GLGi: Increasing Utilization and Strength of Private Label Brands

Tuesday, July 31, 2007

New York

Angela Chew© 2007 Gerson Lehrman Group Inc., All Rights Reserved

Council Member Biography

Angela Chew is a partner at L&M Global Sourcing, a factory group with facilities in New York, China, Bangladesh and Central America. The company is serving Target, Macy's, Wal-Mart, Guess, Michael Kors, Nautica and others. She has 20 years of experience in retail, wholesale, design, merchandising, sales, global production and product development. She has worked with large corporations such as Macy's (Federated) Dept Stores, Saks Fifth Avenue, Ann Taylor, Victoria's Secret, Kohl's and Calvin Klein; as well as small start up fashion brands & design companies and a national food franchise,Domino's Pizza. Her product knowledge includes women's, men's & children's apparel, intimates, activewear, maternity and home goods. She has experience in direct mailing, franchising, licensing, buying and selling small companies.

Angela Chew© 2007 Gerson Lehrman Group Inc., All Rights Reserved

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Angela Chew© 2007 Gerson Lehrman Group Inc., All Rights Reserved

Gerson Lehrman Group Contacts

Randi CulangConsumer Goods & Services Global Research HeadGerson Lehrman Group850 Third Avenue, 9th FloorNew York, NY 10022212-750-1229rculang@glgroup.com

Christine RuaneSenior Product ManagerGerson Lehrman Group850 Third Avenue, 9th FloorNew York, NY 10022212-984-8505 cruane@glgroup.com

Angela Chew© 2007 Gerson Lehrman Group Inc., All Rights Reserved

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Topics Of Discussion

I. The Apparel Private Label Paradigm

II. National Apparel Brands Counter Strategy

III. The Future of Apparel Private Labels

Private Label Market Share

10%

20%

30%

40%

50%

60%

70%

96 97 98 99 '00 '01 '02 '03 '04 '05 '06

Private Labels National Brands

Source: adapted from Cotton Inc.

Overview

Worldwide Private Label retail sales have passed US$1 trillion

2006 US apparel & shoes retail sales: $358.6 Billion

2006: 45% apparel sales were private label 2005: 39% apparel sales were private label 2002: 35% apparel sales were private label By 2010, private label merchandise expects to

increase by 22% to 55% of total apparel sales

Source: US Dept of Commerce, expand on May 2007 Apparel and Textile News

Why The Growth?

Consolidation of retailers Brands sell to same retailers and become a

commodity Retailers need differentiation and better margin Declining retail prices (women’s apparel prices

dropped 2.4% 2007 vs. ‘06) Globalization of Production

Decline in Retail PricesFrom 1996 to 2006, the average retail price declined a

minimum of 9%

Product % Change Retail Channel % Change

Total -8.9 Total -8.9

Jeans -5.5 Department -13.7

Slacks -11.7 National Chain -9.0

Shorts -4.9 Specialty -5.8

Sweat Apparel -12.6 Mass merchant -7.5

Shirts -8.1 Off-price -4.2

Sweaters -16.3 Other -11.2

Shirts/Dresses -6.1Source: adapted and expanded from Cotton Inc. winter 2003

Global Sourcing

Imitate designer brands to reduce R&D costs

Source direct with factories to eliminate middlemen cost Buy in larger volume to receive lower cost Source from low cost, duty and/or quota free countries: China, India, Bangladesh, Vietnam, Pakistan, South & Central America, Africa

How do retailers achieve low PL prices?

Types of Private Label

Generic –very promotional, very low margin, Conway, Walgreen

Fast Value Fashion – knock-off brands, Zara and H &M

Premium Store Brands – Retailer’s own brand offers same or better quality at better price. The most profitable strategy in private label.

Source: The Private Label Strategy, Harvard Business School Press,

Premium Store Brands

Highly competitive - same or better quality at better prices, average 37% less than national

brands

Higher Gross Margins (est. 58 – 68%) Higher selling price per square foot than other Private label strategies Biggest threat to national brands Brand Loyalty

What is the preferred PL strategy?

See Appendix 2

Key USA RetailersRetailer 2006 Total

Sales Private Label

% to total sales

Private Label

Sales in USD*

JC Penney $19.9 50% $9.95

Kohl’s $15.5 35% $5.42

Wal-Mart $312.4 40% $124.96

Macy’s $27 33% $ 8.9

Target $59.5 32% $19.4

*Sales in billions include all private label & exclusive products

Macy’s percentage includes 18% private label and 15% exclusive merchandise

Premium Private Label Brands

JC Penney’s – a.n.a., Arizona, Ambrielle Macy’s - INC, Alfani, Style & Co Wal-Mart - Faded Glory, George Target - Mossimo, Circo Kohl’s - Urban Pipeline, Sonoma, Apt 9

Private Label Trends

Combined effort, a win-win strategy:

American Living, Simply Vera, Isaac Mizrahi One time exclusive deal – H & M, Target Blending in with Premium brands - INC, Arizona Marriage with a celebrity name – Sarah Jessica

Parker, Hilary Duff

National Brand Counter Strategies

Develop unique products and stay ahead as a trend leader Create own stores Develop a compelling marketing strategy Increase brand loyalty Combine effort by offering exclusive lines. I.e, Simply

Vera, American Living, Liz & Co Create one shot exclusive deliveries and SKUS Evaluate sourcing strategy and production cost Maintain net price (minimal promotions & discounts) Improve forecasting and turn around time

Future of Private Labels

Becoming national premium lifestyle brands: INC, Alfani, Arizona

Branching out to create specialty chain business: George apparel stores, Wal-Mart, UK

Increasing depth of multi dimensional merchandising product mix (Tony Hawk mens, boys, footwear and etc)

Spin off PL brands (Aeropostale) Cannibalize weaker PL brands

Private Label Pros & Cons

PROS Exclusivity & differentiation Bring customer loyalty Better margin Better control in deliveries Brand equity Freedom in pricing strategy Increase bargaining power

with both national brands and PL factories

CONS Inventory risk Higher R&D expense Higher marketing expense No markdown or return

allowance from branded suppliers

If product fails, will create negative image

Quality control, complex production & import issues

Private Brands To Watch

KOHL’S New Launches– Simply Vera by Vera Wang, Elle Apparel, Food

Network Kitchen estimated growth rate 6-7% for 2nd half of 2007 Tony Hawk, board-sports inspired, a hot category

JC PENNEY American Living by Ralph Lauren 2008 C7P – Chip & Pepper Denim 2007 Liz & Co Arizona - $1 billion lifestyle premium brand

MACY’S INC, Alfani, Style & Co, Martha Stewart, Field Gear, Epic

Threads WAL-MART *

George - $3 billion men’s urban fashion Faded Glory - $3 billion lifestyle premium brand

*Wal-Mart figures represent worldwide sales

What This Means

To differentiate To gain and maintain consumer loyalty To achieve higher gross margin To compete with national brands

I. Retailers believe private brands are their strategy:

II. National brands should:

What This Means

Change mind set and realize that Private Labels arecompeting brands Innovate and stay as market leaders to beat PL Stay focused on target audience Increase and market brand imagery to gain and maintain customer loyalty Partner with retailers to produce exclusive brands,SKUS, one-time offers or lines Price competitively and streamline expenses

III. Future of private labels:

Private brands will continue to play an important part of the assortment to their growth strategyBecome national lifestyle premium brandsDeploy a multi-layer strategy in brand, price and qualityCannibalize weaker private and national brands

What This Means

Appendix 1Retail Price Comparison

Private Label

Brands

Retail $

Gross Margin

National Brands

Retail $

Gross Margin

Price Difference betw. Brands

INC (Macy’s)

Dresses

$79-129.00

GM 60-69%

BCBG

Dresses

$158-178

GM 48-56%

37%

Alfani (Macy’s)

Men’s Polo

$34.50-42.0

GM 58-68%

Nautica

Men’s Polo

$45-55

GM 50-54%

30-39%

Faded Glory (Wal-Mart)

Denim

$10.77-14.42

GM 38-54%

Levi’s Denim

For Wal-Mart

$19.68

GM 45-48%

37%

Sonoma (Kohl's)

Menswear

$ 16-28.00

GM 60-62%

Dickie’s, Shady’s & etc

$16 – 40.00

GM 40 – 48%

20 –25%

Average price gap 37% based on quality equivalent categoriesAverage price gap 21% based on national brand’s quality is perceived to be less than private label brands.

Increasing Utilization and Strength

of Private Label Brands

New York July 31, 2007Boston August 1, 2007