchkes around the house.

Of Amazon’s estimated 34 private-label brands, 19 are clothing collections. That there’s an industrywide rise in interest in store-brand apparel manufacturing comes as no surprise to ThomasNet CEO Tony Uphoff, who pointed to store closures at Gap and Abercrombie & Fitch and the decline of traditional brands.

But success, even for Amazon, is not guaranteed. Paris Sunday, its fashion-forward casual line of dresses and other clothes, is reportedly being phased out, according to a recent WWD story

Still, it’s early days, and as department stores are waning in influence, Amazon’s access to massive amounts of data means it wields gargantuan power.

“Way back in the day, it would take several months to figure out what a trend was and what people wanted and analyze the data,” said Daymon CEO Holbrook. “And then the data got more available with point of sales scanner data and loyalty card data, so that would take several weeks. And now, Amazon’s true competitive advantage is they know, real time, minute by minute, what people want.”

In the first half of 2017, the young women’s apparel line, Lark & Ro, made an estimated $1.9 million for Amazon — chump change — but AmazonBasics has become a $210 million business, according to 1010data estimates.

And sales of Amazon’s in-house children’s apparel, Scout & Ro, grew fivefold over that same time frame, said the research firm.

“The brick-and-mortar retailers who get good at marketing and good at telling those stories and get good at the human touch, I think, can beat Amazon,” said Holbrook. “But at this point, Amazon’s trying a lot of different things in the private brand space. And they’re going to figure it out.”

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