Brand This: Department Stores Capitalize On Their Names

A visit to a favorite department store affirms that private-label brands are gaining strength.

J.C. Penney Co. has the highest level of private-label brands at 40% of sales, according to a retail report issued last month by Merrill Lynch & Co. Federated Department Stores Inc.'s Macy's and Bloomingdale's stores each have successful private labels, and Nordstrom Inc. has been steadily adding private labels to each of its departments. Kohl's Corp. this year is expected to launch Apt. 9, its newest private label.

As private-label brands grow in importance, retailers are turning to more advanced technology to better understand how well their products are doing compared with national brands. Nordstrom is starting to deploy new point-of-sale and inventory systems to help it analyze sales trends by style, store, and region, according to the Merrill Lynch report. In addition, Nordstrom plans to roll out a system that will automatically monitor stock levels and generate recommendations for optimal replenishment.

Those kinds of systems can make or break private-label initiatives. Saks Inc., which operates the high-end Saks Fifth Avenue stores, launched three new private-label brands in 2004, but none did as well as expected, according to the Merrill Lynch report. Saks admitted it hadn't done a good job forecasting sales, which were lower than expected and forced higher markdowns, the reports says. In addition, Saks reportedly didn't order the optimum mix of nationally and private-label branded apparel. For example, the company ordered too much private-label men's clothing.

This year, Saks is investing more of its IT dollars in new systems, including inventory-management and analytical software. Between 1999 and 2003, much of its IT funds were spent to integrate disparate systems, the report states. Saks' private-label sales are expected to stabilize at between 16% and 17% of sales, Merrill Lynch says.

The upswing in private-label initiatives is good news for the suppliers that make private-label goods. Innovo Group Inc., which provides private-label apparel to American Eagle Outfitters, Kmart, and Target, last week reported that sales rose 78% to $23 million for the first quarter, ended Feb. 26, up from $13 million in the year-ago quarter. Branded apparel gross margins increased to 41% on $6.1 million, compared with 15% on $4.7 million in the year-ago quarter. While sales and gross profit margins rose, the company suffered a narrow first-quarter loss of $616,000.

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