PRIVATE LABEL PINCH GIVES DENIM GIANTS THE BLUES
NEW YORK — It isn’t only Levi’s that is feeling the squeeze of private label denim brands.
Even Mackey McDonald, president and chief operating officer of VF Corp., admitted Thursday that private label is gaining ground once held by brands. So did a number of key retailers in the denim business.
J.C. Penney’s Arizona Jeans Co. is doing $500 million a year and planning 80 percent growth this year; Sears is reportedly planning a private label line and numerous moderate and mass stores are already into the private label fray.
Pamida launched Omaha Jeans last year, Target is moving forward with its Greatland label and Hills has its American Spirit label. All these efforts may be plucking business from Levi’s, VF and other brands and pressuring branded denim lines to lower their prices, enhance their products and expand their lines.
As reported here Thursday, the pressure of private label has forced Levi Strauss to boost its funding 70 percent, to at least $850 million, to change the way it does business.
McDonald said that brands such as VF’s Lee are increasing the amount of innovation in the line so that consumers see value in paying a little more.
“We need to have more innovation in product to convince the consumers they should pay a higher price,” he said. “There are no great new fashion trends, and I don’t think the customer is looking for a great new fashion trend. They’re looking for innovation. They want softer fabric, they want a jean that enhances appearance. For example, Lee has a classic-fit jean for women that is comfortable and slimming.”
McDonald said the company targets the youth market with its ecologically oriented Soda Pop denim, a cotton blended with fiber made from recycled plastic bottles.
But, he added, private label brands rarely pack the punch of the big brands.
“Private label is only a concern when it offers more value than we can in our brands,” he said. “That requires a significant investment in terms of time and money, and not many retailers are going to do that. As long as we focus on adding value to our line, we feel the consumers will choose us over the private label.”
Private jeans brands — including Arizona, The Gap, Jaclyn Smith and Ann Taylor — are proliferating. According to data from The NPD Group, private label has increased its share of the denim market in the last five years to 25.6 percent from 14.9 percent.
At the same time, market share of the top five brands decreased to 32.7 percent from 43.3 percent. Private label’s biggest gain was in mass market and specialty stores, while department stores figures remained flat.
Although Levi’s is still a $6 billion fortress and growing, the tremors from the private labels are impossible to ignore. The Levi’s brand has lost some market share, Andrew Jassin, founding partner of Marketing Management Group, said Thursday.
“Levi’s has to really enhance its women’s business. VF, through Lee and Wrangler, has done a superior job. When you think of Levi’s, you generally think of men’s or young men’s,” he said.
Levi stores will “reinforce the trademark on all their products…to protect the business” from changes at department stores, a “fickle” side of the retail industry, Jassin said.
As reported Thursday, Levi’s plans to open 190 company-owned stores in key markets over the next five years, according to a new 10K filed with the Securities and Exchange Commission. It also is planning a comprehensive customer service program that will include a 72-hour turnaround on basic products, fully complete orders and floor-ready merchandise.
But private label “seems to be where the growth is coming in,” said David Mitchell, vice president of merchandise planning and distribution at County Seat, a 650-unit denim and casual apparel chain based in Dallas.
Its private label line is “a fast-growing part of our business,” Mitchell said. “Private label gives value to the customer that doesn’t perceive value in the brands.”
The stores also carry Guess and Girbaud jeans, as well as Levi’s, which, he said, “enjoys a much stronger franchise with the consumers than its retail partners, and their reengineering efforts are geared to improving management and efficiency of the business with retail partners.”
Levi’s efforts to improve customer service were commended by Mitchell and other retailers.
“We’re very pleased with their reengineering efforts,” he said. “Levi’s is taking the offense. I don’t think it’s a reaction to a problem. Levi’s is trying to move forward.”
Ironically, the brand is still robust at J.C. Penney. The retailer is reportedly Levi’s biggest customer, and senior buyer Bob Schmid said more stores are expanding Levi’s presence. But Penney’s Arizona brand is planned to grow 80 percent this year, compared with a planned 50 percent surge for Levi’s, according to Schmid.
“Our intent is to grow both businesses,” explained Schmid. “For future gross margin considerations, our goal is to grow Arizona much faster than Levi’s.”
Penney’s plans to increase the space devoted to women’s denim business, citing the growth potential in the category.
Schmid said he’s not dismayed by Levi’s plan to open freestanding stores, adding that the move should boost sales by establishing and solidifying a regular-price business along with heightening the Levi’s image.
Best-selling Levi’s at Penney’s are the 550 relaxed fit style and the 512 slim fit style, each at $39.99, but typically marked down to $29.99 during promotions.
Similar relaxed and slim-fit versions from Arizona also are bestsellers, usually at $19.99 at regular price or $17.99 on sale.
Sears, too, is reportedly planning a new private label denim line while still carrying its workwear denim.
“We’re not talking about that at the moment,” Robert L. Mettler, president of Sears Merchandise Group, said Thursday.
Whether the growing influence of private label jeans will become more of a threat to Levi’s “depends on if people downplay Levi’s in favor of private label,” Mettler said. “Then, the customer will make the choice. We plan to continue to do a strong business with Levi’s.”
Mettler said Levi’s currently is doing very well at Sears and added that he doesn’t see “cause for concern on their part.”
“They continue to do an excellent job of branding their company and continue to develop product,” he continued. “The category is growing. They’re doing very well relative to other people in that category.”
According to Mettler, Levi’s initiatives to improve its relationships with department stores are working.
“They’ve spent a lot of time studying the needs of their important partners, and they are doing a terrific job in terms of performing on fulfillment of product, on-time delivery and floor-ready merchandise. Those are very important initiatives for both them and us.”
As to whether Levi’s should worry about price, Mettler said, “We all have to be concerned about the value equation. I think Levi’s has carved out an important market segment for themselves and offer a very good product.”
Caldor introduced its Fresno jeans line a year ago, in the wake of Penney’s success with Arizona, according to president Marc Balmuth.
“It’s a better way to get better prices and margins,” Balmuth said. “There’s a certain amount of customers buying just on price.”
He noted that Fresno is priced about 20 percent under Brittania, the mass market label of Levi’s, also sold at Caldor, although he said Brittania is holding up well.
But the Levi’s name still means a lot at retail.
At Carson Pirie Scott, Levi’s has become a strong partner, said Stanton Bluestone, president and chief executive officer.
“As we came out of bankruptcy, we changed our strategy,” he said. “Levi’s became a very important part of this strategy. We do a very big business with Levi’s, primarily with Dockers in men’s wear.”
Bluestone said he believes private label is going to grow — it accounts for 10 percent of Carson’s business and could grow to 15 percent — as stores try to differentiate themselves, but he said he’s not convinced that private label “can overtake the best names nor can they come up with enough product to knock Levi’s out of the box.”
“Most stores don’t have that kind of innovation to keep their private label changing,” said John Freudenthal, executive vice president of merchandising for Carson’s.
Freudenthal said Levi’s has been working to improve its Dockers women’s brand, which has not fared as well as Dockers for men, and some improvements have been made in the last six months.
Bluestone said Levi’s and its partner, Design Inc., have already opened some stores in Carson’s markets.
“We’re not happy about it, but on the other hand, I guess it depends on how they merchandise the stores and where they open them,” he said.
Carson’s also carries Lee, Guess, Girbaud and Calvin Klein for women. Guess is the biggest seller in the women’s denim area, but Levi’s is biggest in the men’s area.
“Remember, Levi’s is a lot more than denim,” Bluestone said.
“We really have an excellent partnership with Levi’s,” Freudenthal said. “That’s really important because we’ve developed that over the years.”
At Macy’s West/Bullock’s, the Levi’s business is balanced between jeans and sportswear, said Michael Steinberg, chairman and ceo. The store has a private label jeans program in young men’s under the Badge label, but it has not cut largely into Levi’s.
“Our Levi business is very big and has grown very quickly over the last couple of years,” Steinberg said. “It’s met and in some instances surpasses our projections.”
Joe Levy, chairman and ceo of Gottschalks, Fresno, Calif., called Levi’s a “great company,” but said retailers have a difficult time making money on the line in today’s competitive market.
“All I’m asking for is a fair profit, better than the 29 to 30 percent I might eke out if I buy enough tops to bottoms,” he said.
“No doubt, margin is an issue, but you’re able to help that with tops,” said Elayne Garofolo, executive vice president of merchandising and marketing at The Broadway Stores.
In women’s, The Broadway has a private label program under the Bleu Cafe label. Garofolo said it is not a strong program, but noted “the situation is always fluid.”
Garofolo said the Levi’s reengineering will help The Broadway.
“We’re being quite aggressive in all Levi’s — including Silver Tab and wrinkle-free Dockers,” Garofolo said. “There are so few brands that mean anything today, but Levi’s is a brand that means something.”