Volatility squeezing private label supply chain, says Deloitte Study

Volatile cost is one of retailers' top challenges in

sourcing private label goods. While changes in consumer behavior fueled by mobility and online shopping are driving the strategic importance of private label sourcing, says a new Deloitte study, ‘Private Label Sourcing: Strategies to Differentiate and Defend.’

“Rapid population growth, skewed to developing regions, is increasing demand on raw material sources while providing new markets for low-cost labor,” said Michael Daher, Principal and Retail Sourcing Practice leader, Deloitte Consulting.

“Additionally, online, mobile and social channels continue to disrupt the retail landscape. As low-cost online competitors continue to expand across more categories, private label provides an opportunity for retailers to defend their market share by offering products that are exclusive to their banner. But it's not the 'copy and paste' private label we grew up with—these are innovative private label brands that require more sophisticated sourcing capabilities,” Daher added.

Deloitte's Private Label Sourcing Study – is one of the largest and most comprehensive to date – analyzed responses from more than 260 executives from apparel, general merchandise and grocery retailers to uncover shifts in market trends and private label sourcing practices. The survey asked respondents to rank their top market pressures. Respondents indicated that raw material cost increases and volatility were considered the top market pressures, followed by rising labour wages and fuel price volatility. Raw materials, production labour costs and transportation costs account for 80 to 84 percent of total respondents' average product costs.

“Re-shoring to local markets is becoming an increasingly attractive option for retailers looking to reduce transportation costs and for products with low labor intensity," Daher says, adding, “For retailers in sub-sectors such as apparel, which tend to have the most vendor fragmentation, cost pressures may incentivize vendor consolidation – especially when retailers desire to improve their leverage to negotiate lower costs, manage smaller order sizes and execute faster production cycles.”

Outsourcing of retailers' sourcing activities continues to play a significant role. Virtually every sourcing activity was fully or partially outsourced more than 50 percent of the time, and for activities like raw material and finished goods sourcing, that number rises to more than 60 percent.