A little over 25 years ago, Kmart teamed up with Jaclyn Smith, the onetime Breck Shampoo Girl and star of TV’s Charlie’s Angels, for an exclusive line of fashionable, reasonably priced clothing and accessories. At the time, the discount chain was best known for its folksy “Blue Light Specials” — where a store worker would light up a mobile police light and offer a discount in a specific department. The goal of the Jaclyn Smith partnership was to add a touch of sophistication to the chain. Today, the collection, which sells everything from faux leather jackets to silk table linens to velvet Christmas ornaments, is one of Kmart’s most recognized and enduring brands.

But the collaboration signifies much more than the widespread availability of affordable wedge sandals and two-tone straw hats: It effectively blazed a trail for what might be considered the golden era of celebrities designing for big box stores. Today, for instance, Michael Graves, the architect, designs a line of hip teakettles and toasters for Target. Vera Wang, the A-list fashion designer, creates stylish shoes, sweaters and jewelry exclusively for Kohl’s. Pop star Miley Cyrus has an allowance-friendly label for Walmart of tops, pants and graphic tees targeted at tweens. This summer, reality TV stars the Kardashian sisters will introduce their line of clothing, the Kardashian Kollection, at Sears.

In an otherwise price-driven economy, retailers are increasingly relying on a stable of private label and exclusive brands, according to Wharton marketing professor Barbara E. Kahn, director of the Jay H. Baker Retailing Initiative. These lines differentiate stores, give them more say over the marketing of their merchandise and perhaps most importantly, give retailers control over pricing, which leads to greater profitability, Kahn says. Profits on exclusive brands tend to be higher than national brands because chains are able to mark the lines down at their own speed.

“Retailers are in a difficult situation right now because the price of cotton is going up, as are labor and operating costs. But with private labels, they have many more pricing options and much more control over their brands,” Kahn notes. “Attach a celebrity name to an exclusive store brand, and retailers get all that dazzle and panache along with all the profits. It’s a way to create excitement in the store, and make it special.”

But there are pitfalls to these partnerships. Exclusive lines represent an enormous amount of time, effort and expense from retailers. If stores do not properly execute the line in any way — by stocking an ill-considered miniskirt or a shoddily manufactured appliance, for instance — they are left with a large and costly inventory.

Retailers are also vulnerable to the personal foibles of their celebrity designers: If one misbehaves or becomes embroiled in a scandal, sales could fall. For example, now defunct retail chain Anchor Blue failed to score with a clothing line by reality television star Heidi Montag, better known for her multiple plastic surgeries and other controversial off-screen behavior. Finally, celebrities can find themselves susceptible to the declining fortunes of their retail partners: The bankruptcy of budget chain Steve & Barry’s left exclusive lines by Sarah Jessica Parker, Amanda Bynes and Venus Williams without a place to call home.

Cutting Through the Clutter

One of the biggest challenges facing retailers is the lack of differentiation among the major department stores. Walk into any two strip malls in America and the monotony of merchandise on the shelves is apparent: shelf after shelf of the same trousers, toasters and tea towels. But an exclusive brand — particularly one with a celebrity name on the label — helps separate retailers from their competition, according to Stephen Hoch, a Wharton marketing professor.

“This is just one of the ways we’re seeing that branding is more important than it used to be,” he says. “What is new is that retailers are doing it more often, and these exclusive lines represent a higher percentage of their sales than they ever have before.”

Last year, for instance, Kohl’s garnered about 48% of its sales from exclusives, up from 44% the previous year. Exclusive brands at Saks Fifth Avenue stores until very recently made up less than 10% of the products for sale, but last year the up-market retailer announced several new product lines that will make exclusive items about 20% of its offerings over the next several years.

Celebrity lines are an obvious way for retailers to generate buzz. They also put a face on the brand and help crystallize the target market, notes Hoch. “It’s a way to borrow some equity from the celebrity — a way for stores to sell the same stuff, but with a measure of exclusivity…. Plus, everyone else is doing it. Stores reason, ‘If my competitor is doing it, I have to do it to stay in business.’ That’s why it’s more ubiquitous now.”

Famous clothing and product designers are also much more open to the prospect of having a line at a major retailer, he adds. “Every designer is interested in the middle market. If they are only designing for the runways and doing haute couture, they will be famous in Women’s Wear Daily, but they won’t be rich. They know that the money is in the mass market. This is where they will get scale.”

A second reason retailers seek out celebrity partnerships is to enhance their image and build loyalty among customers. Stores’ own private label brands do not inspire allegiance because “there’s an enduring notion that store brands are cheap and not as good,” according to Jonah Berger, a Wharton marketing professor. But consumers feel better about brands with a “name” attached. “They feel better about wearing them, and they feel better about giving them as gifts. This is why name brands are more resistant to a downturn.”

Consumers feel a personal connection to famous-name brands. Martha Stewart has lines at both Macy’s and Kmart, and if you are a Stewart fan, “You know something about Martha Stewart as a person, you already have a connection to her, you get excited about her and you have a quality association with her,” Berger says. “People buy celebrity brands not just for what the products do, but what they mean. Part of the reason people like celebrity brands is because they want to be associated with celebrities.”

After all, celebrity sells. Take, for instance, Jessica Simpson, the pop star and actress, who has an eponymous line of moderately priced shoes, handbags, coats and clothing. According to Women’s Wear Daily, the Jessica Simpson Collection took in $750 million in retail sales last year. At its current rate of growth, it could be the first ever celebrity clothing line to top a billion dollars in retail sales next year.

These labels not only add flair to the stores, but they also cause a “spillover effect.” Customers are attracted to a certain retailer because of the cache of a given celebrity brand, but they may ultimately buy other items they hadn’t intended — a phenomenon known in the retail realm as “cross-shopping.” “If you go into a Kmart to buy Martha Stewart pots and pans, you’re more likely to buy other things as well because the very fact that they sell Martha Stewart — a brand you have a connection to — makes the rest of the store seem even better,” according to Berger.

Gaining Control

In addition to differentiation, retailers seek out celebrity partnerships to gain control of their supply chain as well as control over how their products are marketed and sold. At a time when retailers are just starting to recover from the near-collapse of the financial sector in the fall of 2008 and the ensuing consumer slowdown, they are coming under new pressure from higher sourcing fees in China and the rising cost of materials and labor.

Exclusive brands enable retailers to gain more control over manufacturing costs, says Kathy Doyle Thomas, chairman of the Retail Advertising and Marketing Association (RAMA). “It also makes it easier for them to control inventory. A retailer knows it sells a certain number of black pants every season, so it makes economic sense for them to control the supply chain, and make the manufacturing cheaper. And if something is not working, the stores know what their margins are, so they know what they need to do to fix it.”

This control over the supply chain also allows them to react faster to customer demands and trends, and enables big box retailers to be nimbler at creating so-called disposable fashion. Disposable or “fast fashion” is a specialty of retailers like H&M and Zara, which sell inexpensive, readily-available clothes designed to be worn a limited number of times before quickly going out of style. “The clothing may not be of the highest quality but it’s very much in the moment, fun, and fashionable,” notes Kahn. “Shoppers are not planning on wearing it forever so they don’t mind that the product is not of the highest quality. It has a short shelf life.”

There are other forces driving the movement toward private label brands, she says. Retailers are reacting to the fact that national brands — such as Ralph Lauren — are pulling out of department stores and instead selling directly to customers in standalone storefronts. “National brands want to have complete control,” Kahn states. “When they have their own stores, national brands can be as persnickety as they want to be about their image. They can control how their products look on the shelves; they can dress the mannequins; they can determine how all the products appear in catalogs. And they also have a lot more control over price — which is especially important when they are so vulnerable to prices of commodities.”

When retailers launch an exclusive famous-name brand, they are able to wrest back some of that control over price. They are not beholden to national brands for markdowns, and the very existence of their in-house exclusive brand makes it tricky for customers to do a straight price comparison with similar goods. After all, it is hard to know the exact difference in quality between a Michael Graves lemon squeezer designed for Target and a generic one. And because there are no like-for-like comparisons, the product is no longer competing completely on the basis of price.

Of course retailers must pay careful attention to the marketing of their brands to make sure they don’t become commonplace or over-extended. But generally speaking, these lines sell at a premium, says Theresa Williams, director of the Center of Education and Research in Retailing and marketing professor at Indiana University’s Kelley School of Business. She estimates exclusive brands have a profit margin of about 50, which is 10 to 15 points higher than a national brand.

“Exclusive brands create a sense of urgency in the customer’s mind about owning a particular product. A customer at Kohl’s will pay $64 for a sweater with a Vera Wang label on it,” Williams notes, adding that $64 is quite expensive compared with other Kohl’s sweaters. “To that shopper, there is something there that tells her that sweater is worth it.”

The Downside of Fame

Partnering with a celebrity does have some disadvantages, however. Exclusive brands are very expensive to execute and require a significant effort on the part of retailer. Chains often must commit to large minimum orders to get the best prices on their in-house products, and if those products don’t sell, they could be left with a big and expensive inventory.

“The cost is substantial mainly because they have another partner — the celebrity on the label — to worry about,” says Williams. “It changes the way retailers source manufacturing, and the approval process becomes much more onerous. There’s a certain aesthetic — not just a look or style — that really is the entire essence of the line, and everyone has to approve. It puts a much greater responsibility on the part of the retailer to keep the brand partner satisfied.”

Williams estimates that partnering with a celebrity for an exclusive brand increases the cost of a product line by about 12%. Add the advertising dollars to create customer awareness, and royalty payments to the brand partner, which typically range from 1% to 3% of revenue and, “for a retailer like Target, that’s a lot of money,” Williams points out. “And if you miss the mark, or make a mistake — you own it. You don’t have guaranteed profitability with these lines.”

For this reason, retailers must choose their celebrity partners carefully. “They have to think hard about who best represents the brand, who makes sense and who excites the customer,” says Williams. “They have to look at the demographic and psychographic of their target customer and figure out who has the greatest ‘stickiness’. They don’t want to just hang their hat on the flavor of the month.”