Value Chain Part 2: Private Label
“An artist is someone who can hold two opposing viewpoints and still remain fully functional.” - F. Scott Fitzgerald
For today’s blog post, I will honor Mr. Fitzgerald and apply this principle to a hot topic within the Outdoor Industry: private label products.
Viewpoint #1: Private label is a fundamental pillar of retail that directly benefits the consumer
Those of us who have developed and managed outdoor gear brands tend to detest private label and treat it as though it is a new, disruptive phenomenon. But private label did not begin with Cabela’s, Orvis, or Walmart. Brands developed by retailers have been around for as long as department stores and catalogers have been in existence.
Sears Roebuck was one of the early pioneers. From the Sears guns to Kenmore appliances to Craftsman tools, products manufactured by Sears were part of their business model starting in 1902. Just 14 years after the company’s founding, Sears printed the following copy about the Long Range Winner shotgun:
“How we make the price $3.98. We own the factory in which these guns are made and control the entire output. The cost to us is gotten down to merely the cost of the raw material and labor, and to this we add our one small percent of profit.”
Walmart and its subsidiary Moosejaw continued the private label tradition this year by launching new mid-tier price point Lithic and Allforth brands, a step-up from Walmart’s opening price point Ozark Trail brand. A memo issued by Mossejaw CEO stated “Both lines are designed to draw new participants into the fun, community and health benefits of hiking and backpacking.”
If the market truly exists to serve the consumer, then private label is great for people buying outdoor gear. Private label products particularly benefit younger consumers, people new to outdoor activities, and consumers of lower income. Private label gear lowers the price of admission into the world of outdoor adventure.
Viewpoint #2: Private label destroys the relationship between retailers and brands
For brands, building business with major retailers requires long term strategic and financial commitment. Early in the process, the word “partnership” is thrown around by both sides of the table, and brands find themselves committing to increasing levels of investment. Retailers insist that brands share their market research and consumer insights. Brands present early previews of product lines for feedback and buy-in. Brands take an ever-increasing number of chargebacks and financial penalties. Brands invest in IT infrastructure to meet the retailers’ evolving vendor requirements. Brands participate in retailers’ marketing programs which ultimately draw funds away from the brand’s core marketing plans. As brands commit to deeper and deeper levels of investment, the idea of pivoting distribution strategy away from major retailers becomes strategically impossible.
What is often financially damaging to brands is the fact that private label starts at opening price points and eventually works its way up to the middle tier. It is the lower half of the price point spectrum that moves the most volume and often provides the most profitability to the brand in terms of gross profit dollars. When retailers gobble up both the bottom and middle of the price point continuum for themselves, they leave outside brands with the highest priced, lowest volume, and often least profitable part of the assortment.
Eventually, brands serve as nothing more than window dressing to draw consumers into the store. Branded product hang on the top wrung of the planogram and quickly the consumer’s eyes scan lower and discover more approachable, higher value private label price points.
Few private label retailers are strong on product innovation. Instead, they draw directly from successful brands in the marketplace to inform design and features. Brands are inevitably forced to protect their investments by bringing legal action against retailers. The most notable recent example of this is YETI bringing two lawsuits against Walmart in 2016 and 2018 for both patent infringement and violation of trade dress.
This cycle of investment, divestment and intellectual "borrowing" has put enough of a strain on the relationship between brands and retailers that something must change. If brands are to survive, they must remove a link from their value chain.
Next time on Outdoor Minds: Direct-to-Consumer