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The First Time


Retailers continue to use Private Label Merchandise to highlight their “value message” and also support gross margin improvements, but economic conditions have hampered the ability of small and mid-sized retailers’ ability to grow that side of their business. Not surprisingly, Retail Winners, or those who historically outperform their peers and inflation, have been most aggressive in growing that part of their assortment.

Business challenges have remained surprisingly unchanged over the past three years, a legacy from the era of reverse auctions and bidding events, where demands for low costs drove manufacturers to cut quality corners. Retailers still hope to find and keep dependable partners to support improving inconsistent merchandise quality. Retail Winners in particular, express these concerns, while laggards worry about vulnerability to supply chain shocks. While time to market has increased somewhat (likely in hopes of improving merchandise quality), expectations around transit times for factory shipments to reach local points of service remain wildly out of step with reality.
Retailers know there is value in collaborating with their suppliers, but seem challenged to close the loop on insuring that their expectations are met. The importance of scorecarding and pre- and postproduction audits has grown, but has yet to reach what we believe is critical mass. Sales laggards in particular see a move to quality Private Label merchandise as a means to overtake their competitors and manage their costs.
Retailers with annual revenue over $1 billion appear to be better equipped to influence or collaborate with suppliers than their smaller competitors.
Technology Enablers
Larger retailers (those with annual revenue >$1 billion) are most optimistic on the potential value of technology to support their Private Label merchandise management, yet most have not developed a holistic view of Product Lifecycle Management. Most respondents tend to look at “features” and call them applications… when in fact, they are interrelated. It’s therefore not surprising to find more than 60% of these retailers using between 3-5 applications to design, source, track, and verify their Private Label product. Responses seem to indicate an evolution towards that more holistic roadmap.
Retailers continue to design, promote and sell more of their own Private Label Merchandise. In fact, the Great Recession of 2008-09 provided an opportunity for retailers to highlight the Private Label value message to consumers while holding steady or even improving their selling gross margin.
In early 2008, when RSR most recently studied the shift to Private Label and the use of enabling technologies to support it we found evidence of both process maturation and new business challenges. Simply put, retailers were getting their products to market faster and cheaper, but quality suffered tremendously. 
Certainly, in the ensuing eighteen months quality issues were pushed off the front page by economic concerns. Confident companies like Publix in the U.S. boldly offered promotions like “Buy a national brand, and get a Private Label equivalent free.” Macy’s aggressively marketed its Private Label merchandise in TV ads on fashion shows like Project Runway. External indications were that quality problems were behind us. We believed it was time to update the retail story. As always, our goal in this benchmark report is to move beyond mass media noise and map actual industry progress and technology usage to support continued maturation. Can retailers really design and deliver merchandise that sells?
Surviving Retailers with “Critical Mass” Sell More Private Label Products
In aggregate, it would appear as though surviving retailers are selling less Private Label Merchandise than those who responded to our report published in January 2008. But a closer look at the data reveals that more large retailers – those with enough “clout” to manage Private Label effectively – employ it as a strategy than ever before (Figure 1). 
Larger retailers have continued increasing the percentage of Private Label merchandise that they sell,while almost half of smaller retailers have held their merchandise mix steady (Figure 2). RSR believes this shift has been caused by several factors. 
The credit crisis left smaller retailers, in particular, with less borrowing power than they’d had in the past – using working capital to fund more Letters of Credit (LC’s) or support import agents was nearly impossible. Most could only hope to manage the status quo. Fear of customer defections also kept smaller retailers from “rocking the boat” and so they stayed with “tried and true” brands and assortments, rather than venturing out into new territories.
Larger retailers, on the other hand, with enough mass to obtain lines of credit, enough personnel to manage Global Trade and enough brand equity to put alternatives to national brands on their shelves continued to increase Private Label product as part of their assortments.
Private Label Supports Gross Margin Improvements
The vast majority of retailers surveyed (77%) have been sourcing Private Label product through outside manufacturing facilities for longer than one year. These percentages are even higher for mid-sized to large retailers (88%). Those fortunate enough to continue expanding their Private Label lines have reaped the fruits of continued gross margin improvements, even in an era when top-line sales increases proved challenging. As we can see in Figure 3, most retailers with annual revenues greater than $ billion were able to sustain the gross margin increases reported prior to the recession, while only 16% of smaller retailers were able to continue those improvements.
Defining Retail Winners
Our definition of Retail Winners is straightforward. We choose to follow top line performance. Retailers cannot cut their way to successful growth, and only those retailers that can consistently demonstrate that they understand and can meet the needs and desires of their customers are going to succeed.
Assuming industry average comparable store sales growth of three percent, we define retailers with sales above this hurdle as “Winners,” those at this sales growth rate as “average,” and those below this sales growth rate as “laggards” or “alsorans.” It is consistent throughout much of RSR’s research findings that Winners don’t merely do the same things better, they tend to do different things. They think differently. They plan differently. They respond Differently.
Obviously, in a selling environment like we saw in late 2008 and most of 2009, it’s challenging to find retailers whose comparable store sales improved over prior years. In an attempt to normalise results, we asked retailers to report their historical performance levels, rather than just current year results.
It’s instructive to note Retail Winners have been increasing the percentage of Private Label merchandise in their mix more than their poorer performing peers (Figure 4). Larger retailers have continued expanding their Private Label assortment, while smaller retailers have slowed growth. We can see from Figure 5 that retailers with more than $1 billion in annual revenue believe they have the ability to affect and impact their supplier far more than their smaller brethren.
Some of these disparities are fairly obvious and logical – larger retailers are more likely to have the “clout” to create advantageous long-term contracts, the time and resources to collaborate with suppliers on product design, and the financial wherewithal to open their own sourcing offices.
But some disparities are less logical: the cost of poor quality far outweighs the cost of factory audits, both pre- and post-production, and frankly there is no excuse for any retailer to avoid scorecarding suppliers on a regular basis when a significant portion of its brand equity is based on Private Label merchandise. RSR has long believed that when it comes to suppliers, the motto“Trust, but verify” is critical to moving beyond persistent merchandise quality issues. A perfect order is more than the right quantities delivered in a timely fashion. It also includes products that meet retailer specifications and customer expectations.
Impatience with the Status Quo
“Legacy technology” and “lack of executive support” are often cited as top organisational inhibitors that prevent retailers from moving forward on a variety of issues, to the point where we at RSR have debated whether or not to even ask the question. However, the relative scale of one or both of those problems compared to other potential inhibitors can sometimes be surprising, as in this study. “Existing Technology” has jumped to the forefront of inhibitors that prevent execution of a go-forward Private Label strategy, garnering an eye-popping 75% from our Retail Winners (Figure 6). Racing to catch the sale, they’ve built inflexible, sometimes haphazard infrastructures. If there’s a “good news” message in this, it’s that these retailers should be ready to act to fix the problem. Existing technology is also a top inhibitor for laggards, but those retailers aren’t so sure of the ROI for Private Label initiatives, and that prevents them from moving forward.
Looking inside the numbers that show “technology” to be the top inhibitor, mid-tiered retailers feel most strongly about the problem (83%, compared to approximately 50% for both larger and smaller retailers). Many Winners are not only aware that legacy technology is hurting more than it’s helping, but that cultural inertia also stands in the way. For 58% of Winners, there’s a palpable sense of impatience with “the way we’ve always done it”; these retailers want to move forward and most feel that there’s sufficient business justification (ROI) to do so.
When “technology” is a top organizational inhibitor, it should come as no surprise that finding the right champion to “pony up” tops the list as opportunities to overcome the inhibitor (Figure 7). Nearly onehalf of this year’s respondents look for a line-of-business (LOB) champion to help justify the costs associated with overcoming the top inhibitors, up sharply from the 2008 study. But our retailers also look to external help from suppliers to help them to defray costs.
Retailers haven’t necessarily “given up” on their existing technology portfolios; there is little interest (although it’s growing) in hosted solutions. Instead about four out of ten retailers seek better integration tools to connect legacy systems in their existing portfolio of solutions.
This result is driven by Retail Winners. Looking inside this year’s responses, it’s clear that Winners, having identified the existing technology as the top inhibitor to progress, want to fix, rather than replace, the component pieces of the technology solution. To that end, “improved technology integration tools” are really important to them (Figure 8).
Laggards on the other hand are primarily interested in finding a business champion to overcome inhibitors associated with a successful Private Label program.
High Hopes
As retailers seek to expand their Private Label programs, visibility is the most highly sought-after capability, especially for larger companies. In this study, supply chain visibility is the most highly rated capability for retailers with greater than $1 billion in revenue (Figure 9). It’s an interesting selection, as is the #2 most potentially valuable “technology” – global sourcing, because it could be argued that those are both outcomes of a well integrated PLM solution in the 21st century. S/C visibility doesn’t exist as a solution unto itself – it is the result of technology enablement from design to consumption. It could also be argued that forecasting engines should be part of a PLM suite – however, retailers tend to think of that capability as Separate.
The stand-out “oddball” in the identified potentially valuable technologies is “lead time optimisation”.
Retailers seeking to maximise the flexibility of their supply chains with lead time optimisation capabilitiesseek to execute postponement strategies that delay production and transportation commitments until they have the most accurate understanding of fluid demand. Theoretically, such a capability would help to maximise profitability by minimising markdowns at the other end of the cycle, but to-date the concept is more theory than fact, at least in
As retailers’ appetite for Private Label has grown, so have the number of technology tools they’ve use (Figure 10). 
It should come as no surprise, given the organic way in which many retailers have developed their Private Label programs, that more than one application would be employed. However, it is surprising that for 36% of retailers with over $1 billion in annual revenue, at least three separate applications are being utilised, and even more surprising that 16% of those larger retailers are running their Private Label businesses using the ubiquitous spreadsheet.  
This finding of course begs the question, “What applications?” Interestingly, several of the applications that our survey respondents identify (Figure 11) as “implemented” are typically found as major functions in modern PLM solutions, that is, they have been pre-integrated by the vendors. Specifically, sample management, process & workflow management, and portfolio & program management, are definitely found in modern PLM solutions. While it can be argued that factory audit and quality management capabilities are control frameworks external to the PLM process, they are also necessary to a successful program, and for that reason are integrated into applications as well. 
Bootstrap Recommendations
RSR believes the time has come for retailers to embrace Product Lifecycle Management. The percentage of Private Label merchandise produced and sold has long since gone beyond the primitive tools many retailers use to manage the process. Continued uncertain financial conditions do dictate caution and a step-wise approach. Towards that end, RSR believes retailers should take the following steps. First, begin scorecarding suppliers as often as possible. Every delivery should be evaluated for quality and compliance.
Next, get into a “portfolio mindset” that treats PLM as a cohesive whole, rather than a set of disparate functions. Third, get realistic about merchandise transit times. Understand bottlenecks and chokepoints in the supply chain and find ways to open them up. Finally, we recommend working the “virtuous cycle” of supplier relationship management.