IBS

THIS month Liz Claiborne, an American clothing firm, reported a 65% drop in profits for the first quarter, largely due to a 7% fall in sales in its wholesale division. This includes clothing lines such as Dana Buchman and Ellen Tracy, which the firm sells to department stores. Take a stroll through JCPenney, one of America's biggest department stores, and you can see why sales have plunged. Private-label brands such as Worthington, Arizona and a.n.a., designed and made by JCPenney, now make up nearly 50% of its total sales. At Macy's, another big department store, private-label lines have been growing three times as fast as wholesale lines—making private-label clothes the fastest-growing product category in American department stores.

Macy's has devoted extra floor space to private labels such as American Rag and Alfani, and has even displayed them in the sorts of in-store boutiques normally reserved for designer brands. Last year JCPenney opened a temporary store in New York's Times Square devoted to its private-label brands. (The trend is not limited to America: private-label brands are on the rise in British department stores such as Selfridges and Harrods, which are expanding their own clothing lines.)

Department stores are also working with famous designers and celebrities to differentiate their offerings, increase their appeal and generate extra publicity. Last year Oscar de la Renta and Elie Tahari signed on to create clothing lines for Macy's, which already has a line of Donald Trump menswear (presumably woven from a strange, orange natural fibre). In the autumn Vera Wang, a designer best known for her wedding dresses, will unveil a line of women's clothing at Kohl's, a budget-conscious department store.

Design teams work directly with clothing manufacturers to create private-label lines, avoiding the mark-up applied by apparel companies which normally serve as middlemen between retailers and manufacturers. This means higher margins for the department stores. Robert Drbul of Lehman Brothers, an investment bank, estimates that private-label brands are 10-15% more profitable. But the risks are greater, too: if the clothes sell poorly, the retailers absorb all the losses.

Furthermore, private-label brands do not appeal to all buyers. Marshal Cohen of NPD Group, a market-research firm, notes that private labels are unpopular among the wealthy and the young, who account for about one-fifth of the market. This gives traditional brands an opening. Liz Claiborne plans to expand its high-end lines, such as Juicy Couture and Lucky Jeans, in department stores. As well as being more profitable than mid-range brands such as Ellen Tracy, their sales have been growing by 20-30%. The firm says it will continue to acquire luxury brands such as Kate Spade, which it bought last December, to focus on customers who find private-label brands unappealing.

For their part, department stores are under pressure from fashion chains such as H&M and Gap, which are using many of the same tactics. H&M launched its “M by Madonna” line in March, creating hysteria as customers queued for hours to buy the clothes. The company has now moved on to its next celebrity line—a limited collection of swimwear inspired (and modelled) by Kylie Minogue, a singer. Kate Moss, a supermodel, designed a line of clothes for Topshop, a British fashion chain, that is also being sold in Barneys, a New York department store. And Gap's high-end line, Banana Republic, has signed a five-year deal with Safilo Group, an Italian luxury-eyewear firm, to sell Banana Republic-branded frames and sunglasses in Safilo's Solstice stores, other retailers and possibly in department stores, too.

Mr Cohen predicts that department stores will respond by creating stand-alone shops for their private-label brands and selling their wares in other stores. There is, after all, only so much floor space in any given department store. If so, the future for private-label brands may well be outside their parent companies' doors.