The rise of brand X

A web store can feature its own goods in a way a physical store can’t and test small quantities before committing to big purchases.

Retail giants like Wal-Mart Stores Inc. and Amazon.com Inc. sell popular products in such large quantities they can afford to make small margins on items like Tide laundry detergent and Levi Strauss & Co. jeans. That means competing for sales of such brand-name goods is increasingly a losing proposition for many retailers.

That’s what’s fueled the growth of private-­label brands that a retailer controls from design through manufacturing. Retailers frequently add distinctive features the major brand manufacturers don’t, and, because they don’t pay manufacturers the markup that brands like Levi’s and Procter & Gamble can command, they can frequently undercut the retail prices of branded goods.

The Internet provides new brands access to millions of consumers, and several private-label brands established online have been among the fastest-growing e-retailers in recent years. These include Bonobos Inc. in men’s apparel, Warby Parker in eyeglasses and Harry’s Inc. and Dollar Shave Club in razor blades.

On a more modest scale, the web has made it possible for David Heacock, founder and CEO of FilterBuy.com, to build a business he expects will sell $10 million worth of air filters this year. The key for him is to reach consumers when they are searching online for replacement filters, which he does largely by bidding to place ads on the Google and Bing search engines and on Amazon.com when consumers search for terms like “air filters” and “furnace filters.”

“We’re very focused on intent-based marketing,” says Heacock, a former Goldman Sachs options trader. “Our shoppers have the intent to purchase something specific when they need it.”

That’s just one example of how web-only retailers use the Internet in ways not available to small merchants in pre-Internet days. They also can bolster confidence in their brands with online reviews and photos of happy shoppers drawn from social networks, promote their own goods over those of branded products in search results on their own websites, and use their sites to test small batches of new goods, gauging online shopper reaction before deciding whether to place bigger orders. What’s more, online wholesale business portals give them access to the world’s manufacturers, even if they’re as far away as China.

That’s not to say their success is assured. A major challenge for small companies is to get manufacturers to allocate factory time to what may be small runs at uncertain intervals, while bigger companies can give them large, predictable replenishment orders. That has led some web-only merchants to buy their own factories so they can assure control of production.

They’re willing to make that investment because consumers are willing to buy private-label goods, often because they are priced below name brands, and sometimes because they offer unique features. Roughly $1 of every $6 U.S. consumers spend is on private-label products, according to the Private Label Manufacturers Association.

Company-branded goods can be found readily online. A woman shopping for activewear apparel in mid-April would have seen plenty of private-label options: They represented 84% of the items for sale at JCPenney.com, 57% at Kohls.com and 27% at Macys.com, according to Boomerang Commerce, a retail and e-commerce pricing analytics firm. On that same day, Amazon.com had no private-label products in women’s activewear, the analysis showed.

Since Amazon deliberately chooses the fashion categories it enters, the gap shows “a clear opportunity for every other retailer to establish their own private-label brands in that category and extract the extra margins,” says Raghu Hariharan, head of strategy at Boomerang. “At least it’s an opportunity until Amazon at some point decides to enter the activewear category.”

The growing prevalence of new brands on the web helps other retailers win acceptance for their own labels, says Lauren Schwab, co-founder of lingerie e-retailer Negative Underwear. “The emergence of new brands signals to shoppers that it’s OK, that it’s actually a good thing to shop for new brands and try something different from what they’ve known,” she says.

Schwab and co-founder Marissa Vosper unveiled a redesigned website in April that features photos customers post to Negative Underwear’s Instagram account, which it updates daily, Schwab says. The photos are meant to reflect the retailer’s range of customers, who eschew lace, bows, embellishments and push-up styles in favor of comfort and minimalism, she says. The name Negative Underwear is meant to be easy to remember and set apart from the girly aesthetic of many lingerie brands, Schwab says. Business in 2015 doubled from 2014, though the co-founders decline to give specifics.

Negative Underwear introduces new styles with a production run one-quarter the size of a full-scale run to gauge response, Vosper and Schwab say. The latest example is a wireless bra that the pair started developing in 2014 based on customers’ email requests, Instagram chat messages and comments at in-person events. The company had previously sold only underwire bras.

NegativeUnderwear.com introduced the wireless bra last fall, charging $55, and sold out within three weeks, Vosper says. The e-retailer quadrupled its next production order and relaunched the bra online in January 2016. It again sold out within three weeks, she says. “If the product sells fast, we know we can experiment with more typical quantities in future runs,” Vosper says. “We believe it’s a better approach than being overstocked in something that just won’t sell.”

The co-founders say their price point is lower than competitors who use similar materials and produce similar quality products, pointing to products available online for as much as $300.

Lower price is frequently the key selling point of private-label products, and the web gives an online retailer plenty of ways to highlight that price difference for shoppers.

For example, Aaron Leon, founder and CEO of printer ink cartridge company LD Products Inc., lists his company’s remanufactured versions of brand-name products first in search results on the LDProducts.com website. The company also sells new brand name ink and toner. LD-brand products are generally priced 30%-60% lower than original brand cartridges, Leon says.

In each product listing, the branded product’s list price appears as “regular price,” with the less-expensive private-label price in bigger print just below it. For a set of four Hewlett-Packard 822A Laser Toner cartridges for office-grade color printers, for example, the regular price is listed as $1,439.96 in small print with “our price” listed below as $1,069.96 in big blue bolder typeface. To bolster confidence in LD’s house brand, the website lists as many as 100 customer reviews of its products, which it solicits through email a couple days after a shopper buys an item, Leon says. The company, whose private-label goods comprise a majority of yearly revenue, also sells its merchandise through online marketplaces operated by Amazon.com Inc., eBay Inc., Jet.com, Sears Holdings Corp. and Rakuten Inc.

As with many other e-retailers selling private-label goods, price is a big differentiator for Stock Manufacturing Co., which makes its own brand of men’s shirts and other apparel and sells them directly to consumers via StockMfg.co.

“We sell directly to our customers and skip selling wholesale, so everything is about half of what it would cost if we sold to stores,” says Jim Snediker, co-founder and CEO. “For example, selling wholesale, I would spend $20 to make a product that would be sold to a store at $40, and which would sell to the consumer at $80. Instead, we sell directly to our customer at $40.” Sales last year were in the $500,000 to $1 million range, with 50% coming from direct-to-consumer online sales and 50% from designing and making uniforms for waiters, servers and bartenders at high-end hospitality companies.

The company produces test runs of its direct-to-consumer merchandise in batches of 50 to 100, Snediker says. If a product sells well, the company produces more and, if not, there’s no excess inventory, he says. For example, Stock Manufacturing designed midnight blue and hunter green flannel shirts in early August, produced a total of 65 units of the two styles by the end of September, posted them online in early October and, because they sold quickly, replenished them by the end of December.

“That is a prime example of replenishing a product that hits inside the same season,” Snediker says. To be able to replenish supplies even more quickly, he plans to open his own factory, instead of using a contract manufacturer near Stock Manufacturing’s Chicago plant. “If you handle production yourself, it will be even quicker,” Snediker says.

Harry’s Inc., an e-retailer that offers shaving blades and razors by subscription, owns its Germany-based blade manufacturer, too. The company aims to take a nick out of a high-margin business dominated by Gillette, a division of consumer packaged goods giant Procter & Gamble and the dominant brand of razors and blades, with kits such as The Truman set for $15 or The Winston set for $25, plus blade refill sets. An eight-pack, for example, is $15, with free shipping for orders of more than $10. By contrast, a 12-pack of Gillette Mach3 blades was priced at $27.19 last month on Jet.com.

Relying on outside manufacturers can be an obstacle for small companies placing modest orders. Negative Underwear, for example, will have to wait until May for a replenishment order of the wireless bra it launched in January because its Belgian supplier had to fit the order into its regular production schedule as it finds time and capacity. “Being a small brand with smaller production orders you don’t always get priority in the factory’s production line,” Vosper says. “You have to take what they are able to give you.”

For a small company that can’t afford to buy a factory, finding reliable suppliers is crucial, says Jose Calero, owner of LapWorks Inc., which sells stands and other accessories for laptops and tablet computers through eBay, Amazon and two of his own e-commerce sites, Heldtite.com and Laptopdesk.net.

“It’s like finding the right spouse,” Calero says. He advises retailers to use Alibaba.com, MadeinChina.com and GlobalSources.com as a starting point to find Chinese manufacturers capable of producing private-label goods.

Of the three, Calero prefers Alibaba.com, a website operated by Chinese e-commerce giant Alibaba Group Holding Ltd., because of steps it’s taken to make buyers feel comfortable about purchasing from a Chinese supplier. As an example, he says Alibaba.com’s free Trade Assurance program guarantees buyers 100% of their money back if a supplier fails to deliver a quality product on time. Alibaba also will certify a supplier after it reviews a company and finds it to be trustworthy. Alibaba charges suppliers a $25,000 fee to go through the certification process.  “After paying Alibaba the $25,000, no supplier will act in a way to lose that most valuable Alibaba certification,” Calero says.

Finding suppliers of private-label products, testing new products and promoting them are all more possible today because of the web. And many online shoppers are willing to look past name brands to find greater value. Little wonder there’s a growing coterie of small, web-only retailers determined to meet shoppers’ increasing demands for a good deal at the click of a mouse.

BY SANDRA GUY