Cheaper private label apparel "losing traction"
The growth of inexpensive private label apparel is ending as the sector becomes less and less competitive, according to new research.
A report by UBS Global Research, entitled 'Is this the end of inexpensive private label apparel?', considers the future for an apparel segment which has evolved to play an ever bigger role in global retail markets over the past decade or so.
The report’s analysis and research has a global reach – including conclusions on the situation in Europe and Japan, for instance – but focuses mainly on the US retail market.
“While we believe higher-price private label apparel will continue to attract certain consumer segments, our research has led us to conclude that the competitive advantage of inexpensive private label apparel brands is diminishing quickly,” UBS says in the report.
“We believe the timing of our analysis is critical, as there are signs some retailers realise a change in consumer attitude towards inexpensive private labels might already have occurred and are taking measures to maintain their competitiveness.”
In particular, the report highlights Kohl’s, the US department store retailer for which UBS upgraded its rating to 'Buy' recently, partly thanks to the company’s announced shift of focus back to national brands – although its private label share of revenues increased to 52% in 2012 from 42% four years earlier.
“We believe there has been a permanent shift in expectations among Kohl’s customers,” UBS says; “they no longer expect to find strong national brands (for example, Nike and Levi’s) at Kohl’s stores.
“Kohl’s commitment to refocus on national brands (even with the temptation of the higher margins from private label sales) is critical to our ‘Buy’ rating.”
UBS contrasts Kohl’s with JC Penney, to which it has given a 'Sell' rating, partly because of concerns about the company’s ability to reverse the “deeply negative” traffic trends of 2012 and 2013 – and the group's continued strategic “over-exposure” to private brands.
Factors behind decline
The report identifies four major factors which it believes are leading to the decline of inexpensive private label apparel, including the growing numbers of “spend my money wisely” consumers – for instance, professionals who are equally happy to shop at Hermès and Zara.
Rising sourcing prices and the inability to increase retail prices are also highlighted, leading to declining profitability for the entire value chain and limiting the capacity of importers to absorb charge-back.
Finally, there is the emergence of new generation suppliers – as retailers turn increasingly to fast fashion in order to compete, UBS believes they are more likely to work with integrated suppliers with on-site development capability, rather than working with agents.
The consequences of this, the report conjectures, will be that inexpensive private label apparel will gradually become less and less popular; and that department stores with a high mix of low-price private label apparel will find it harder to drive traffic – or move back to national brands and accept slimmer margins.
Beyond the predicted contrasting fortunes for companies such as Kohl’s and JC Penney, UBS forecasts that off-price retailers, in particular TJ Maxx and Ross Stores, will gain market share as a result of the decline in private label business.
And it says the contribution of inexpensive private label apparel to sourcing giant Li & Fung’s revenues could shrink from 35% in 2013 to only 10% in five years’ time.
In Europe, the trend is viewed as having less impact, because department stores typically have a lower market share, with mid-market retailers who own their own brands assuming a more significant role – for instance, Marks & Spencer (M&S), Arcadia, Next and Debenhams as the four largest clothing retailers in the UK.
What's more, the report adds, department store private labels, such as Designers at Debenhams or Howick at House of Fraser, have tended to be at the upper end of the market.
“This may be a function of Primark having already occupied the space of the inexpensive private label brand through its very successful expansion in the UK, and now other European markets, over the past ten years,” UBS suggests.
Companies: Arcadia Group, Debenhams Plc, H&M Hennes & Mauritz AB, House of Fraser, JC Penney Company Inc, Li & Fung Limited, Marks & Spencer Group Plc, Nike Inc, Primark, Ross Stores Inc, TJX Companies Inc, Uniqlo, Zara
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