After witnessing many retailers follow what seems to have become a formula for success, I’ve been wondering how far it will go in the case of REI, or Recreational Equipment Inc. The formulaic trend at hand is that of offering house-brand merchandise for reduced prices as compared to the name brand, out-of-house merchandise that was formerly sold on the same store shelf.
Just one of many REI stores.
The concept isn’t new; one could argue that it began around the time that Barney Kroger, who founded the Kroger Co. in 1883, introduced an in-house bakery to offer his grocery store customers freshly baked bread. Unusual at the time, the concept did well and was profitable. It led to Mr. Kroger’s realization that profits could be increased by manufacturing the products sold, rather than simply displaying the products made by others. In time, this became known as a corporate brand strategy, and others retailers followed suit.
The corporate brand is easily recognizable – it’s the package or good with the retailer’s name as the manufacturer. It competes directly with, in many cases, the product’s originating brand. Further, it often resembles the brand it is competing against, so much so that labels often exist on the package to both edify and disavow. In a simple example, one can buy anti-dandruff shampoo made by Western Family which, with its white bottle and blue cap, closely resembles the bottle put out by the Head & Shoulders shampoo brand (made by Procter & Gamble). It resembles the brand it is mimicking so closely that the package even reads, compare to Head & Shoulders®*. One can compare the active ingredients and easily see that they are identical. Following that asterisk around to the back of the Western Family bottle, one finds the disclaimer which tells the world that the product is not made by the company being imitated. In this case, that’s Head & Shoulders, or indirectly, Procter & Gamble.
This sort of imitation is rampant in the manufacturing world. Imitation may be the sincerest form of flattery, but it raises questions about branding, the research (or reverse engineering) that goes into products, and product pricing. The key question is, ‘Are these products comparable?’
There is a lot going on with those in-house, corporate brands. From Office Depot making and packaging their own paper for sale, taking a slice from the Asia Pulp & Paper business, to Kroger manufacturing just about anything sold in a supermarket, to Lowe’s offering its own brand of tools labeled as Kobalt, rather than stocking the age-old Craftsman tool brand, this phenomenon is as widespread as shopping malls, retailers, and convenience stores. The trend has touched the sporting goods industry as well, with the prime examples of Cabela’s, Nashbar, and REI engaging in the practice.
One wonders how much business is being taken away from formidable outdoor brands such as Marmot, Cloudveil (which merged with Spyder in early 2008, and has since been acquired by Windsong Brands, LLC, a private equity firm), Mont Bell, Mountain Hardwear, Black Diamond, Patagonia and others, as the self-labeled REI product line grows. Already among the largest outdoor gear suppliers, REI and its private label brand Novara will prove to be a formidable competitor. With REI’s 100% satisfaction guarantee, whether on items of their own brand manufacture or not, customers are assured of owning a product with which they will be satisfied. It seems likely that Recreational Equipment Inc. will head further down the product manufacturing road. Why so obvious?
Let’s look again at Kroger. Following Barney’s idea to its present result, fully 26% of the total grocery dollar sales are derived from the Kroger brand, or Kroger’s private label items. After acquiring Fred Meyer, Inc. in 1999, total sales of $70 billion aren’t derived only from the sale of groceries. Private labels and Kroger branded merchandise comprise, as a conservative estimate, well in excess of $10 billion per year of merchandise sold with the Kroger label. These sales are more profitable than is standard retailing.
With wares ranging from sleeping bags, softshells, backpacks, clothing, cycling gear and bikes, as well as tents, the REI private-label brand (including Novara) is clearly growing while saving consumers money over the prices charged by other outdoor gear manufacturers. They may not be ‘cheap,’ but they are more inexpensive, and many consumers prefer to save a few dollars in a rough economic climate.
Has Recreational Equipment Inc. learned to produce high quality items, comparable to the brands which line their racks and shelves? I’ll try to answer that question in future posts, as I detail my experiences with several REI branded products.
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