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Tweaking the Formula: BBW to Cut Number of Outside Brands

Bath & Body Works is reinventing itself once again, by rethinking its experiment with outside prestige beauty brands and cutting its vendor list in half.

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Bath & Body Works is reinventing itself once again, by rethinking its experiment with outside prestige beauty brands and cutting its vendor list in half.

This story first appeared in the November 30, 2007 issue of WWD.  Subscribe Today.

Four years ago, the vertical retailer heralded an internal revolution by tilting its business model to add a selection of outside brands to a smattering of doors in its chain. The shift in strategy reinvented BBW from an affordable purveyor of scented lotions and bath gels to a beauty apothecary that aimed to go head-to-head with Sephora to procure emerging brands.

The change plugged into BBW’s then-chief executive officer Neil Fiske’s trademark “trading up” strategy, which surmised that shoppers are already spending money, but they will spend more money in the right environment.

Using that consumer insight as a guide, BBW created flagships, larger locations measuring up to 6,000 square feet in size, that allocated roughly 15 to 25 percent of its assortment to outside brands, particularly in categories where the fragrance-driven shop was not competitive, noted industry sources.

The concept caught on with niche beauty brands, many of which didn’t have the might to do business with department stores, and fed shoppers’ desire for discovery. At the height of the strategy two years ago, BBW had inked distribution deals with 80 beauty vendors, including Frédéric Fekkai, Molton Brown, Awake, Ahava, Vincent Longo cosmetics, Jaqua and Supersmile.

The retailer has since cut that number in half, and currently plans to carry about 40 outside — or third-party — brands in its 110 flagships across its 1,600-door chain, said Diane Neal, who replaced Fiske as ceo of BBW.

Brands that have left or are slated to leave flagships by yearend include DDF, Peter Thomas Roth, Korres, Juvena and the retailer’s proprietary line, The Savannah Bee Company. A representative from each of these brands confirmed their departure.

Neal, who took over the helm in June, said the pullback is part of an editing process intended to separate the performers from the laggers.

“We still feel very strongly about third-party brands and continue to carry them. We continue to look for not only new items within the brands we carry, but also additional brands,” said Neal, noting the trimming began before Fiske’s departure last spring. Referring to BBW’s early approach to its flagship format, she commented: “I personally think we over-assorted ourselves, and we are really just right-sizing” the assortment.

Fiske broadened BBW’s reach outside its house brands as a part of his antidote to reverse negative same-store sales growth. When he came aboard in early 2003, BBW’s sales had stalled at $1.8 billion, and the company was entering its third year of negative same-store sales growth. During his tenure, BBW’s flagship strategy, as well as the development of house brands, helped push revenue to $2.56 billion in 2006 from $2.29 billion the prior year. BBW reported a 9 percent increase in same-store sales last year, driven by sales of its Signature Collection.

Neal declared that outside brands tie into the retailer’s long-term strategy, but acknowledged BBW currently has no plans to open additional flagships.

“Our flagships are larger in size, and if we want to dominate the beauty industry, we have to have more than just our proprietary brands, so [third-party brands] are definitely in our strategy going forward.”

The flagships are roughly 30 to 50 percent larger than BBW’s core stores.

An industry observer with knowledge of the situation noted that BBW found that outside brands, particularly those in high-performance categories such as face and hair care, lend credibility to BBW as a beauty authority. For instance, BBW can bolster sales of its proprietary Patricia Wexler M.D. Dermatology — its best-selling skin care line — with a handful of well-known techie skin care brands, including Murad and Freeze 24/7. BBW also has carved out a position for itself in hair care by clearing room for salon brands such as Warren-Tricomi, Fekkai and Jonathan Product, and then offering a lower-priced alternative from its Signature Collection. Shampoos from the proprietary collection sell for $7.50 each.

A number of past and current vendors, speaking not for attribution, said BBW’s flagship strategy was a pioneering idea, but noted it was fraught with operational and inventory headaches. To add outside brands to its mix, BBW had to build the infrastructure needed to receive, store and then distribute these brands to its flagships. That necessity aside, BBW also was tackling inventory problems. In the summer of 2006, the retailer began to implement a large-scale logistics systems conversion that caused disruption in ordering. The effort was put on hold during the pivotal holiday season, said Neal. She noted the company spent the first six months of this year getting its systems in line, and that BBW has since completed physical inventories in all its stores.

Neal acknowledged that, during the systems overhaul, BBW at times lost visibility of its inventory, but pointed out that its inventory problems had a minimal impact on outside brands, compared with the house brands, which suffered the bulk of the troubles. Several of BBW’s vendors disagreed, saying BBW had halted orders during that period, which in some cases caused significant financial setbacks.

Neal said that, if BBW did stop orders on certain lines, it was only to liquidate the brands it no longer planned to carry.

Several vendors surmised that BBW is pulling back from its flagship format because of the less-attractive economics of outside brands. Industry sources estimate that, as an industry standard, a retailer’s margin for its house brand is north of 80 percent, a hefty premium over the margin for outside brands, which is about 50 percent.

“The intention was to be a good retailer partner,” said one vendor, who still distributes to BBW. “The concept was working. It did bring people into the stores, but there were logistical problems,” the vendor continued, later crediting Neal with mending BBW’s inventory issues.

Another vendor, whose brand is slated to exit BBW this year, said that, in order to make a powerful brand statement on the shelves, the retailer over-bought goods, which hampered inventory turns and brand performance. The same vendor noted that the strategy, despite its flaws, worked, given that BBW was able to encourage its shoppers to put a $20 shampoo and $120 skin cream into their baskets alongside an $8 scented lotion.

Neal said the sales velocity of its house brands is faster than the rate of its more expensive lines, but affirmed that shoppers are not put off by higher ticket items. “We still sell those higher-priced items and we sell them well,” she said, pointing to the success of the Wexler line.

BBW has succeeded in building a host of proprietary brands, including C.O. Bigelow personal care products, Goldie cosmetics and Slatkin & Co. candles. Several vendors said it also has supported their brands with sampling efforts and direct mail, but that in the end, BBW’s brands took precedence. One vendor illustrated that point by referring to BBW’s recent holiday push of its Bath & Body Works Signature Collection in Velvet Tuberose, which dressed its store windows and Web site’s home page prior to Thanksgiving. BBW’s windows and Web site now tout its Twisted Peppermint line. Sephora, the vendor commented, is less reliant on its house brand.

Despite the confusion BBW’s editing may have caused vendors, Neal reaffirmed the retailer’s commitment to outside brands, but also reminded: “We are not only working on flagships. We are also working on BBW’s core store. We have lots of ideas about what that strategy looks like.” However, Neal, only four months into her new role, said, “We are still vetting that out.”

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