The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
Big luxury brands have long embraced “shop-in-shop” concessions on department store floors, which allow them to control product assortment and pricing while benefiting from the customer traffic and upmarket adjacencies offered by shops like Paris’ Le Bon Marché and London’s Harrods.
Now, in a bid to control discounting, a number of top brands are imposing a similar model on e-tailers like Matchesfashion and Mytheresa as the labels pull back from online wholesale — or in the case of Gucci- and Balenciaga-owner Kering, eliminate online wholesale completely.
The shift has added another layer of complexity to a multi-brand luxury e-commerce market that’s already under pressure, with fierce competition, high customer acquisition costs and logistical challenges making it increasingly difficult to turn a profit. The concession model remains largely uncharted territory for online wholesalers, with financial and strategic implications that are only starting to emerge.
Marketplaces like Farfetch and Alibaba’s Tmall Luxury Pavilion were early adopters of the e-concession model, happy to let brands control pricing and assortment themselves in order to lure them (and their deep inventories) to their platforms. Their business model has always been to charge sellers a commission rather than buying inventory and marking it up.
But for wholesale players, which trade on offering a unique point of view, curated product selections and high-touch services to stand out in a highly competitive online landscape, moving to an e-concessions model where brands are in control is more complicated.
It’s a completely new way of working.
Still, leaders in the sector are forging ahead: in the past year, Net-a-Porter, Matchesfashion and Mytheresa have all introduced versions of e-concessions for certain brands alongside their traditional wholesale setup. The shift hasn’t come without challenges.
“It’s a completely new way of working,” Matchesfashion chief commercial officer Elizabeth von der Goltz said of the model, which the e-tailer began rolling out in November for five Kering brands. “It was a big piece of work behind the scenes that the customer will never see.”
A Boon For Big Brands
The move is largely being driven by luxury brands that have long since tired of playing whack-a-mole with discounting by wholesalers, whose markdowns are seen as tarnishing brand equity and fuelling comparison shopping. Many have accelerated plans to reduce their exposure to wholesale since the coronavirus pandemic, which highlighted the importance of tightly controlling inventories, product perception and customer relationships both online and off.
In the push to control discounting, online wholesalers are seen as particularly problematic. The internet has made price comparison instantaneous, with popular products just a click away on competing sides, prompting e-commerce players to resort to frequent promotions to drive sales.
Kering-owned Gucci’s wholesale revenues were down by 39 percent compared to 2019 last year. That’s partly due to a slower rebound in department stores and travel retail since the pandemic, but also part of a strategic shift away from wholesale — perhaps for good.
“The problem all brands have with online wholesalers is that we can’t control the discounting. … So we’re stopping all online wholesale,” Kering CEO and chairman François-Henri Pinault said at a February press conference. Now, Kering brands will only remain on multi-brand platforms via e-concessions, where they retain ownership of inventory and exert greater control over pricing, product mix and presentation, he said.
Recalibrating the Brand-E-tailer Relationship
For the biggest brands, the switch to e-concessions won’t just allow them better control, it’s also more profitable: paying out a commission allows them to keep a greater share of each sale than under a wholesale model, where the retailer pockets a steep markup. Brands usually take home between 40 percent and 50 percent of a product’s retail price with wholesale, versus pocketing 65 percent to 90 percent of each sale an e-concession, according to a report by Altagamma and Bernstein.
“Stronger brands have an obvious economic advantage in transforming wholesale sales into e-concession sales, with the added benefit of a greater alignment of their prices,” Bernstein analyst Luca Solca wrote in the report.
Stronger brands have an obvious economic advantage in transforming wholesale sales into e-concession sales.
For online retailers, the implications could be less rosy, as the companies are having to navigate the shift amid a tough trading environment where it’s already crowded, competitive and costly to do business.
In theory, e-concessions have some upside for retailers, eliminating the financial risk of holding inventory and providing a better customer experience with opportunities to tap deeper product availability via a brand’s stocks.
But the commission on an e-concession sale tends to be much lower than their markups on wholesale inventory, meaning e-tailers need to sell much more product to generate the same revenue. If a retailer is also managing shipping and returns, scale is even more crucial to offset those additional costs.
Moreover, in the fiercely competitive world of e-commerce, a multi-brand store’s value-added is most often expressed through a carefully curated product assortment, elite services or the focused editorial line of their communications. Online wholesalers may be loath to relinquish the freedom to differentiate themselves using those tools.
Negotiating an Emerging Model
Some players have already begun working with brands to tweak the e-concessions model in a way that also works for them. After all, brands stand to benefit, too, from working with multi-brand retailers who can tell a fashion story and engage customers in a different way: third-party retailers remain important to the luxury eco-system as a key channel for discovery and inspiration for many consumers. Consulting firm Bain estimates that by 2025 wholesale will still drive between 45 percent to 50 percent of the personal goods luxury market, down from 60 percent in 2019.
Mytheresa, known for its tightly curated edit of brands, rolled out what it calls a “curated platform model” for six brands, including Moncler and Gucci, during the Autumn/Winter 2022 season. As with a traditional concession, the brand retains ownership of the inventory that it sells on the Mytheresa platform. What’s different is that Mytheresa’s buyers still curate the selection of items it sells, shoot and market the products and ship them from the Mytheresa warehouse as they would under a wholesale structure. From the customer point of view, the experience of shopping at the e-commerce site remains unchanged.
“This is in the interest of the brand. They want us to act differently so that we bring a different audience,” said chief executive Michael Kliger. “It’s a business decision: for us to continue to curate and for the brands not to just upload everything on a rented [online] retail space,” he added.
This is in the interest of the brand....for us to continue to curate and for the brands not to just upload everything on a rented [online] retail space.
For the model to work, Mytheresa plugs into the brand’s own stock management systems, meaning they become part of the brand’s overall retail network, said Kliger. For example, if the e-tailer is running low on stock of one of Moncler’s signature puffer jackets, additional stocks can automatically be shipped to the Mytheresa warehouse from Moncler’s wider inventory pool. Conversely, if a product isn’t selling, it can be moved back into one of the brand’s stores.
“The replenishment part actually creates the value-chain efficiency, which is also very important in managing supply chains nowadays,” Kliger added.
The Model of the Future?
For wholesale businesses, making the shift to an e-concessions model can be a significant undertaking that requires ample time and investment. Matches, too, says it’s collaborating on product curation and maintaining control over service since switching five Kering brands to the e-concession model in November 2021.
It took almost a year of planning and technology development to get the e-concessions up and running, according to Matches’ Von der Goltz, who added that the model requires significant scale to make benefits like auto-replenishment and diminished inventory risk worth it.
“It is an investment in terms of our manpower and our time,” Von der Goltz said. “This really truly only works when you have a brand that has a core product — usually it’s a category, so shoes or bags — that’s constantly selling.”
“The business needs to be large enough within your own business to be worth it … The reality is that there are very few brands that this model works well with,” she added.
The business needs to be large enough within your own business to be worth it … The reality is that there are very few brands that this model works well with.
Mytheresa estimates that by the end of the fiscal year in June, almost 20 percent of revenues will come from their curated platform model, a share the retailer expects to increase to between 30 percent and 35 percent by 2024.
“The model allows us to be as profitable as wholesale, but there are different mechanics,” said Kliger, highlighting the way access to deeper inventories can drive high volumes.
Still, “we don’t see based on the information here today that this will be the one and only model,” he said. “It works with a brand that has a big retail pool, it works with brands that…can replenish from their own doors to a platform. Not all brands have that capability.”
Some top brands, too, are hesitant to emulate Kering’s switch. Prada, which has shrunk wholesale revenues by almost 30 percent since 2019, currently operates an e-concession with marketplace Farfetch. But the group isn’t ready to roll out the model with all its online multi-brand partners just yet.
“This is something that we have been actively investigating,” Denni Manzatto, Prada’s commercial director, said. “It’s a very interesting value proposition, but there have to be a number of conditions to apply, including finding the right balance in inventory management, to make it work effectively for brands.”
Pressure to Consolidate
In the case of Kering, the end of online wholesale might actually prove advantageous for the handful of players who manage to forge an e-concession partnership, as fewer online competitors are likely to be selling popular items like Balenciaga’s Track sneakers or Gucci Horsebit bags. With the brands carefully controlling price, retailers won’t have to worry about rival websites offering the same product for less.
“They’ve actually decreased the competition,” said Von der Goltz. “Thankfully, we’re one of the established players in the e-commerce world. If you’re a smaller business that doesn’t have the partnership of the biggest brands that drive the largest sales volumes, it’s going to be hard to really scale your business.”