When is a retailer like a manufacturer? When it embraces private labels. The growing trend among big retailers of selling privately branded merchandise is forcing them to take on a whole set of supply chain responsibilities. Best Buy Co. Inc., long known for offering major brands of consumer electronics and appliances, now has five different private labels, according to Robert S. Forrest, an analyst with Accenture in Reston, Va. They include Insignia, vpr Matrix, Dynex, Init and Geek Squad. The strategy is part of an attempt to have the best of both worlds: maintain relationships with the big suppliers, while finding niches in which to sell private brands. The latter present bigger headaches on the supply chain side, but promise bigger profits as well. According to Forrest, Best Buy's private-branding program functions on multiple levels, from the mere relabeling of existing product to individual product differentiation (items with national names but in the form of models sold only at Best Buy), entire product lines carrying an in-house brand, and after-sales service, Geek Squad being the most obvious example.
With private brands, the retailer not only must engage in classic brand management, it must closely oversee manufacturers and product development. Private-label goods increase replenishment lead times, and the risk to the manufacturer is greater because it's turning out products for a single buyer. Consequently, says Forrest, retailers must have deep visibility over goods in production (usually in Asia) and in transit. How they choose to do that is another question. "Some use third-party logistics providers extensively," he says. "Others take the approach of building capability so that they can manage it." Either way, Forrest sees continued growth in the private-label sector over the next five years. For office supply stores, he expects the percentage of privately branded product to go from 20 to 40 percent of all merchandise. Home improvement stores should increase their private brands from 10 to 20 percent. Consumer electronics retailers such as Best Buy are still in the single-digit range but will grow that sector as they grow comfortable with the concept. (Unlike office supply retailers, consumer electronics merchandisers favor private brands that are not obviously linked to the names of their stores.) At the same time, electronics retailers must be careful not to conflict with the big national brands, who still hold substantial selling power and customer mindshare. The key concept, says Forrest, is targeted differentiation. "This is not about replacing national brands at all," he says. "This is a complement."
