It’s a lesson many retailers have learned the hard way: Competing solely on price is only going to reduce margins and hurt profitability. Best case scenario: profits grow modestly, and that’s assuming that heavily discounted goods are sold on a massive scale. Worst case scenario: Extinction. Many retailers have been forced to shutter after getting sucked into dangerous price wars with competitors.

As an alternative to playing the discount game, many retailers roll out private label products. The goal is to distinguish a brand by selling innovative goods that can’t be found elsewhere. It’s a sound strategy, but it can easily backfire if the infrastructure is not in place to support it.

Why Unique Offerings and Compelling Experiences Are Not Enough

Retailers such as PetSmart in the pet segment, Aerospostale in apparel, Best Buy in consumer electronics, REI in outdoor equipment and clothing, Target in mass merchandising and Coach in accessories have grown rapidly this decade in large part because they recognized the absolute need for unique offerings and more-engaging customer experiences than those found in the mass discounters. By doing so, they escaped the black hole of price competition.

But that isn’t nearly enough to avoid death by discounting. Retailers need expertise in product design and development; inventory management; and supply chain management in order to successfully roll out private label products.

Product Design and Development

Creating unique offerings requires a large investment in product design. Protecting those investments requires tools that will allow retailers to accurately forecast demand for goods that have little precedent.

Because suppliers assume more risk as well, retailers must work much more closely with them (and even their suppliers’ suppliers) in demand planning and synchronizing orders and production calendars. Our research found that the most successful act vertical retailers (retailers who are “acting” vertical but do not own any manufacturing resources) collaborated much more strongly with their suppliers in design and development than the least successful act vertical retailers.

Inventory Management

Inventories must be managed tightly as well. Better to be conservative with orders, may be even going so far in some instances as to make stockouts a strategy for very fashionable merchandise. When a retailer has excess inventory of its own product brands, it cannot negotiate a return to a vendor or ask for markdown money. This is to say that if the retailer doesn’t manage these and other supply chain issues well, its return on popular products can quickly go from positive to negative. And even if the return is positive, an inefficient supply chain will whittle it down.

Supply Chain Management

To be sure, having the right unique products trumps everything else. A streamlined supply chain cannot rescue product and service offerings that customers find unappetizing. But if its proprietary offerings are on the mark, a retailer must make sure two critical supply chain capabilities are in good working order: assortment lifecycle management and in-season inventory management.

This is the first part of a two-part series. For the second part, click here.

23 November 2009