Private Label (part of Chapter 3)

(Note: This post is a continuation of the periodic ‘release’ of a book I wrote back in 2002, and recently updated, now called The Rise and Stall of Kohl’s Department Stores. This section, titled Private Label, is part of Chapter 3. To begin reading the book from the beginning, you need to go back to earlier posts, and start there. Once all of the chapters have been posted, it is my intent to then set up the book in a pdf file in the Writings section, which will be available for free download).
The proliferation of non-branded, or private label, merchandise over the past 30 years has radically altered the retail landscape. It’s one of those areas where consumers have responded better than the industry had originally expected. Eventually, just about everyone in the business scrambled to take advantage of it.

When I was a storeline executive in the 1980s, private label for many of the larger department store groups was just emerging as an important revenue stream. Some companies, such as May Department Stores, Federated Department Stores and The Hudson Bay Company (Canada’s largest retail group) began to launch new lines that were developed in-house, in that the names of the new lines, with all the accompanying labels, tags, and marketing material, were their own developed intellectual property. These new lines gave retailers some control over their product, in that they could price, market and promote it however they chose. Private label was viewed as an opportunity to create a competitive edge.

But not all retailers fell in love with the idea. Quite the contrary, as we will see. But first, some background. When Macy’s opened an award-winning 256,000 square foot store in the Dallas Galleria in the Fall of 1985, I was privileged to be the Store Manager. The opening, in the grand tradition of doing it ‘big’ in the State of Texas, included black-tie events on the wide marble aisles in the store itself, a kick-off mini-concert with Paul Anka, and many other splashy attention grabbers that we knew would surely create the proper buzz. The idea was to get people curious enough to come on down and check us out. At the time, our strategy was to make this Macy’s the only one in the country that had all of its sales associates on commission, and not to conduct the infamous One Day Sales. Basically, I was given the directive to copy Nordstroms, which at the time was in their heydey for their legendary service levels and ability to sell goods at regular price.

In the first four days of business, the store did over $2 million in sales, smashing all previous Macy’s records at the time. To say the least, they were pretty heady times. The word was out there about this new store in Dallas (to this day one of the most expensive department stores ever built) and the industry lost no time in taking notice. Retailers from all across North America would come visit the new store. Often I was there to escort these people and (in many cases) their entourage around the store. I had the honor and privilege of escorting the late Stanley Marcus, then Chairman from Neiman-Marcus, and Marshall Field’s former CEO Phillip Miller (who, following his visit, wrote me the most complimentary letter I have ever received; it is framed and is in my home office) and many other executives who wanted to see what this new store was all about. They were suitably impressed, and I took a great deal of pride knowing that they were taking notice of our entry into the market. On more than one occasion, the leader of an entourage would hold court with his minions somewhere in the store, point something out, and basically make the point: “We need to do it like this.”

Another one of those executives was the late William Dillard, Sr., who at the time was the Chief Executive Officer of Dillards, based in Little Rock, Arkansas. Mr. Dillard, upon walking the missy apparel departments on the main floor, began to question all the space dedicated to private label. I could tell that he obviously didn’t think it made much sense. He almost had a visceral reaction when we would walk through an area dominated by private label merchandise. “Where are the brands?” he would question. The look on his face was priceless. Mr. Dillard’s company clearly at the time had a disdain for private label, and they were leveraging this as best they could to develop extremely close relationships with the major branded players of that day: Liz Claiborne, Ralph Lauren/Polo, Haggar, Maidenform. In the late 80s, vendors absolutely loved Dillards. Every year they would win their individual “Retailer of the Year” award and get constant mentions in Women’s Wear Daily. But they were out of touch with where the future was heading. (Footnote: It’s interesting to note that many years later, Dillard’s underwent a major shift and started to vigorously go after private label. Orchestrated by William Dillard’s two sons, Bill and Alex, Dillard’s established a strong relationship with the buying group Frederick Atkins in New York, and began buying large commitments of apparel, and eventually hardgoods, off-shore, through agents in Hong Kong, Singapore and elsewhere. This new initiative created strains back home with the national brands, who had to give up valuable real estate to make way for all of this private label. Relationships with most of these vendors soured significantly in the mid 90s, as Alex Dillard put the screws on, demanding gross margin guarantees, and was perhaps the most aggressive in the industry when it came to taking end-of-season chargebacks. The shift from being the most loved of retailers by the major brands to being despised was truly remarkable).

Over time, many of these new private label lines created genuine brand equity, in that they would begin to register with customers the same way, for example, the name Dockers would, connoting certain selling points regarding relative quality and value. Rather than seeing it as some sort of quirk or gimmick created by the store, customers came to see these private label items as something that attracted them to the store just as much as the brand labels did.

As a generalization, private label was an opportunity for retailers to sell fashion ‘basics’ at generally higher gross margins. Whereas, for example, a typical Liz Claiborne blouse would sell at ‘keystone’(i.e., two times cost) plus $3-4, and therefore an initial mark-up of around 53% or so, retailers could sell a one pocket garment washed tee shirt at a mark-up significantly higher, say around 58%. Those extra 500 basis points of markup were huge in helping the bottom line, or at least the projected bottom line.

Other retailers, notably Wal-Mart and Target, would ‘knock-off,’ or copy, perceived fashion items, to include fashion basics, and would work with mostly off-shore factories in getting merchandise at the lowest landed cost possible. Using merchandise lingo, they would “take a lot out of” the garment: for example, reduce the gauge, or weight and ‘beefiness’ of the sweater, simplify the stitching, reduce the quality of the buttons, things like that.

In the end, retailers would have a lot of ‘water’ (another garment term, meaning that the spread between what they paid for a garment and what it retailed for on the selling floor was substantially higher than similar branded product) in private label. It gave merchants more flexibility in promoting goods: for example, with these ‘inflated’ retails, buyers could promote their merchandise at 33% off and still run the goods at keystone.

To his immense credit, as the chief merchant of Kohl’s from 1986 until his retirement in 1999, Jay Baker had a somewhat unique approach towards private label. This approach, which continues today to be the cornerstone of the merchandising philosophy at the company, is in my view a major reason behind Kohl’s success. It is based on three key objectives:

Grow and maintain private label to 20% of total revenues, while never losing focus on the importance of national brands in attracting the customer to the store. When private label programs at Kohl’s gradually took shape in the early-90s, Jay made sure that the proprietary assortments complemented the merchandise provided by the national brands. Private label simply added to the value proposition. Customers have never been overwhelmed by seas of private label, such as at JC Penney in the 90s; instead, they have been introduced over time to a select group of names such as Sonoma, etc. And although these private label products were pulled together into meaningful shops and presentations, overkill was never the message. Yes, the private label products were prominently displayed and readily available. But the importance of national brands was never neglected or forgotten.

In 2002, Larry Montgomery further underscored the company’s intent to focus on national brands while still offering customers meaningful private label programs: “Our private label is never going to be more than 20% to 25% of any given classification because our customers are telling us they want the national brands. Brands are always going to have a clear edge. Everybody knows, for example, what size they take in Levi 550 jeans. The brands we carry have huge credibility with the customer.”

Develop product with quality on par with top-line department stores. From the beginning, the private label strategy at Kohl’s was to create a dramatic distinction from the merchandise at the discounters, namely Wal-Mart and Target, and even the ‘middle’ retailers, namely Sears and Penney’s. While Wal-Mart and Target were doing everything to get the lowest cost of something (often to the detriment of quality), Kohl’s made an early commitment to develop private label product that would compete favorably with those programs offered at stores run by the large national players: Federated, Macy’s, May, Dillards..

(*footnote: Beginning around 2000, Target made a major change in their private label development, and clearly attempted to ‘trade up’ the customer by bringing in designers such as Michael Graves, Mossimo and Stephen Sprouse to create more updated, hip [and many would say, in light of their comp store stumbles in the past year, ‘too hip and over the top’] assortments and thereby separating themselves from the Wal-Mart customer. Kohl’s, in typical fashion being a late ‘second’ to many new ideas after the initial store concept was born in the 1990’s, finally came on board and created lines for celebrities like Daisey Fuentes, Ashley Judd and in 2007, Vera Wang).

3. Do not maintain the same high gross margins as department stores. So what does that strategy give you as a competitive advantage? Same quality + lower prices = greater value. Which translates to greater market share. Jay Baker, as well as his successor, Kevin Mansell, have refused to use private label as a pad to prop up the numbers, particularly gross margin. The temptation has been there, of course, but such a strategy, they came to believe, would eventually backfire.

Jay Baker’s private label strategy has contributed enormously to the success of Kohl’s. Private label now accounts for over three billion dollars in annual sales. Helping this initiative is the relationship that Kohl’s forged several years ago with Hong Kong based Li & Fung Ltd, the $4 billion global sourcing and production powerhouse. Instead of having buying teams at various points in the Far East and elsewhere, Li & Fung have provided Kohl’s merchants with turn-key full-package suppliers who can handle everything from buying piece goods (the fabric used to make a garment) to overseeing production to booking space on ships for the trip to the United States. While the company owns no factories or sewing machines, Li & Fung manage production in more than 100 plants in 67 countries. While Kohl’s low-cost culture has always tried to avoid middle-men or third-party service providers, the partnership created with Li & Fung enabled Jay Baker and his merchants to focus on the development of brand equity in the stores while relying heavily on their partners in the Far East to ensure consistently high quality control through on-site management at the factories.

Kohl’s continued to expand its quest for still more private label brands. The first major foray into creating a major stake in creating brand equity in private label at Kohl’s took place in 1994 in the denim jeans category. Jay Baker recognized that there was plenty of room for another line of jeans to complement the exploding Levi’s and Lee denim businesses. The line of Genuine Sonoma was created. The next year, playing off the success of the line, Sonoma expanded into men’s, missy and kid’s apparel, and in later years, extended to shoes, accessories and home products. It is by far the most successful and dominant private label line at Kohl’s.

Other apparel and accessories private label lines include Croft & Barrow, and Fairway and Fairway. Entry into the private label health and beauty aids categories occurred in 1995. Spearheaded by buying veteran Nancy Wargin, who joined Kohl’s in 1997 and recognized the opportunity to go after the same kind of merchandise that The Body Shop and The Limited’s Bath & Body Works had sold so successfully, Body Source was launched with much fanfare in the stores and has been a huge success.

The company has done such an excellent job marketing and positioning the in-house stable of labels that many customers, in marketing surveys and focus groups, now view such names as Sonoma on the same level as Levi’s or Nike or Columbia. Anecdotally, reports are abundant of shoppers approaching department managers of apparel areas at Kohl’s competitors and asking them where the Sonoma merchandise is! Talk about a spear through the heart!