Ah, the fickle American shopper. So easily bored. Always asking: What’s new? What’s cool? What do you have that’s so special?
Retailers are asking themselves the same thing as they head into the new year.
The pace of retail spending is forecast to slow in 2007 as high energy costs, increased interest rates and the housing downturn pinch consumers.
That leaves retailers looking more intensely than ever for ways to stand out. And many are doing so by becoming manufacturers themselves, wielding more direct control of the designs and prices of products carried in their stores.
“The rise of manufacturing in China and the shrinking planet has made the line between retailers and manufacturers blur,” said Ron Boire, president of Toys “R” Us Inc. in the U.S. “We’re bigger than most manufacturers we deal with.”
Indeed, Toys “R” Us is expected to generate about $13 billion in sales this year. Mattel Inc., the toymaking giant best known for Barbie, is less than half that size, at an estimated $5.5 billion in 2006 sales, according to retail analysts.
With retailers typically generating relatively slim profit margins of 3 percent to 5 percent, cutting prices too steeply or too often can eventually drive a retailer out of business.
Yet, thanks to Wal-Mart Stores Inc., the world’s largest retailer, price competition has intensified in recent years, particularly in toys and apparel, trickling throughout the industry, even to stores that do not compete directly with the discount chain.
By taking the design and manufacture of more goods in-house, retailers can get around the Wal-Mart problem, industry observers say. In-house brands yield higher profits, because there is no wholesaler to go through. And they give retailers something unique to sell at the same time.
“We’re seeing more private label because it differentiates the retailers,” said Dan Butler, vice president of retail operations at the National Retail Federation, a Washington-based retail trade group. “Newness drives sales in retail, and this [strategy] offers a new and fresh item that you can’t get anywhere else.”
Hiring designers to make products exclusively for a retailer is nothing new. Target Corp. pioneered the trend years ago, reviving the careers of such designers as Michael Graves and Isaac Mizrahi.
And with just about everyone jumping on the bandwagon, selling an in-house brand or an exclusive in and of itself does not guarantee success.
“It’s a strategy being employed so widely that it no longer sets you apart, but allows you to compete,” said Philip Zahn, a Chicago-based credit analyst at Fitch Ratings.
Under new management since March 2005, Toys “R” Us has been building up its design team in China and Hong Kong with an eye toward expanding its in-house toy brands, Boire said.
The Wayne, N.J.-based retailer is hiring executives with product-management experience; Boire himself worked 17 years at Sony Corp. managing a variety of brands. And since February the toy stores have been under the leadership of Chairman and CEO Gerald Storch, the former vice chairman of Target and a 12-year veteran of the discount chain.
“Every year we try to do more of it, try to get better at it,” said Boire. “You should be able to cut out the middleman and become more efficient and garner more profit.”
The Bon-Ton Stores Inc., owner of Carson Pirie Scott, established its own design staff of more than 100 at its merchandising headquarters in Milwaukee in June to expand its in-house brands.
Likewise, Federated Department Stores Inc., parent of Macy’s and Bloomingdales, has a small army of designers in New York working on in-house brands such as Alfani and INC, a key part of the company’s strategy to revive the department store as a retail format.
And J.C. Penney Co. pinned its turnaround in large part on the success of brands designed in-house, exclusively for the Plano, Texas-based department store. The private-label lines make up more than 40 percent of its business and helped spark a 23 percent spike in fiscal third-quarter net income.
Even Hoffman Estates-based Sears Holdings Corp., parent of Sears and Kmart, set up a 45,000-square-foot design studio in Lower Manhattan in May in hopes of turning around Sears’ long-ailing apparel business. The space is big enough to house 200 designers, technicians and graphic artists working on in-house brands.
In that regard, in the fiscal third quarter, when total sales at stores open at least a year fell at Sears and Kmart, apparel provided one of the few bright spots. Apparel sales rose at both chains, and at Sears women’s apparel in particular posted a “pronounced” increase, according to the company’s third-quarter earnings report.
That’s not to say creating an in-house brand guarantees success. Wal-Mart introduced its trendy Metro 7 apparel to a less-than-enthusiastic audience and wound up marking it down, hurting sales and profit.
At the same time, apparel manufacturers are investing more aggressively in their own retail stores in an effort to keep control over some distribution. In the past apparel manufacturers have largely limited their retail activity to off-price outlets as a way to sell unwanted and leftover merchandise.
Now, manufacturers ranging from Apple and Nokia to Lacoste and Coach have set up their own stores.
Moody’s Investors Service warns that, for apparel-makers, the high fixed cost and complexity of operating stores could overshadow the benefit of guaranteed distribution.
Fitch Ratings, for its part, sees an added benefit for retailers willing to step up their in-house brands. “These strategies will help retailers attract higher income customers, which are a desirable group, given the challenges facing lower income shoppers [in the year ahead],” its report said.
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smjones@tribune.com
