There is nothing new about either private label, or brand owners missing out retailers and selling direct. But both are very much on the rise and these two trends say much about the underlying shift in retail trading economics. Vertical integration was not invented by Inditex and Zara. In fact many apparel and footwear retailers in the UK started out as manufacturers, they bolted on a few stores and over time, the retailing became more core than the making.
As retail evolved, the skills required to make it successful diverged increasingly from manufacturing and helped by the growing need to find low cost production, the two tended to part. Some brands have long wanted to miss out retail for reasons of economics and control. Nike have always had a clear view of how their products should be retailed and that view has not always been shared by their retail partners – their “difficult” relationship with Sports Direct here is a case in point. Consumer electronics is a market that continues to be dominated by brands and Apple is a spectacular example of going direct.
DTC clearly has a radically different economic model in which the retail end of the chain will often be part of the marketing spend. No longer sharing the margin with a third party retailer is a massive attraction. However, a retail operating model is needed irrespective of who owns the brand. You still need to manage inventory, forecast demand and manage price and mark down effectively. To a large extent, you still need to think and act like a retailer.
On the other side of the fence, I believe making money retailing other people’s products will become progressively more challenging. Shrinking trading economics are driving progressive growth in grocery sector private label. Clearly, when a market is dominated by the same brands, retailer differentiation becomes more challenging. Putting your own stamp on your offer helps set you apart and own brands in food are currently at record highs, and rising.
In fashion, private label has long been a big part of our market. But it will get bigger. Squeezed margins make it very difficult for the numbers to work – this is a major factor driving the existential threat to department stores on both side of the Atlantic. There are always exceptions to almost any retail rule – Selfridges has the skills to truly add value and do for brands what they cannot do for themselves. But most others are fighting a rising tide.
Owning the product is clearly a very different model. You need to be exercising control all the way up the supply chain. And, of course, you have to get much better at retailing. Managing inventory becomes much easier if you have the skills to determine the nature of that stock and match it precisely to what your customers want. With so many more moving parts, operating model optimisation is essential. Too many retailers make do with a jigsaw of bits which do not talk to each other, held together by sticky tape. In a world of progressively diminishing returns, this will be increasingly life-threatening.
DTC and private label are two sides of a very similar coin. Both retailers and brands need greater control of their destinies and are increasingly bypassing each other. Nevertheless, they are ultimately both focusing on the need to better engage with consumers. Leveraging digital assets to maximise squeezed trading economics will be fundamental to both.
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