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NEW YORK — In the growing emphasis on private brands, Federated Department Stores stays one step ahead.

Its latest effort, American Rag, was rolled out in juniors’ and young men’s departments at 120 doors this month, another 30 to 40 doors might be added next spring and additional categories and products are on the drawing boards for that label and others in Federated’s private brand stable.

This story first appeared in the August 26, 2003 issue of WWD. Subscribe Today.

“American Rag will be a very big brand for us, not just in young men’s and juniors’,” stated Janet Grove, chairman and chief executive officer of Federated Merchandising Group and vice chairman of Federated Department Stores. “We will be expanding to other categories next year. Kids’ is a natural extension and that’s getting close to being a definite.”

Men’s and women’s accessories, including handbags and jewelry, also are being planned, boxer shorts will be added later this fall and home products and direct mail are possibilities cited by executives. Once there’s an array of categories in place, the label could account for $100 million in sales, according to officials working on the program.

American Rag is part of Federated’s goal to raise the percentage of private brands to 23 to 25 percent of its total volume, from the current 17 to 18 percent. Even now, Federated’s percentage of private brand merchandise is twice that of most of its competitors. The company also sells roughly $200 million worth of products bought in the market and sold exclusively at its stores.

But Federated will have to keep working hard to maintain its lead, because in the world of big-box department, discount and chain stores, there’s a growing hunger for exclusive products so stores can differentiate assortments, obtain better margins and increase sales productivity. Stores see how far Federated has come, and they want to share in some of that success. So they’re also buying small brands with a cachet that could be converted to mass appeal, and shopping for products from designers, celebrities and manufacturers who will agree to give exclusives.

There seems to be no shortage of opportunities. In the past year, J.C. Penney launched exclusive Bisou Bisou and Parallel collections to build a contemporary business, Kmart launched Thalía to cater to the Latino market, Wal-Mart continues to roll out its George apparel collection from the U.K., and Target added Isaac Mizrahi merchandise. May Co. basically overhauled its private label business, attempting to be more youthful and trend right and introduced two labels, Ideology [formerly called be] and i.e.

Tarrant is relaunching No Jeans, a brand from the Eighties, with Wet Seal as an exclusive beginning this holiday. Tarrant also produces Seven7 for Express. “In two to three years, we want to have eight to 10 brand-exclusive relationships with retailers. That is our model,” said Gerard Guez, chief executive of Tarrant, who had supplied Federated previously and introduced the American Rag concept to Federated. Only the most fashion-savvy consumers would have been aware of the brand, which has just two stores in the U.S., in Los Angeles and San Francisco, and others in Japan. It’s owned by Mark Werts, along with Tarrant.

Other Federated-owned brands are ramping up, too. INC, for example, will launch men’s wear in spring 2004. The company launched Hotel towels in spring 2002 and Hotel bedding and tabletop were launched last fall, marking what officials described as FMG’s entry into the luxury arena. This month, gourmet cookware under the Tools of the Trade brand was launched.

There are more possibilities. Tarrant Apparel Group, which co-owns American Rag and manufactures the collection for Federated, will introduce Alain Weiz large sizes for spring or fall 2004. It will be offered to Federated, though no arrangement has been set and other retailers will be approached to determine who gets the exclusive, according to Guez.

It’s a trend placing more and more pressure on national brands, as retailers focus increasing energy on developing their own programs. At the same time, national brands are becoming ever more promotionally driven, providing stores with less and less margin.

Still, Federated’s private brand program, which accounts for $2.4 billion of the retailer’s $15.4 billion in annual sales, does have some product voids, mainly in kids’ and home. That’s where Federated, Grove said, is “aggressively seeking partnerships with name brands.”

As Grove said during an interview at FMG headquarters here: “We have been increasing our penetration of private brand and private label, as well as exclusive products from the market, pretty consistently over the last couple of years. There seems to be a greater interest from the market. I get a lot of calls, but it has to be the right niche for our customers; we don’t want to duplicate something we’ve got.”

American Rag marks Federated’s first exclusive denim-based collection business, and first real attempt at directly competing against specialty stores through product development, such as Abercrombie & Fitch and American Eagle. It’s also the first time Federated has stocked vintage looks, which are almost unheard of in department stores.

“Aside from the vintage, this is a very clean and simple look with nice quality,” Grove said. “It’s easy to wear, and there are a lot of different ways to put it together. It’s not overdesigned, though it has a lot of great details, such as velvet stripe piping, We are trying to go after the specialty store segment.” Bestsellers include minis, denim, tight knit T-shirts and vintage jackets, while men’s has been a little slower on the uptake.

For the second half of 2003, American Rag is a $15 million to $20 million wholesale business for Tarrant, according to Guez. He said he expects Federated to be selling American Rag at more than 200 doors by fall 2004, from 170 doors next spring. Boys’ and girls’ lines will be launched for fall 2004, he said.

With American Rag, Federated is racing ahead. The deal with Tarrant was signed in April and a collection was launched in time for back-to-school with heavy advertising. American Rag sponsored the Lollapalooza concert tour, and ads are in the August issues of Elle Girl, Teen Vogue, Jane, college newspapers and on mall kiosks. There is also an AOL microsite, as part of a strategy to push the brand’s casual sportswear, outerwear, denims and vintage looks hard right out of the gate.

Usually, Federated eases into new merchandise, but there’s pressure to raise comparable-store sales after several weak seasons, and a firm commitment to find exclusive products that appeal to younger customers. All Federated divisions sell American Rag, except Bloomingdale’s, which does not emphasize juniors’.

Five Federated flagships — Macy’s Herald Square, Macy’s Union Square in San Francisco, Rich’s-Macy’s in Lenox Mall in Atlanta, Burdines-Macy’s in Dadeland and Bon-Macy’s in the Bellevue Square mall near Seattle — have been rigged with separate 1,200- to 1,500-square-foot American Rag shops in juniors’ and young men’s, targeting ages 15 to 24. In all the other locations, the junior and young men’s shops are around 500 square feet.

As Federated’s hippest private brand, American Rag could emerge as its fourth-largest brand. Charter Club, which transcends home, apparel and accessories, is the largest, followed by Alfani and INC.

The Federated American Rag collection is inspired by, but different from, what’s sold at the two American Rag authentic vintage stores in San Francisco and Los Angeles.

Prices range from $39 to $59 for denim jeans and nondenim pants; $20 to $35 for fashion knit and logo T-shirts; $69 to $99 for outerwear and jackets, and $39 to $49 for woven shirts, fashion sweaters and active “hookups.”

In young men’s, prices will range from $39 to $59 for denim jeans and nondenim cargo twill pants; $25 to $34 for graphic and garment dyed T-shirts; $59 to $79 for outerwear and jackets, and $45 to $49 for woven shirts and fashion sweaters.

Margins in private brands run one to six points higher, depending on the family of business. Even at the lower end of the price spectrum, a private brand remains more profitable for a retailer than a national brand, though the margin is smaller. “That’s nice, but the important part is that we get sales and points of differentiation,” Grove said.

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