From The Bottom Line, Summer ’09: Change Is Inevitable. Deal With It.

Posted by Marty Brochstein on May 27, 2009

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The retail business is one of continual change. Some of the shifts are swift and obvious, and others are more subtle. One of the keys to success is staying attuned to both kinds, and to figuring out which of the shifts are short-term, and which have more lasting implications.

The history of retailing is one of new formats and store types arriving and exiting the marketplace. I’m old enough to remember the rise of catalog showrooms such as Service Merchandise, Best Products and others in the U.S. in the ‘70s. They were hailed in some circles as the “ultimate” format that would forever change the nature of retail. You only had to heat, fixture and light a small portion of the building while displaying one of each item (with the rest of the space maintained as warehouse), so costs would be low and prices could be sharp while yielding great margins. No doubt, they were going to kill all other formats. They thrived for a while, but even while they did, some vendors refused to sell to them because they would destroy carefully planned pricing structures. (For a variety of reasons, the format ultimately faded into oblivion.)

I also remember, in about the same time frame, when the mass merchandise tier could be segmented into standard discounters (named such as Woolco, Jefferson, TG&Y) and so-called upscale discounters (Caldor, Clover, Bradlees, Venture and the one that ultimately succeeded – Target). There was one growing chain that several vendors were wary of. The stores seemed slightly unkempt, they had bargain tables in the main aisles, and your brand would be instantly degraded if you sold to them. That chain was based in Bentonville, AR, and vendors have figured out a way to work with them.
Then came the rise of the warehouse clubs, which many were convinced would destroy large swaths of retail pricing structures and distribution. Many have figured out how to work with them.

More recently, dollar stores came on the scene in a meaningful way. The initial reaction by most brand owners and licensors was to avoid them like the plague. More recently, many have developed strategies to enable them to participate in the channel while maintaining their business elsewhere.

That ongoing reformulation of the marketplace will proceed. The online retail world will continue to grow, with a multitude of variations on the theme. One can make the argument that the retail business is now going through a painful rightsizing, with chains winnowing down their store counts or going out of business outright. Some of that business will come back, and the only sure bet is that there will be some new specialty concepts and store formats filling in some of that now-open space.

Another retail shift is the growing popularity of private labels and store brands. There’s little doubt that they’ve been picking up significant shelf space and sales dollars. For decades, retailers have fallen in and out of love with private label programs in fairly predictable cycles. They see margins that are higher than those of brands, pump up their private label offerings, and all is well until something doesn’t work, and they have to take the markdowns themselves with no help from a supplier. Brands grow again. Sometime later, a bright executive sees that margins on private label are higher, and….you know the rest of the story.

But things are different this time around. For one thing, retailers of all sorts have built their own product development and sourcing operations, rather than merely relying on an outside supplier to develop and manufacture store brands. So the retailer now has a more direct role to play, and a more vested interest in developing store brands. Many have been throwing development resources behind developing house brands positioned on the same plane as national brands – with well-formulated packaging and marketing campaigns – rather than the old-style “nearly as good as, but cheaper” positioning.

But that can also be a double edged sword. As the retailers are pouring more money into store brands, the margin implications become less enthralling. In fact, some retailers’ desire for more protected brands has generated an upsurge in large direct-to-retail (DTR) programs, which give the retailer the benefit of a protected label without the cost of building one on its own.

And the rise of private label is having an effect on pricing. One textile executive talks of the struggle to elbow his way onto the store shelf.  He divides shelf space in his category into “private label, DTR licenses, and the ‘properties bucket – ‘ that’s the bucket that everyone [with licensed properties] is shooting for.” And a key concern for the retailer, he says, is that the licensed property “can’t in any way degrade” the sales prospects of the private label and DTR products, which generate better margins than the traditionally licensed goods.

It’s one of those retail challenges that continue to arise. Those that learn how to deal with ongoing change in the retail environment will be those who have a vital business going forward.