Facing a marketplace overflowing with stores, most retailers have spent the past several years tirelessly searching for new ways to grow. In the case of runaway successes such as the apparel manufacturers Nike and Calvin Klein, the secret appears to be strong, well-leveraged brands, which, McKinsey research shows, add five points on average to shareholder returns. Do retailers have the same access to brand magic? Vertically integrated ones certainly do. Companies, such as Gap and Victoria’s Secret, that design, manufacture, and market their own products have very substantial long-term growth expectations embedded in their share price, reflecting, in part, the expectations created by their brand strength (Exhibit 1).

Some retail brands have been built from the ground up virtually overnight. One vertically integrated single-brand retailer—Old Navy, Gap’s retro-hip discount concept, offering a proprietary line of value-priced family apparel—sprang onto the scene in 1994. Five years of phenomenal growth later, Old Navy had sales of $2.6 billion and could claim to be the first retail chain to have reached $1 billion in sales within 48 months of its launch. There seems to be no end in sight: Old Navy plans to add upward of 140 stores to its base of...