By  on September 6, 2008

Entitling its 2007 annual report “the drive to differentiate,” MACY’S Inc. has made its exclusive and private brand offerings a top priority.

More than 35 percent of the $26.3 billion in sales Macy’s did last year came from brands that are exclusive to the retailer or in limited distribution, including the private label INC International Concepts line, Martha Stewart Collection, Donald Trump’s line and diffusion collections such as T Tahari. That number—about $9 billion—is only expected to grow, as Macy’s expands exclusive partnerships with Tommy Hilfi ger, FAO Schwarz and Lush Cosmetics.

At the company’s annual shareholders meeting in May, chairman, chief executive and president Terry Lundgren called Macy’s “ongoing quest for distinctive and exclusive merchandise assortments” the first priority on his mind, as he wrapped up 2007’s results.

“Customers come to Macy’s and Bloomingdale’s looking for new and interesting merchandise,” Lundgren said in his annual report. “They don’t want to see the same goods in our stores as they do all over town.”

Private brands make up 19 percent of Macy’s sales, or nearly $5 billion. Besides staples like INC, Alfani and Charter Club, the retailer launched three new private brands last year: Haven by Hotel Collection, eco-friendly bed and bath products; Epic Threads for tweens, and Field
Gear outdoor sportswear and products for men.

About another 16 percent, or approximately $4.2 billion, of Macy’s total revenues come from a grow business in exclusives. In fall 2007, Macy’s added the Martha Stewart Collection, the largest brand launch in its history, which improved the retailer’s home business, according to Macy’s.

This fall, the momentum toward exclusive partnerships will gain even more steam.

Foremost, Tommy Hilfiger sportswear is partnering with Macy’s as its only U.S. wholesaler, a partnership Lundgren has called “a home run idea” and “the best example now” of the growing exclusive business.

According to Tommy Hilfiger ceo Fred Gehring, the brand stands to gain a lot from committing exclusively to Macy’s: planning longer-term rather than season by season, cooperative advertising, the ability to focus on a narrower range of consumers and—most notably—bigger and more prominent real estate in updated in-store shops, which likely means higher volume at Macy’s alone than the Hilfi ger line was doing at multiple doors before. “It was a very attractive opportunity to become very important in one account as opposed to being of little importance to many accounts,” says Gehring.

Indeed, Lundgren promises brands that will partner exclusively with Macy’s many benefits to make the deal sweeter. “When the product is exclusive to us—which makes it one of the most important products we carry in the store because it’s only in our stores—we want to make sure we do everything we can to fi nd success,” Lundgren says. “If we are the only customer, we have a responsibility to make sure this brand is highly successful, so we will want to give it primary space and location and make sure the advertising is prominent.”

Of course, exclusivity is not a guarantee of success. This year, Oscar de la Renta’s better-priced diffusion line, O Oscar, shuttered.

The mini store-within-a-store is also a growing trend in the exclusives world. Lush Cosmetics is rolling out departments to 44 Macy’s units by October, with upward of 100 in 2009. FAO Schwarz will also grow its business with Macy’s to 275 stores this fall and 685 in the next two years, after several seasons testing a store-within-a-store at Macy’s on State Street in Chicago, where Lundgren calls the results “impressive.”

To tout its unique ties to celebrities and brands, Macy’s ran a major marketing campaign, “The Magic of Macy’s,” with commercials featuring the well-known personalities—like Martha Stewart, Jessica Simpson, Tommy Hilfiger and Donald Trump, whose “men’s wear is among our bestsellers in categories such as dress shirts, ties and accessories and brands,” according to the retailer—and brands available only at the chain.

“Big initiatives like Martha, Tommy, Donald and FAO Schwarz could not have happened if we were not the national fashion department store that Macy’s is today,” Lundgren says.

With more than 800 stores, Macy’s size alone makes a strong case that the chain can provide enough business to make a brand viable. Brands approach Macy’s constantly to do exclusives, but the retailer only accepts about 10 percent, according to Lundgren.

As the department store with the largest volume, Macy’s aggressively protects its territory with exclusives and diffusion line distribution. The Liz Claiborne line lost doors and real estate at the retailer when Liz Claiborne Inc. gave its Liz & Co. and Concepts by Claiborne lines exclusively to Penney’s. Sources say Macy’s is also unhappy with the similarities between the American Living line at Penney’s by Polo Ralph Lauren’s Global Brand Concepts and Lauren by Ralph Lauren, which Macy’s carries.

“If a brand name that we carry suddenly has 1,000 more points of distribution, then that brand will be diluted,” Lundgren points out. “There’s no question there will be more supply than demand, the business will be transferred out of the existing companies and our business will be hurt. We take action because we’ve seen this movie too many times before. We’re not trying to flex our muscles—we are just trying to get ahead of what history tells us.”

How big can the private label and exclusives business become at Macy’s? The retailer’s executives decline to be specific, saying only that it will become more than the current 35 percent but less than 100 percent.

“I’ve never tried to have a goal to target or hit an exclusive number,” Lundgren says. “I can’t imagine having 100 percent of our brands that are exclusive to us. We are the largest seller of Ralph Lauren, and brands like that—Estée Lauder, Clinique and Coach— are so powerful and so important to us.”

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