If you wear Guess jeans because you feel they fit you best, meet your sense of style, and offer the value you're looking for in a pair of pants, then you are unlikely to buy a pair of Levi's because they're on sale.
The same might be true for your favorite toothpaste, shampoo, pizza, or any product or category in which a brand can build loyalty. There might be an extreme point where a diehard lover of one brand switches to another due to price, but that's much harder to make happen in an area where consumers have no clear preference.
That's why Target (NYSE:TGT) has spent the past few years creating a powerful array of private labels. These are brands the retailer owns (or at least partners on, like it's arrangement with Chip and Joanna Gaines) that customers can't get elsewhere.
It's about more than price
Target can't always compete with Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) when it comes to price. That does not mean the chain can ignore pricing (and it hasn't). It's a case where the retailer must offer a fair price while creating another reason for consumers to pick Target. Private label brands have done that and they provide the chain a secret weapon through the holiday season.
Target CEO Brian Cornell admitted in the company's second-quarter earnings call that it was impossible to determine exactly how much each of its operating initiatives contributed to its success. In the company's Q2 earnings release, however, he made it clear what he thought drove the chain's success.
"We are extremely pleased with Target's second-quarter results, which demonstrate our guests' excitement for the enhanced and differentiated shopping experience we're building," he said.
Basically, private labels build a moat that protects Target from Amazon and Walmart. Yes, those retailers might offer equivalent products at lower prices, but brand loyalty means customers won't generally see the choices as equal.
"Target has put itself in a great position to capitalize on the strong consumer environment and, as such, it should be one of the clear winners this holiday," GlobalData Managing Director Neil Saunders told RetailWire. "There are two things that stand out. First, the development of strong own-brands. These help to differentiate Target and, to some extent, insulate it from price comparison."
Competing with Walmart and Amazon directly is foolish and the end result is fairly predictable. To win -- or at least be one of the winners -- Target has changed where the finish line is.
"Target's private labels have been a great addition for the retailer over the years," Wiser Solutions Marketing Director Min-Jee Hwang commented on the same RetailWire story. "The company pairs affordability, quality, and service, among other factors, to help them attract customers. Overall, it's the private labels plus BOPIS [buy online, pay in store] and other online changes that have positioned them well to compete with Amazon and Walmart this holiday season."
It's important to note that Target did not put all its eggs in the private label basket. It also worked to improve pricing, supply chain, and its omnichannel capabilities.
The retailer has kept up with Amazon and Walmart as best it can in those areas. That progress should be good enough to keep customers happy while its private label brands give it something its competitors don't have. That's a long-term competitive advantage and it should be a driving force for success this holiday season.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.