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*Private label development is in full swing for some retailers, especially for the big-box ones in the United States, reflecting a successful business model that Millennials are also favouring. The penetration of private labels amongst Millennials is 1-2 points higher than prior generations and continues to grow.

Usually considered as a margin enhancer, a great tool to recruit customers, a way to develop loyalty thanks to attractive price points, or an asset to emphasize the store brand message, private labels can meet tremendous success for retailers such as Target. But for others, they struggle to reach profitability.

To stay relevant these days, private labels not only have to offer an excellent product implying a great deal of research and creativity, but also differentiate from competitors, and even outdo national brands. As retail consultant Stacey Widlitz sums it up when discussing Target’s success in launching private labels: “They’ve basically been going around saying, ‘Who does it best and who does it worst?. Let’s replicate what the winners are doing and take on the losers and do it better.’” Is it really that simple?

Private labels currently represent an average of 6-7% of the IADS members’ turnover (data from IADS Merchandising meeting dedicated to private labels, January 2021). This part of their business has been reorganised in the past years and months raising critical questions: do department stores still need private labels, are they still good at this historical part of their business?*

The price appeal

It’s a well-known fact that price is a key component when it comes to private labels. It’s even the first idea that comes to mind, especially in the food area. With Covid, such products have recently grown even bigger due to newly price-conscious consumers finding themselves with less money. According to a McKinsey study from November 2020, when consumers are asked why they switched to private labels, more than 45% said price was the primary reason.

A Nielsen study from 2018 also states that 67% of customers think that private labels are extremely good value for money. This high percentage reflects the fact that own brands are not about being the cheapest they can be, but more about being cheaper than national brands (and filling a void on the market), whatever their price points are. As for department stores, they have no interest in trying to be the cheapest: they would put themselves in direct competition with Amazon Basics own label, a competition that we know is lost before even beginning…

So, should department stores continue using private labels to offer an entry price point to customers? Does a relevant product offer have to come with a low-price positioning? With its ‘Monoprix Gourmet’ brand, Monoprix (the French urban “variety” store) shows that the key factor is not about being the cheapest, but about being cheaper. Relying on upscale urbanites willing to pay more for quality food, the retailer developed a range of 700 gourmet products. There were no such products in supermarkets: ‘Monoprix Gourmet’ filled a void and became extremely popular with rather expensive products.

The Monoprix Gourmet example shows that a cheaper price point works if it comes with a strong dose of creativity, in all possible ways: in that case, it comes with strong consumer needs analysis and a great deal of research and testing with many potential food suppliers. It may be obvious to retailers that the price point is not enough, but it remains difficult to be creative enough to find the sweet spot giving a product range its needed added value and competitive edge.

Right now, Target is probably the best retailer when it comes to both being able to offer cheaper prices while having a "’cheap chic’ image and changing the cheap and low-quality perception that store-owned brands have had for many years.”  In 2021, the US big-box behemoth accounts for 48 private brands. Ten of them are worth one USD billion dollars.

In the department store business, Le Bon Marché also achieved a significant performance, yet at a very small scale, with its menswear brand Balthazar: while being cheaper than national brands, it’s also recognized for its quality and designs. Through the years and the eyes of the consumers, it even became a ‘true’ brand and is not just considered as a private label anymore.

A 2020 survey by Numerator (a US data and tech company evolving in the market research industry) also shows how decision-making factors in choosing brands are shifting when it comes to price. It is still key, but its importance greatly decreases with ‘modern’ consumers (the price factor drops from 87% for ‘traditional’ buyers to 69% for ‘modern’ buyers), with quality and product claim gaining more importance instead.

Creating loyalty and additional sources of revenue

Good pricing brings loyalty, that’s for sure. In that sense, private labels remain a great way to recruit and retain customers. Very recently, own brands benefited from the unavailability of some products during Covid. According to McKinsey, 40% of customers switching brands will likely continue purchasing the new brand once Covid is over. With products usually being good value for money, the short-term switching behaviour can obviously transform into long-term customer loyalty. Considering customers are more and more unfaithful to brands and retailers, and costs of customer acquisition are sky-rocketing, having a solid and loyal customer base is more crucial than ever.

When it comes to the loyalty factor, Galeries Lafayette is an interesting example. According to company private labels management, they are benefiting from a very strong loyal customer base thanks to their women’s ready-to-wear considered as qualitative, affordable, timeless, colourful and easy to ‘mix and match’ with customer’s wardrobes. The Galeries Lafayette brand relies on recurring customers favouring the store brand over national brands. This great success built itself throughout the years /nbsp]meaning the customer base has now to be rejuvenated.

The loyalty effect is also interesting when it comes to gathering key data about consumers’ shopping habits (demographics, products, price, cross-selling…). It’s even more important in department stores where the concession operating model is widespread, and consequently the relating data is owned by brands. Having a direct relationship with customers that are buying different items and brands, department stores are benefiting from a true competitive advantage when compared to national brands. Not only can the data help private labels to become more appealing to customers, but the richness and depth of this data makes it a great asset to be valued and sold to national brands and partners. Especially at a time when department stores are evolving their business model to find additional sources of revenue.

Loyalty has some limits though. In 2001, Le Bon Marché tried a ‘spin-off’ Balthazar store in Boulogne, a Parisian wealthy suburb where a fair part of the store customers actually live. It wasn’t a success, and it closed a few years later, but the experience remains of some interest as an attempt to try to make a private brand live outside of its native ecosystem.

A tool to differentiate from competitors

Amit Philip, SVP and chief strategy officer at TreeHouse Foods (producing private label packaged foods in the United States), believes that “you can get national brands in any store but retailers establish unique brand and value propositions that are only available in their banners. The more sophisticated retailers even have price tiers within their private brand portfolios. Historically private label was seen as perhaps a cheaper, lower quality option and the standard was to try to match national brands. Today, retailers are looking to exceed national brand standards and create new and higher value propositions.”

El Palacio de Hierro is an example of a department store digging into the unique brand and value proposition as they are developing more and more brands coming with different price points. In ready-to-wear for instance, brands are ranging from the Entry price point with Catamaran (designed for the 17-28 y-o with a EUR 27 average price is), Mid-range with Epsilon (designed for the 30-45 y-o with a EUR 45 average price) to Premium price point with Chester & Peck (designed for the 35-55 y-o with a EUR 93 average price).

Creating such a high-value proposition to differentiate from competitors, and succeed, depends a lot on research and creativity. Among pure players, Asos is a good example when looking at their ‘Asos Curve’ private label. When national brands were still lagging behind in terms of inclusivity, Asos was ahead of its competitors in terms of trends and filled a void on the GenZ fashion market.

Visual identity has also become an asset to the private label business. Monoprix is again a fair example of innovation in that area. The “Monoprix” brand covers basic needs with more than 2,000 products. As there is no excitement in buying eggs or detergent, Monoprix draws attention to such products thanks to a strong brand image using bright colours and an unprecedented factor: the fun. While own brands packaging usually imitate national brand looks, the French retailer uses bold colour-block designs and funny quotes, transforming boring products into eye-catching ones. When this new packaging launched, customers were even talking about the funny jokes found on cans of beans. Such packaging came with an ad campaign that drastically reinforced customer loyalty to the label.

Attracting customers, but also brands

With enhanced private brands, comes new perspectives in terms of advertising. Promoting a price point is replaced by promoting the product itself: its claim, quality, and difference. In that case, private brands can become a great tool to advertise the store image itself, and to leverage social media to reach more customers. Also think about the importance recently taken by the unboxing trend on Instagram: it has been adding new and supplementary visibility for brands and products.

When thinking about private labels, collaborating with other brands is also something to consider to promote the store image itself, gain new customers and create excitement on social media. Once again, Monoprix is succeeding when launching collaborations with designers or brands, this year with edgy fashion designer Vincent Darré or interior designer India Mahdavi. In such cases, direct revenue is not the point as very few products are produced and sold in the end. But they have proven to be a great way to draw customers attention and reinforce the store image.

Post pandemic, even the most endangered retailers are willing to use collaborations as part of their private label strategy. The last example to date comes from bankrupt and relaunched JC Penney partnering with the infamous Juicy Couture brand, also resurrecting from the dead. It’s a smart move though, considering Juicy Couture is still a famous and impactful name able to draw shoppers attention. The brand is considered a pioneer when it comes to athleisure, a trend that is not predicted to end soon.

Ultimately, private labels collaborating with selected brands can become instrumental to attract new customer groups. At a time when some brands are adopting more and more direct-to-consumer business models (as we know it’s the case with major luxury brands, Nike, Adidas…), private labels could be a key part of an attractive product offer, assuming they have developed a great value proposition.

Another option to be considered is to develop new private labels, especially in the fashion area, using a brand licensing model or even by buying brands and relaunching them exclusively under the department store umbrella. Still, caution is in order in that case. Even a powerful retailer like Walmart faced difficulties when acquiring brands. In 2017-18, the retailer bought a bunch of direct-to-consumer ready-to-wear brands. At that time, comments on the buy-out were harsh on social media, customers worrying about Walmart lowering the quality of such brands. In 2019, the retailer even sold one of these brands, bought 2 years earlier.

A way to prove commitment to CSR questions

For many retailers, private labels are now a way to benchmark sustainability progress and prove ‘transparency’ to customers. For instance, Macy's private brand uses the Higg Index Environment Module but also its Facility Social and Labour’s to gauge the environmental and social performance of manufacturing facilities. Audits in factories supplying the private labels are conducted every 18 months. Hudson’s Bay has enforced a Supplier Code of Conduct applying to all vendors producing private labels (based on the United Nations Human Rights Declaration, the Amfori Business Social Compliance Initiative, to name a few).

Nordstrom is also an interesting business case. They reorganised their private labels by reducing them from 40 to 12, but they are growing the business anyway, thanks to an embodiment of the CSR topics. In 2020, 64% of “Nordstrom Made” product volume was produced in factories using the Higg Index Facility Environmental Module. They also tackle body inclusivity questions by appealing to different age groups, communities and body shapes: for instance, they launched Henna and Hijabs x Nordstrom, designed for the modern Muslim woman, and Nordstrom x Christina Martinez to celebrate Latinx heritage.

A department store is a house of brands. Even though they cannot take responsibility for partners' ways of producing, department stores could become accountable, if not already, for having brands considered not sustainable or responsible enough by customers. Developing sustainable private labels is a way for them to have more control over the CSR issues. In that perspective, Magasin du Nord’s main priority is to improve the entire private labels’ value chain to ultimately be able to market its products as honest, authentic and sustainable. In general, IADS members are very ambitious and target 100% of sustainable offer: by 2024 for Galeries Lafayette and Magasin du Nord, and by 2025 for Breuninger and El Corte Inglés (data from IADS Merchandising meeting dedicated to private labels, January 2021).

*In theory, there are many reasons why department stores should continue developing private labels: offering an interesting price point, filling a void on the market, attracting new shoppers, developing loyalty, differentiating from competitors, anticipating potential national brand withdrawals. Own brands are also supposed to increase retailers’ margins. But the situation for department stores’ is contrasted when it comes to profitability as we know some are struggling. And also, are they still really attracting customers, even after some internal reassessments, or changes in organisation and offer? Considering the challenges ahead, IADS members’ CEOs have decided this year’s IADS Academy will be dedicated to the private labels topic.

Furthermore, there is no ‘one size fits all’ when it comes to private labels, which makes it an even more challenging business. IADS members are not following the same trend in terms of development. For instance, El Palacio de Hierro tries to multiply the number of its own brands (having a different name for each of them), while others like El Corte Inglés or Magasin du Nord reduced the number of brands.

In any case, this part of the business remains a challenge as consumers’ expectations won’t lower. On top of that, private brands have to find their way online. Creativity, research, imagination will surely be key to meeting all expectations. A unique value proposition based on sustainability seems to be the best tool available right now.*

Credits: IADS (Christine Montard)