NEW YORK, United States — Israeli-American designer Nili Lotan opened her first retail store in Tribeca in 2006, just three years after launching her label with a $25,000 loan and a pair of unassuming cargo pants that, 15 years later, are still a best seller.
While Lotan nailed a hit product from the get-go, it took a lot longer for her direct retail strategy to take shape. One year ago, 70 percent of her revenue came from wholesale partnerships. Today, the split is even, with 50 percent of sales coming from her own retail channels, including two more physical stores — one in East Hampton, another on Madison Avenue — and e-commerce.
According to market sources, Nili Lotan hit $50 million in sales in 2017, up 40 percent from 2016. Lotan says she expects direct retail will soon make up 60 percent of the business.
“If I started my business today would I open wholesale? Probably not,” she says. To be sure, direct retail offers far better margins than wholesale, but also an opportunity to own and hone the relationship with the customer, capturing their feedback, both quantitative and qualitative, to make better business decisions. It also mitigates the risk of working with traditional multi-brand retailers, many of which are finding it increasingly difficult to grow as consumer choice multiplies.
However, like Lotan, many brands don’t have the luxury of starting from scratch. And they often feel crippled by the capital investment it takes to recalibrate the balance between their wholesale and direct businesses. While the likes of Nike, Ralph Lauren and Michael Kors have made strides in shifting more of the business to direct retail, they have the financial resources required to make this happen.
For labels that rely on cash from wholesale partners to keep their businesses afloat from season to season, such a shift is not as easy. “You need to build direct-to-consumer strategy on top of a solid and stable foundation so you can respond faster and more efficiently,” says Jeremy Bergstein, president of the Science Project, a New York-based retail innovation agency that advised Nike on its global direct-to-consumer strategy. “It’s capital intensive because you’re revising almost all of your business enterprises, then comes the technology, then comes the brand experience.”
So, what are the levers a wholesale-dependent brand can pull to give its direct retail strategy a boost?
1. Start small and iterate. “Test and learn,” Bergstein says. That can mean a temporary space — like a pop-up shop — or a working showroom where clients can make appointments to come in and try on samples.
Shop-in-shops at department stores are also a good way to test out direct retail. While some brands have deals where they pay the department store rent — or a percentage of sales — others partner with retailers to open a dedicated shop that still operates on a wholesale model. (For instance, many of Saks Fifth Avenue’s standalone shops — including Jason Wu, Derek Lam and Altuzarra — are run this way. Los Angeles-based brand Co. has a similar partnership with Neiman Marcus.) These partnerships afford the brands many of the same benefits as running their own retail location — they can easily gather customer feedback, helping to inform the seasonal buy — without the risk that comes with investing in inventory up front.
Another option is to partner with a bigger company that can provide the necessary infrastructure for launching e-commerce. For instance, Yoox Net-a-Porter Group operates the back-end e-commerce systems of several major fashion brands, including Alexander Wang, Armani and Isabel Marant. In 2015, rival Farfetch launched Black & White, which offers global, cross-channel solutions to brands including Thom Browne, Proenza Schouler and Christopher Kane. “We utilise our distributed inventory model to give brands the advantages of a single unified stock view across multiple stock points and therefore the ability to use inventory to fulfill orders from in-store, warehouses and even wholesale accounts,” explains Kelly Kowal, managing director of Farfetch Black & White. “We also have incredible cross-border, international logistics with the ability to ship, for example, from the EU or the US into countries like China in less than three days.” While there are set-up fees, Black & White operates under a revenue-share model, meaning the upfront investment is generally smaller than going it alone.
Successful direct retail requires at least some level of vertical integration.
2. Stack, don’t silo. In the past, seemingly disparate departments within companies often operated independently from one another. But successful direct retail requires at least some level of vertical integration. “Everyone in the company needs to communicate,” Bergstein says. “You’ll hear a CTO saying ‘I’m collapsing under all this data,’ and a CMO saying, ‘I really wish I knew more about my customer.’” However, such integration is often easier said than done. “To offer a single view of product, to speak to a customer anywhere, you need the operational and organisational structure to support that,” he adds. “Sometimes, brands have a hard time re-aligning.”
There are some quick fixes. For instance, Lotan’s VP of sales oversees both direct retail and wholesale accounts, which are often separated in businesses of comparable size. “By overseeing all venues of distribution, she can make sure that we’re maximising the growth for each one,” Lotan says.
3. Focus on storytelling, not just marketing. “The brand has to have a culture,” says Rodrigo Bazan, chief executive of Thom Browne, which has 29 directly operated stores globally. Currently, direct retail makes up 45 percent of sales — up from 25 percent two years — with an aim for it to become a majority of the business. At Thom Browne, the storytelling starts with its made-to-measure program. “In the beginning, we didn’t have wholesale,” he adds. “Retail, the atelier, has been there since the beginning.”
While it’s tempting to pour marketing dollars into online advertising when going direct, it’s not always the most effective use of funds. “We’ve never invested any money in advertising,” says Bazan, who has instead built up the company’s internal editorial team, which produces shoots and content for its e-commerce site and social channels. “Instead, we invested in great shows and communication, with magazines and retailers telling the story. That has now shifted to us telling the story.”
A lot of successful digitally native direct-to-consumer brands built their businesses on Facebook and Instagram advertising, though costs are rising and resulting in lower return on investment. Lotan has recently begun advertising on platforms like Google — where she says she is earning $17 for every $1 she spends — although her main form of marketing is Instagram Stories, which she posts herself at 5 a.m. every morning. “What drives business is the swipe up in Stories,” she says. “Somehow [shoppable posts] don’t feel as real and genuine to my customer. It’s about the intimacy and relationship that I have with them. The minute that I put the price tag on the clothes, the engagement goes down.”
“The real black magic still lies in design, creative and storytelling,” Bergstein says. “There’s a lot of brand detritus. Storytelling cuts through it.”
4. Continue nurturing wholesale relationships. For many brands, exiting wholesale altogether is not only next to impossible, it’s also ill-advised. The right wholesale partners can help to generate reliable revenue. But perhaps more importantly, they can serve as additional marketing platforms and storytelling vehicles, helping to grow both channels along the way. “Any smart merchant embraces the idea,” Bazan says. “You can make it complementary. We love the fact that we have shop-in-shops. They still offer a closer relationship to the customer.”
For many brands, exiting wholesale altogether is not only next to impossible, it’s also ill-advised.
The key to succeeding at wholesale is treating the channel as if it was your own. (“I go in and rearrange the racks at Barneys,” Lotan says.) It’s also important to develop exclusive product, but only if it feels authentic to both the brand and the retailer. Thom Browne’s month-long residency at Colette, for which he designed 100 unique products — ranging from custom Post-it notes to mink intarsia blankets — is an example of exclusive product that goes beyond the norm of a custom silhouette or colorway and into the extraordinary. “It was a huge amount of work,” Bazan says. “But in today’s world, with technology at your hand, you have to really make the in-store experience worthwhile.”
5. Always keep the customer’s best interests in mind. Brands spend a lot of time selling a dream: through runway shows, advertising and dressing celebrities in their wares. But in order to truly engage a customer directly, they need to think not only about why she wants to buy a certain product, but how she will use it. Other than great, original design, what will convince her to make a purchase? “Brands have to stop talking to themselves,” Bergstein says. “They have these internally facing brand pillars, but nobody cares about what they’re saying. Instead, you need to ask, ‘What role does brand play in the consumer’s life?’” This, Bergstein says, will help to build relevancy and make a brand feel vital.
6. Raise capital. In order to swiftly move more of the business direct, many larger brands have made significant investments in technology and supply chain, while taking a short-term revenue hit. But for brands who lack the money to make such bold moves, raising money is one solution. Depending on the size of the business, that could mean an angel investor, a venture capital firm or a private equity partner. “Going direct is difficult for small brands to do,” Bergstein acknowledges. “Capital allows you to make the change swiftly.”
Of course, it’s not always so easy to find a compatible investor, which means a brand may have no choice but to take things slow and steady. Lotan, after all, has not borrowed money since that first $25,000. (Which, she says, she paid back within two months.) Many of her smaller risks have paid off: While it cost her $24,000 to open the East Hampton store in 2012, it did a quarter of a million dollars in sales in the first two months.
“The growth from wholesale to brick-and-mortar to e-commerce came gradually and not all together,” Lotan says. “That is one thing that worked for me."