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HBC has set an ambitious five-year goal for private label sales, to 15 per cent of annual revenue from 9 per cent today.TIM FRASER/The Globe and Mail

Hudson's Bay Co. trumpets high-profile brands such as Coach as a big part of its turnaround efforts, but behind the scenes the retailer is building an arsenal of its own private labels to fight growing competition from its suppliers' standalone stores.

While HBC and other department stores count on stocking well-recognized lines to draw customers, the merchants also contend with those same companies running their own shops nearby – often in the same mall or down the street.

Now, HBC, which reports its first quarterly results as a reborn public company on Tuesday, is putting a new push on its own labels. In-house brands give merchants more leeway in setting prices without having to match a competitor's discount, while scaling back on middlemen. Retailers are betting they can generate higher profit margins from their own brands, while taking on their suppliers on their own turf.

On Nov. 28, HBC took another step in pumping up its house brands by launching a shop at Toronto Pearson International Airport to tout its signature collection, which features its heritage multicoloured stripes on everything from blankets to coats; in March, it will open another HBC Trading Post at Vancouver International Airport.

"As you watch the proliferation of vendors opening their own stores, you're seeing the reverse proliferation of retailers doing their own product," said Marc Metrick, HBC's chief marketing officer and a former executive at U.S. department store purveyor Saks Inc. "That's all about controlling your own destiny. It's profitable and it's a key differentiator."

Some chains, such as apparel specialists Gap Inc. and J. Crew Group Inc. carry almost exclusively their own labels, while grocer Loblaw Cos. Ltd. has become a destination for its President's Choice foods and Joe Fresh fashions, competing directly with similar national brands, often at lower prices.

Today, department stores are aiming to create a buzz for their own labels to help bolster their bottom lines and keep customers from fleeing to their vendors' rival stores.

"They are offering a distinctive bundle rather than a flea market of somebody else's goods, which you can buy anywhere else," said Jim Danahy, managing principal at retail consultancy CustomerLAB.

Retailers are drawn to private labels because they can generate double the profit of national brands if managed well, with opportunities to chop marketing and distribution costs, he said. But if their styles fail to resonate with shoppers, they risk having to clear them out at a discount, which pinches margins.

Private labels in women's wear can be more challenging than those in men's fashion because female shoppers hanker more after coveted brands, Ron Frasch, chief merchandising officer at Saks, told analysts this year.

"We really have just scratched the surface," added chief executive officer Steve Sadove.

Indeed, department stores, including Sears Canada Inc., increasingly are focusing on stepping up their private labels. HBC set a five-year goal for private label sales to reach 15 per cent of its overall $3.9-billion in annual revenue (excluding the soon-to-close Zellers chain), from 9 per cent today, according to its securities filings.

At U.S.-based Macy's Inc., private labels make up 20 per cent of sales, up from 17 per cent in 2004, says HBC's initial public offering document. "Higher penetration of exclusive and private brands has allowed some department stores to increase merchandise margins while also attracting new customers," it says.

Mr. Metrick stressed that HBC is using its private labels simply to complement strong national brands such as Michael Kors and "fill some gaps." The new airport signature shops act as a brand billboard for a "captive audience" of travellers.

HBC plans to trim to five – from 25 – the in-house brands it carries at its Bay and Lord & Taylor chains. Next fall, it will introduce a new brand called 1670 (the year Hudson's Bay was founded) for contemporary styles. It will broaden its Lord & Taylor line in 2014 beyond cashmere fashions to a wide array of goods. Other surviving labels will be the signature collection, the Black Brown 1826 men's wear line and Gluckstein Home.

Private labels allow HBC to respond faster to shifting trends and better control the flow and timing of merchandise shipments, the company said. The retailer has hired agents to find non-competing retailers in North America and beyond to stock its brands, and already sells its Black Brown line to Belk, a U.S. department store.