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Spin-Off Brands Are on the Rise

Specialty retailers like Ann Taylor, Gap and J.Crew use secondary lines to help fuel growth.

ANN Inc., the company that owns Ann Taylor and Loft, had a lot of news to report last week. Not only were fourth quarter and fiscal year sales up, but earnings nearly doubled in 2013. The company also announced a major restructuring. It laid off 100 employees in redundant positions, saving $25 million along the way.

But for shoppers, the big news was that ANN is adding a third label to its roster. Lou & Grey, a loungewear line that came to life within LOFT shop-in-shops, will open four standalone stores this year. (It'll also have a designated space in all 537 Loft locations -- for now.)

"The strategic realignment builds on our ongoing initiatives to expand our omni-channel capabilities, enhance the productivity of our store fleet, grow our international presence, and develop new categories of growth, including the launch of the Lou & Grey brand," ANN CEO Kay Krill said in a statement. So while Lou & Grey is just one part of ANN's overall strategies, it's a significant one. It's also an indication of a bigger movement happening in specialty retail: the rise of the spin-off brand.

Secondary labels are nothing new. Free People, after all, sprung from the racks of Urban Outfitters. (In fact, Urban was originally named Free People when it opened in Philadelphia in 1970. It reemerged as an Urban in-house brand in 1984, and eventually got its own stores in the early aughts.) Banana Republic joined Gap in 1983. Eleven years later, Gap opened affordable chain Old Navy under the purview of Mickey Drexler. (Another interesting tidbit: Old Navy started out as "Gap Warehouse" in 1993.)

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But the approach is more popular than ever. As specialty retailers face more and more competition from fast-fashion (Zara, H&M, Forever 21) and online retailers (Nasty Gal, ASOS), spin-off brands have become more ubiquitous. Ann Taylor has Loft -- which it launched in 1996 -- and now Lou & Grey. J.Crew has Madewell and Kate Spade has Kate Spade Saturday. Much like a contemporary collection does for a ready-to-wear designer, these spin-off brands are often targeted toward a younger demographic. The goal -- as of the last half-decade, at least -- seems to be to appeal to your core customer in a new way, but also to attract shoppers who have traditionally spent their money at teen retailers or fast-fashion houses.

"A number of specialty apparel retailers have realized they must incubate new brands, as opposed to viewing their historical mono brand focus as the only one the customer wants," says analyst Brian Sozzi, CEO of Belus Capital Advisors. "They're attempting to give consumers a reason to shop their physical stores once again with a new brand that creates all sorts of positive, buzzy experiences that will hopefully be plastered on social media."

In the majority of the cases, the strategy has worked. Quarterly sales at LOFT often exceed Ann Taylor by $100 million. Gap has benefited from having brands at varied price points: one will pick up the slack for another during different retail cycles. There was so much buzz around Kate Spade Saturday that the company quickly nixed its plans to launch in Japan only, where it now has six stores. A U.S. e-commerce launch was shortly followed by pop-up events. Now, there are permanent Kate Spade Saturday stores in New York, Los Angeles and Houston, with more on the way. And while Madewell, a heritage brand relaunched by J.Crew in 2006, is obviously not the juggernaut that its sister brand J.Crew has become, it certainly has a following amongst "influencers": ie, editors, bloggers and fashion-forward customers.

But are spin-off brands the big answer to specialty retail's problems? After all, malls are still closing, the Internet is still chugging and brand loyalty is a virtual thing of the past. "It's a mostly harmless strategy," says Robert Passikoff, founder of New York-based retail consulting firm Brand Keys. "But it's borrowed equity. If you're successfully engaging people and making a lot of money, then you don't have to do a spin-off. Companies are not spending as much time as they need to be looking at their core brands."