Department stores have been aggressively pushing private-label brands over the past decade, depriving independent brands of floor space and promotional muscle. However we may be approaching a turning point.

The Wall Street Journal points out (Exclusive Lines May Prove Risky in Cool Economy) that several major department stores have put a LOT of eggs into the private-label basket — 35% to 50% of their eggs, in fact.

In good times, private-label brands allow retailers to capture more margin and differentiate the shopping experience. The stellar growth of branded retailers like Gap and the Limited brands also encouraged department stores to counter with their own, high-margin exclusive product.

There’s a downside though: risk. Department stores used to be less subject to volatile shifts in customer behavior because they could more easily adjust merchandising to reflect changes in the marketplace. The risk was shared with suppliers and mitigated by a wide range of brands. When you’ve invested half of your sales in in-house brands, inventory, and marketing, though, you’re WAY more exposed to downturns. The WSJ notes:

If the retailers are forced to sharply mark down their exclusive goods, that could hurt the image of both the brand and the store. What’s more, retailers can’t share the pain with suppliers, as they do with national brands that offer allowances for markdowns, meaning retailer profits will suffer. And, retailers often commit to large minimum orders to get the best prices on their in-house products — and can wind up with far more inventory than they need.

“This vehicle for improved profitability is a double edged sword when sales are weak,” says Bill Dreher, an analyst with Deutsche Bank Securities.

If department store private label lines get whacked by a downturn, that’s good news for brands. Branded manufacturers can expect a bit more breathing room as retailers retrench and limit or reduce their investment in exclusive labels.

Filed under: market size, marketing, retail, strategy