Sep 19, 2007

A New Era of Trusted Brands and Channel Stewardship

A long-overdue new era of partnership between trusted brand manufacturers and dominant retailers is taking hold in many consumer markets. Long-overdue because these relationships have been acrimonious and short-sighted; focusing on price negotiations, overseas sourcing, and stripping out any hope of consumer excitement and experience differentiation in market after market. Times are changing. And they're changing fast.

  • While the financial re-engineering of faltering retailer JC Penny was initially built on the back of deep backward integration into every element of design, sourcing, logistics and merchandising for house private label products, the company is starting a big move back to more traditional vendor-based relationships with powerhouse brands. Today, roughly 40 per cent of JC Penney sales are private label (versus 20 per cent for Federated and Kohls), and these early house brand names (Nicole Miller; Chris Madden) helped the company attract lost customers back into its stores and also increased sales of more profitable private name labels. But in an important nod to the strategic role of strong branded apparel company relationships, JC Penney has recently reached a striking new deal with brand powerhouse Polo Ralph Lauren to launch a range of exclusive private label apparel and home goods in 2008 under the name American Living. And insiders indicate that RL will have significant control over fabric selection, design, merchandising, pricing and advertising, along with some involvement in key sourcing decisions.

  • Best Buy announced plans to expand its Apple outlets to 270 by year end, from about 200 currently. Best Buy executives have been quoted saying Apple products, including the iMac and new music and video products, are boosting customer traffic in stores and adding to sales which has helped Best Buy gain market share, customer loyalty and improve its customer satisfaction scores.
We're seeing these moves now for several reasons.

First, the US Supreme Court themselves weighed in when they recently overturned an almost 100 year ruling and will now let branded manufacturers create minimum resale price agreements with channel partners. Why would the court conclude higher prices are good for consumers? Because higher prices provide the margins needed to get moribund retail systems energized to invest in the consumer experiences and services required to make competition more vital between brands.

Second, low-cost private label initiatives at major retailers are faltering. Sure, short-term profit gains have been impressive and branded products were replaced with obscenely low cost overseas alternatives. Large Asian contract supply wholesalers such as HTC in consumer electronics (see earlier post) and Li & Fung in apparel (see earlier post) have grown quickly by providing these retail private label initiatives with easy, turnkey sourcing machines. But there was one catch for income statement-oriented retail managers: consumers got bored and stopped shopping in the stores. And on top of that alarming trend, it turns out that manging the supply chain risks associated with recalls and safety scares is one big expense pit for aggressive supply-integrated retailers.

Bottom line: consumers seek out and spend money on product innovations and lifestyle shopping environments. Consumers ultimately want some level of excitement and experience. It's true that a few fully-integrated manufacturing/retailing players know how to make it work. Abercrombie and Fitch. Apple. Benetton. But for most players on both the retailing and manufacturing sides, narrow distribution and product offerings are simply inadequate and limit their market share and growth upside.

The new era of partnership and channel stewardship will see new-style branded product makers focusing on and investing more in strong, lifestyle brand platforms. And new-style retailing leaders focusing on and investing more in strong, lifestyle shopping platforms. Core competencies are back!

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