Why Do Retailers Launch Private Labels?

It’s an easy way to squeeze more profit out of consumers

Acne Studios San Francisco

Yesterday, discount luxury retailer Yoox.com launched 8 by Yoox. It’s the latest example of “private label” fashion from a multi-brand retailer.

By putting its own brand name on the label, Yoox is part of a practice known in the wholesale retail market as “private label.” For its part in defending the need for a new line, Yoox said:

The Yoox design team uses advanced, patented artificial intelligence tools to review content from across social media and online magazines in key markets, with a particular focus on fashion influencers.
This insight is combined with predictive indicators into emerging lifestyle and style trends, analysis of own data from products sold on its site, customer feedback, industry purchasing trends as well as text search and image recognition.
From the mood-board that emerged from this research, Yoox’s creative team started working on the collection, scrupulously referring to the data collected for inspiration, on “everything from shape trends to colours, sleeve lengths, neckline shapes, fabrics, textures, heel heights and price points.

In this way, with the help of its corporate parent Yoox Net-A-Porter (YNAP) and by extension, Richemont Group, which recently purchased YNAP, Yoox is making use of its plentiful data on buying behavior and social media activity to create a suite of pieces that are in-line with the zeitgeist.

Or so they say, anyway. Isn’t the zeitgeist just a reflection of what already exists? My cursory perusal of the 8 by Yoox collection showed only a mirror image of the sorts of things sold by relevant peer retailers like MR PORTER and Barneys and peer brands like Officine Générale and A.P.C.

The difference, and only in some cases but not all, is a lower price point, all other things being equal.

8 by Yoox is just one example of a business with its core in multi-brand retail launching a private label brand to sell alongside other brands on its site or in-store. Others that come to mind are Nordstrom’s 1901, John W. Nordstrom, and Halogen brands, and eponymous lines from Saks Fifth Avenue, Neiman Marcus, and Barneys.

Years ago, department stores were more involved with the goods they sold, often affixing their own labels. It wasn’t abnormal to see “Saks Fifth Avenue” on the inside of a fur coat or stamped on a cosmetic bag as part of a special licensing agreement with Louis Vuitton. Department stores were revered authorities on style and the sole access point to many European goods unavailable domestically.

In recent history, traditional multi-brand department stores like Nordstrom, Saks, Neiman, and Barneys have used the private label to satisfy their customers’ desires for lower pricing on staples like dress shirts for men, generic footwear, cashmere knits, and socks. These are all things with a lesser emphasis on brand, and thus, on the need to buy branded vs. generic, so to speak. In other words, commodities.

In just the last few years, as e-commerce has grown and the new authorities on stylish dressing and living include properties like Matchesfashion.com and MR PORTER, so too have those brands launched private label lines. RAEY for the former and MR P. for the latter.

Given my overarching belief that we are well into peak stuff, and the revelation that many of these private label brands offer a questionable value or uniqueness proposition, I sought some insight on the case for and against private label (“PL”) fashion.

I enlisted a former YNAP insider, who worked directly with the 8 by Yoox development, and previously worked in more traditional department store multi-brand retailing.

The rationale for PL follows three broad business benefits:

  1. Better margins — often 50% on PL because retailers are buying directly from factories and producers rather than from brands (one layer of markup is removed). What’s more, since PL goods are priced lower relative to other brands’ comparable goods, they may sell in greater volumes, meaning even more margin for the retailer. This also helps with the overall gross margin on certain categories when blended with other brands/SKUs, for reporting purposes.
  2. Filling assortment gaps — i.e. adding goods in for a more complete overall offering where wholesale brands aren’t present/producing, especially as retailers are attempting to boost customer loyalty and capture more share of total wallet. This may manifest as, for example, a perennial collection of cashmere knits, which come and go with fashion brands, but may be in-demand year-round in a rotating subset of a national retailer’s 30 to 50 store locations. Think: winter in Florida is the same climate at summer in California, so knits are in demand year-round.
  3. Making a brand play — a la Trader Joe’s. When the retailer brand is strong enough to stand alone, on its own reputation. This relates to more retailer control over inventories, pricing, and its overall financial picture relative to only selling other brands’ goods. It also touches on hedging a risk, as more traditionally wholesale brands (e.g. Theory, Vince.) move toward direct-to-consumer and omnichannel sales.

The business case against PL, and this coming from my aforementioned YNAP insider: the effort and investment required on behalf of a retailer to start and maintain a PL can run well into half a million to a million dollars each year, with questionable returns. That is, unless it is a truly turnkey operation, the supplier relationships are easy to establish, and they can deliver on simple designs relatively cheaply.

Investing time and resources into actually designing a collection, when your core competency as a retailer is to curate, advise, and distribute other brands, may be all for nothing if the collection fails to be a hit.

If a retailer attempts to design something unique, that takes skill and creativity (and hiring actual designers). And, it diminishes the margin.

If a retailer sticks with safer, simpler designs, essentially co-opting from existing brands’ designs (or slight variations), it skips the creative costs, but also fails to provide something differentiated.

From the consumer’s perspective, private label traditionally offers a single core benefit: a lower price for comparable quality and design that mimics that of branded goods. Nordstrom’s 1901 brand offers the Avalon driving loafer that look vaguely like a Salvatore Ferragamo or Tod’s design, for $99 vs. $400–500. Though, not made in Italy.

Neiman Marcus sells women’s cashmere duster sweaters for $300–350 while brands like Vince sell for $400–500, both made in China. Upper-end brands like Akris and Loro Piana start at $1,000 and go well beyond $3,700, though they’re produced in Europe, which accounts partly for a higher production cost.

A lower price point, all other things equal, is valuable to most consumers.

For a small subset, the economic principle of a “Veblen good” explains why a lower price may actually turn off some consumers, which is partly why many brands regularly increase prices for their goods in order to maintain exclusivity and thus, appeal (Chanel, Louis Vuitton, Hermès).

Nevertheless, we know most consumers love a deal, and have been trained in recent years to expect regular sales, discounts, and promotions. A “steal” will always appeal.

Overall, the price of upper-end fashion goods has increased disproportionately to increases in income for the majority of households. While the top 10% of households have held steady or grown their wealth, the bottom 90% have experienced stagnation or even decline, relative to prices. This may be another reason why mainstream upscale retailers have maintained and invested in their private labels, in order to capture some of these consumers.

Further, stores like Saks Off 5th, Neiman Marcus Last Call, and Nordstrom Rack have been the revenue drivers of their parent brands for many years. They’re often stocked with — you guessed it — their respective private label brands.

Saks Fifth Avenue, Neiman Marcus, Nordstrom, and 8 by Yoox all follow the “better value” model as the reason consumers should consider their PLs. They mimic the offerings from wholesale brands those retailers already carry, with a slightly lower price, similar quality.

What’s more curious is the Barneys New York PL and recent entrants like MR PORTER’s MR P. Both of these tend to mimic trending designs and peer quality standards, but they eschew a relatively lower price point, all while offering nothing not already available from other brands.

RAEY, which is exclusive to Matchesfashion.com, presents a more interesting collection, beyond the standard PL. I actually like some of the designs, and they’re priced reasonably for the quality, along with a unique design perspective. And, mostly made in the U.K.!

These last three fall under the “making a brand play” category, perhaps setting the groundwork for graduating beyond just retailer. Of course, they are also going after higher margins.

Overall, private label still represents a very small segment of the high-end apparel business. However, recent entrants have upended the traditional rationale for retailer PL, aiming to establish themselves as luxury brands in their own right, despite not offering a compelling design point-of-view.

Personally, I am skeptical. Retailers’ strengths lie in their curation and service, not in creating the perfect pair of boots or affixing their label to a cheaply-made, inferior-quality cashmere sweater. Plus, in 2018, there are rarely gaps in the market. Legacy brands and young startups touch just about every niche and subcategory out there.

Most private labels boil down to a profit grab, simply put. We’re in a quarterly earnings society after all.

Sadly, it seems like a bit of a waste to be making unnecessary things. When I say we could stop producing all manner of garments and accessories today and still consume at normal levels for the next two years, I’m not joking.

We all have enough, there’s no need for more.