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No longer just cheap alternatives, private labels represent 20 percent of U.S. retail sales. JC Penney, Target and Wal-Mart are just some of the retailers that have recently announced increased emphasis on private label merchandise.

It is nothing short of a revolution, say the authors of, "Private Label Brand Strategy: How to Meet the Store Brand Challenge," due out from Harvard Business School Press in February. According to authors Nirmalya Kumar and Jan-Benedict Steenkamp of the London Business School and the University of North Carolina, products carrying an exclusive retailer label have outperformed manufacturer brands in all but one of the past 10 years.

Private label apparel, one of the largest store brand categories, now accounts for 45 percent of total U.S. unit sales, up from 35 percent five years ago, according to Kumar. And within apparel, the share of private label women's skirts and children's clothing exceeds 65 percent.

"Absolutely, it's a revolution," agrees Richard Hastings, vice president and senior retail analyst of Smyth-Bernard Sands LLC. He says the primary driver is IT (information technology) resident in point of sale hardware and the software that accompanies it.

"It's not so hard for stores to find the right styles, but it's less easy to get them produced in a timely fashion. With the sophistication of point of sale IT, chains are not shooting in the dark," Hastings explains.

Information from the sales counter register links with production, "Particularly with apparel production in Asia," he says, "and the retailers match inexpensive production with better local demand." Software also synchronizes production with transportation and logistics.

"The search for high margins and greater control over one's destiny are the primary reason retailers turn to private label," Kumar says. As for the role of IT, he says, "I suspect that better information has made the retailers more aware of how to manage the private labels against manufacturer brands in order to maximize profitability." He agrees with Hastings that the control doesn't just apply to apparel.

"The larger the retailer, the more likely they engage in private labels, as they have the scale to justify development of private labels. Retail consolidation," Kumar adds, "is a big driver of private label share." Yet private label is not only growing among large retailers. Many suppliers and wholesalers now make it easy for small independents to also offer private label merchandise.

Kumar credits part of the increase in private label to, "The resounding success of several private label only retail formats, such as Gap, H&M, the Limited and Zara. In response to the value provided by such specialty retailers," he says, "upscale department stores like Bloomingdale's and Macy's are also increasing their percentage of sales."

Store brands are now present in more than 95 percent of consumer packaged goods categories, Kumar points out. Among the fastest growing private label categories are lipstick, facial moisturizers and baby food. Even Costco, he notes, is developing a line of private label cosmetics.

Books may seem an unlikely category for private label. But according to Kumar, Barnes & Nobel plans to generate between 10 and 12 percent of total sales from private label titles by 2008.

Once considered cheap substitutes, many private labels now compete on quality, not price. Gap's 1969 label, for example, retails for twice the price of most Gap jeans, and The Limited has introduced Seven7 jeans to compete with designer jeans by Calvin Klein, Diesel and Hugo Boss.

"Consumers want brands for the quality assurance and emotional satisfaction they provide," he contends. However, "Retailers now position their private labels as brands in their own right. The improvement in store brands has made them an acceptable purchase alternative for large groups of consumers."

U.S. retail lags behind Europe in the embrace of private label. For example, the combined market share of private label goods among the top five U.S. grocery retailers is less than 30 percent, compared with 68 percent in Germany. Among the reasons, according to Kumar, is that retail trade in the U.S. is still less concentrated than in other developed countries.

The factors holding back private label success in the U.S., "Are bound to change through continuing retail consolidation," he says. "If the U.S. closes the private label development gap with the U.K. by half," he contends, "billions of dollars in operating profits will migrate to retailers. Famous brands, brand icons, industry leaders, nothing is exempt from the pressures from private labels," he concludes.

Article ID: 24