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The Boom of Private Label: Why DTR Licensing is Crucial to Retailer Success

By Yizan He, Founder & CEO of Alfilo Brands,

Note from the editor: Just under half (43%) of respondents to TLL’s Licensing Business Survey said that the incidence of direct-to-retail (DTR) deals increased in 2018 compared to the previous year. A roughly equal share said that the number stayed the same or decreased (17% each; the remaining 22% indicated they do not have DTR deals).

Private labels have always been an essential part of the retailer’s toolbox. However, their popularity and success have been rapidly increasing in recent years, meaning competition is getting tougher. Sales from private labels grew three times faster than national brands in 2017, according to AC Nielson.

A key factor in this rise in demand has been the global economic downturn over the last decade, with both consumers and retailers tightening their belts. Meanwhile, the continuing use of online shopping data to inform the development and marketing of private labels has improved their success rates, making the competition even fiercer.

Ecommerce giants have been capitalizing the most on these trends. Amazon reportedly has over 100 in-house brands, ranging from basic product lines that compete on costs to more aspirational, fully-fledged private ‘brands’ that provide direct competition across multiple sectors, from homeware to fashion. Private labels will continue to be a lucrative strategy for retailers in the coming years (investing in private label products was one of the highest priority business goals for Amazon U.S. marketplace sellers in 2018), but strategies need to evolve. Traditionally, private labels tend to be less developed and less creative than their fully-fledged brand counterparts, as the primary focus is on cutting costs rather than creative marketing or design. However, with increasing competition, companies now need to be more innovative than ever in how they create and manage their private brands.

We’ve been observing a growing trend of brands using direct-to-retail (DTR) licensing strategies to outshine competitors. This is when retailers go directly to IP licensors to create unique, high quality products while keeping margins high.

European fast fashion retailer Primark have been trailblazers with a DTR licensing strategy that has seen them become the largest retailer partner for Harry Potter-themed products in the world. Similarly, international Japanese retailer Uniqlo has made deals with the likes of the Museum of Metropolitan Art (MoMA), Museum of Fine Arts Boston, and iconic graffiti artist Futura, bringing fresh appeal and audiences to the brand.

At Alfilo Brands, we’ve secured exclusive licensing rights to some of the most well-known cultural institutions in the world, such as The Metropolitan Museum of Art, Museum of Fine Arts, Boston, the V&A, the National Gallery, and The British Museum. Our creative teams in Los Angeles and Shanghai develop annual cultural and art themes that draw on fashion and lifestyle trends and use these to create meticulously crafted designs for use on private label merchandise. Leading Chinese retailers Alibaba and JD have been actively introducing these themes to retailers operating on their platform via DTR licensing.

We expect to see these kinds of DTR licensing models become an increasingly popular choice for brands and companies of all sizes, which has the potential to completely reshape the global retail industry. Here’s an overview of why companies are increasingly opting for DTR licensing strategies:

  1. Keeps the retail model flat. Importantly, DTR licensing strategies maintain a very flat retail model because the agreement is structured directly between the retailer and licensor, cutting out the middleman. In turn, retailers can increase their margins, pass on some savings to their customers, and still undercut competitors. Meanwhile, the licensor accrues royalties and gets increased brand exposure. It’s a classic DTR strategy, but the added value that the licensed IP brings to consumers increases the success rate of these products in a highly competitive market place.
  2. Elevates your brand. DTR licensing strategies can bring unique aspirational value to products that would be otherwise too expensive to achieve. Like Uniqlo and MoMA, retailers who secure the right IP can attract whole new audiences and allure to their brand overnight.
  3. Diversifies the reach of your brand. This development signals what some are calling the shift from “private label” to fully-fledged “private brands”. While there will always be a demand for low-end, budget private label items, many of these emerging private labels/brands are no longer the “poorer cousin” in the marketplace. The way that DTR licensing is opening up and diversifying the private label arena offers more opportunities for retailers to compete, from budget to higher level entry points in the market.
  4. A mutually beneficial strategy. Finally, in DTR licensing, partners can benefit from each other’s expertise. For example, the licensor can inject creative know-how and narratives into the commercial expertise of the retailer to create private labels that stand the best chance of success at appealing to consumers. Meanwhile, the licensor recoups royalties while the retailer gets a continual supply of unique, aspirational products to sell at competitive margins. When done well, it’s a win-win situation. In Alfilo Brands’ case, it allows partners like Amazon’s Kindle, Nestle, and Twinings Tea to engage a younger generation of shoppers, while retailers can offer consumers a continual stream of unique products and shopping experience.

It’s clear that DTR licensing can be a lucrative strategy to leapfrog competitors in the increasingly crowded retail market. But while the attraction of high margins continues to be the main draw to these kinds of partnerships, it’s worth remembering that in today’s market, winning at price alone is no longer enough to guarantee success. We know that consumers, at all entry levels, increasingly want experience. If retailers ensure that’s at the top of their minds when embarking on DTR licensing partnerships, they’ll boost their chances of making it a success story.

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