As consumers remain value conscious, strong brands that have cultivated trust from consumers continue to dominate the marketplace. Weaker brands must begin forward planning, investing in their companies to develop the differentiation and uniqueness that consumers desire. As discretionary spending begins to make a slight recovery, RSM McGladrey Director of Retail and Consumer Advisory Services Jeff Edelman takes a look at how strong brands continue to drive sales and what weaker brands can do to make up ground.
Consumers remain value focused: Buying patterns remain largely unchanged from the recession, although there have been a number of instances where the consumer has begun to purchase discretionary items they want, rather than need, particularly within the better and luxury categories. Nevertheless, it would appear as if the frugal mindset is here to stay, evidenced by the growth of private brands. The value proposition is also being enhanced by the consumers’ willingness to frequent discount channels more often.
Private Brands (Captive) are growing market share: This goes beyond commodity private label assortments, including an increasing number of exclusive or store brands at retail. Aside from passing along some of the cost advantages over national brands, these help provide uniqueness, differentiation and protection against competitive pricing. The store environment can set the stage for a strong “owned” brand program if the retailer has built a strong loyal customer base through the perceived quality of the store. These retailers have been able to create better quality and/or lower prices throughout their merchandise assortment.
National brands have built trust over the years: Due to this trust, consumers have responded favorably to expanded product categories and assortments. These brands have built their reputation on quality, sizing and, more often than not, the appropriate fashion vision. Consumers also benefit as many of these items tend to be more heavily promoted, adding to the perception of increased value.
Licensed brands gain momentum: Many former national brands are emerging as important contributors to differentiation and uniqueness for a number of retailers. Liz Claiborne was phased out as a national brand, then licensed to JCPenney, who purchased it and extended it across a multitude of additional product categories. Additionally, Li & Fung continues to grow its stable of brands, providing economies of scale and brand extension opportunities.
Weaker brands will continue to be losers: Sales per square foot used to be one of the main drivers of profitability. However, gross profits per square foot has become just as, if not more important. The latter is generally greater with private or exclusive brands, and responsible for ongoing growth in position within the store. These represent approximately 50 percent of the merchandise mix at Kohl’s and JCPenney, and a smaller but growing percentage at department stores. Weaker brands, accordingly, appear to be losing market share at an even faster pace than ever. Profitability for those vendors is deteriorating rapidly through higher per unit production costs and unabsorbed overhead. It is just a question of when, not if, they lose viability as a going concern.
Facing reality: Many of the above “weaker brands” are owned by small-to-mid sized companies, often second and third generation family or privately-held businesses. There is little forward planning, whether financial or succession; the prime focus has been cash withdrawal from the business. They have approached, or will soon be reaching, the point at which reinvestment will be needed to ensure survival and sustainability. Unfortunately, for a number of these, it is business as usual—for now.
Jeffrey B. Edelman is Director of Retail and Consumer Products Advisory Services for RSM McGladrey, Inc., and is located in the firm’s New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at email@example.com.