Photo: NIke
Retailers and brands collide
In the golden age of brick-and-mortar retail, resellers and brands partnered closely to drive sales. Direct-to-consumer strategies were less common, as brands paid for shelf space and the critical consumer visibility it provided.
Today, retailers and brands are pitted against one another in fierce competition. Warren Buffet, CEO of Berkshire Hathaway, recently confirmed that a “huge struggle” is taking place between brands and retailers.
Retailers building brands
In the past, retailers’ “private label” brands were lower-cost alternatives to national brands, capitalizing on price-sensitive buyers with low brand loyalty. Retailers are now focused on a new value proposition: building highly desirable “owned brands” exclusively available from their store or website.
Amazon.com has notably taken an aggressive approach, currently promoting 74 unique brands. Brick-and-mortar resellers are also prioritizing owned brand strategies. Target launched three new brands specifically to reach Millennials, and its kids clothing brand Cat & Jack sold more than $2B last year. Walmart launched premium-brand Allswell Home with its own website to distance it from the store. Even 7-Eleven recently debuted a line of cosmetics.
Brands going direct
Nike was the first brand to execute a direct strategy back in 1990 with its first storefront. Retail partners pushed back, but Nike calmed their fears — initially. Nike’s Trojan horse experiment initiated the direct model for today’s brands. Today, Foot Locker sales are essentially flat, while 25 percent of Nike sales are direct.
Countless other brands are rapidly accelerating their direct-to-consumer strategies. PepsiCo is succeeding with its Gatorade Endurance brand and Drinkfinity website. M&M’s and Oreos both offer custom products that are not available in stores. Hasbro initiated a direct-to-consumer subscription service for avid gamers. Virtually every new brand launched in the past five years has included a direct-to-consumer component, including Warby Parker, Casper, Bonobos, Dollar Shave Club, Brandless and many others.
Where do we go from here?
It’s going to get increasingly difficult for a retailer to make a living selling other companies stuff. Every market will support a few aggregators, such as Walmart and Amazon, but most retailers are going to need to offer their own products to survive. At the same time, brands are going to have to get much closer to the consumer to better design products to meet her needs. We’re probably going to need to let go of traditional brand and retailer labels as the lines continue to blur.
Discussion Questions
DISCUSSION QUESTIONS: Do you expect to see more retailers and brands competing directly with one another in the years ahead? How has the trend affected department stores and big box retailers? What will this mean for the industry over the next decade and beyond?
Poll
BrainTrust
Cate Trotter
Head of Trends, Insider Trends
Ken Morris
Managing Partner Cambridge Retail Advisors
Let’s be careful not to confuse private “labels” with private “brands.” Private label merchandise is generic goods, sold as a commodity (and commodities have price as their value proposition). Private brands, when properly executed, are truly brands, exclusive to a retailer or channel of distribution, with distinct brand attributes, supported by significant marketing. Overall, private label continues the “race to the bottom,” favoring low cost producers. The problem with the race to the bottom is that you might just win — or worse, come in second. Amazon’s current approach is that of private label. Costco’s approach with Kirkland Signature is that of private brand. Brands make a difference, they separate your products from the herd (as in the origin of the word “branding” for cattle … ).
And let’s remember that Kirkland started life as a private label. No ad campaigns, no social media. Just a long, slow slog of continually demonstrating amazing quality and great value. Until finally the Kirkland brand promise emerged and became obvious and predictable … amazing quality and great value. Now it doesn’t matter what product they put the Kirkland label on. I know instantly that within its category, the Costco Kirkland product will be amazing quality and great value. But it started life as a private label. Time and performance (Costco’s integrity) made it a brand.
A brand is finally a brand when the customer believes and embraces the promise, not when the originating company says so.
Brands and retailers should both be in the space of selling their products to consumers. That isn’t the same thing as competing with one another. In a fireside chat I had with Arc’teryx General Manager Jon Hoerauf, he shared that while Arc’teryx has their own stores, the intel they gained from consumers helped them be better partners with the retailers that they sell to as well. He also indicated that with the retailers that understood how symbiotic the relationship was, the sharing of information back to Arc’teryx helped them be better at retailing too.
Brands and retailers can share space. It means a more thoughtful sales strategy on both sides, but there is room to grow.
There can be little doubt that own-brand development is vital for most retailers, and especially department stores.
Unfortunately, most U.S. department stores — with some exceptions — have been poor and slow at doing this. Where they have attempted it, the impact is lackluster.
Target has always been good at own-brand, as has the U.K.’s John Lewis. Both are interesting case studies in how to get own-brand right.
As product producers flex their brand development muscles many consumer access approaches apply, each one of which offers a different shopping experience and puts pressure on retailers. This will only increase even as retailer private label brands seek their own revenue success. The symbiotic relationship between brands and retail has been a given since retail began, but this has become more dynamic with retail options, consumer segmentation, production capacity and many other factors. The future isn’t what it used to be.
It seems to me that in apparel this collision has been in progress for at least 30+ years. Back when Federated’s “Allen Solly” label and Macy’s “Club Room” label both drew heavily on Polo Ralph Lauren for inspiration. On a more direct level, Polo shocked everybody when they announced the opening of their flagship store in the Rhinelander Mansion back in 1983. “How dare they?” And it’s been a slow-moving collision ever since — or, in a word … competition in its purest form. Except that now the customers don’t have to pick a physical location to shop in. They can just pick up their phone.
I agree — I feel like this conversation started 30 years ago. The customer is agnostic as so much has happened to make things more convenient that this line is blurring. I’m not sure what Ralph would have thought back in the 1980s if he knew customers could order a Polo shirt from their phone while sitting on their couch. Or how soon it would happen. Retailers (either brands or traditional department stores) still need to work harder than ever to get customers’ attention.
The relationship between brands and retailers has been stressed and adversarial for years. Brands welcomed the promise of the Internet “supernova” as it meant they could communicate with their customers directly. It’s taken 10 years but that direct communication is happening — further marginalizing the traditional retail model. Retailers have been extracting MDF, co-op and placement funds from brands for years. Brands, on the other hand, have been asking for accountability for those merchandising dollars. Everyone knew those dollars were going straight to the retailer’s bottom line. Because of this, in addition to the cold reality that retail continues to be a consignment business, it’s no wonder brands want to communicate directly with their customers. The technological supernova has facilitated this evolution. Retailing will continue — but the brands now hold the power to communicate and sell directly to their constituents.
The U.S. has always been the country of specialization (look at assembly lines). One company manufactured parts for brands like GE and Whirlpool and these companies put the parts together into a finished product and put their name on it. Retailers then sold these finished products to the end-consumer. If so-called brands (think Nike, Louis Vuitton, Ralph Lauren) want to be in the retail business as well as in the design and distribution business, someone is going to lose. Either retailers will abandon selling the brands, or the brands have to stick to design and distribution (they don’t always manufacture what they design).
In today’s retail environment customers have more choice than ever of brands and places to buy. As such, more and more companies have realized the importance of having a relationship with customers and owning their brand. It’s much easier to control how your brand is presented if you sell it direct — Nike has shown that in its recent success and Lush is another successful brand that does direct only. On the flip-side, companies like Amazon are naturally going to want to create their own brands because their business model has been built on selling other names. If they can get customers to want to buy brands they own then they get a better piece of the pie.
I think though there are still opportunities for malls and department stores to leverage these brands and their power. The Fenty/Harvey Nichols relationship shows how the right name can be a big customer draw. Rather than just chucking some Nike trainers into the footwear department, there is the scope now to do a really cool and interesting brand takeover or installation within a department store or shopping center. It gives them a piece of the pie and helps the brand present themselves in a better light.
Absolutely. An expression I use is, “think like a brand and act like a retailer.” Retailers need to consider what unique offerings will drive customers to their store and/or website. Every retailer carries national brands and for good reason. However, what makes a customer drive past one retailer to visit another or close one website and open another? The answer simply is differential advantage. Unique brands, store layout, promotions, websites, customer service, etc., all contribute to a retailer’s differential advantage.
Given this scenario, national brands need to develop their own unique products and alternative distribution channels to balance power and give consumers a reason to “drive” to them.
This evolution has and will continue to take decades to make a noticeable impact upon shoppers. The depth of the retailer footprint in our urban society is firmly planted in the consumer marketplace. Sure brands will continue to increase D2C commerce. Yet the product assortment in existence today, which is increasing exponentially daily, demands multiple retail outlets to reach their audience. So many of these outlets are required that brands don’t have the capacity to replace retailers anytime soon.
Definitely! There are two things going forward: direct-to-consumer and marketplace. Nike is already WAY ahead of the game in this respect, opening over 500 stores in the last five years under various brand names while simultaneously joining Amazon Marketplace. Brilliant (don’t let recent sales softness cloud the long-term play’s correctness), but also just modern strategy at its current best.
This is clearly how consumers shop now: “I need a pair of Nike’s, I’m hitting them first,” or “I need some great sneaks, let’s see what’s out there.”
Welcome to retail 3.0. Hardest hit will be CPG like P&G, just not as easy for them as their choices are pretty much through grocery / big box or marketplace only. DTC is very tough for them. Hence, they will be at the mercy of the coagulators for some time to come.
Jason nailed it! The future is direct to consumer and then employing channels for diversification. IMO, Amazon has accelerated this trend as brands and retailers see a need to own their experience. Being dependent on channels for growth is a big risk. This is great for the advertising and marketing community as more direct to consumer dollars will flow into platform and agency coffers. However, not all is great as retailers will suffer because they lack brand identity. Largely viewed as real estate or shelves, their pivot to building brands needs to happen ASAP.
Retailers and brands have always been frenemies. They need each other – brands need distribution channels, and retailers need stuff to sell. But ultimately they are fighting over the same pot of consumer dollars, so while they aren’t typically competitors, they certainly do have competing interests at the heart of their relationship. Those fundamental dynamics have been inherent in the relationship literally for decades, so that isn’t like to change. And there’s always some cross-over – e.g., Sears had success for decades as a retailer, and owned brands like Craftsman – but DTC brands struggled to get distribution in the pre-Internet era.
But the Internet’s ubiquity and consumer interest in new brands had heighted the pace of change, and the complexity of new models for interacting. The pendulum swung heavily toward a few retailers with dominant online presences, and now DTC brands are counterpunching. Retail has always been a hard business with often-thin margins, so more innovation and cross-overs will come – such as retailers creating their own brands, or retailers partnering with brands in new ways (e.g., Nordstrom carrying DTC brands).
One key is that brands are now able to use market intelligence solutions to provide gain full visibility into what happens on dominant retail sites – information like search activity and conversion rates on Amazon. As brands become more empowered with information, the dynamics of the relationship will change further.
Yes there will be increased competition between brands and retailers moving forward. It is still a bit of a “frenemy” relationship for many brands and retailers. The key here for both retailers and brands is that they need to offer something different and provide a real value. The retailers and brands that are disappearing quickly are ones who pretty much sold the same exact products as every other retailer and the only way to compete was on price. Price is now so transparent so brands and retailer now need to find better ways to differentiate. Not all retailers need to own private label or launch private brands but they do need to find some products, categorizes or services where they can stand out from the crowd.
There is a significant trend of brands going direct and selling online and opening physical stores. This is creating pressures on retailers selling commodity items (items/brands sold at competitors stores and now brand stores). To combat this, department stores and big box retailers are creating their own private brands at an increasing pace. Disintermediation is also increasing rapidly which creates an awkward dance between retail and supplier. Differentiate or die should be the mantra going forward. If you can’t do it with product than service seems to be the key. Customer engagement and relationships become critical in a world where the middleman no longer exists.
Survival for retailers selling commodity items will continue to become more challenging. These retailers will need to offer value added services that are unique, greater convenience or an experience that makes their stores a destination. Competing on price is not a sustainable model.