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How Digital Brands Make Wholesale Work

For direct-to-consumer labels, third-party retailers can provide a powerful marketing channel, but knowing which stores to work with and how aggressively to push is often challenging. BoF makes sense of the strategy.
Aeyde Autumn/Winter 2019 campaign | Source: Courtesy
By
  • Tamison O'Connor

BERLIN, Germany — When former Zalando executive Luisa Krogmann decided to start her own upscale shoe brand, Aeyde, the resolve to sell exclusively through its own website, rather than department stores or boutiques, seemed like a no-brainer. Why hand a big slice of each sale to a wholesaler when e-commerce offered a direct connection to consumers?

She quickly changed her mind.

After some initial success following the Berlin-based brand’s launch, Aeyde needed to find an affordable way to grow brand recognition and reach new customers. When a chance collaboration with an upscale boutique in Hamburg sold better than expected, Krogmann said she realised wholesale was the answer to her problems. Today, Aeyde generates 40 percent of its sales from department stores like Galeries Lafayette in Paris and Lane Crawford in Hong Kong, as well as boutiques like Assembly in Los Angeles and New York.

“We really saw the potential that boutique businesses and high end luxury retail had for our brand,” said Krogmann, who co-founded Aeyde with Constantin Langholz-Baikousis in 2015.

Lots of brands underestimate the cost of growing without any wholesale support.

Direct-to-consumer brands have had a good run over the last few years, with start-ups like Allbirds and Everlane generating tens of millions of dollars in sales through their own stores and website. But as the pool of fashion brands fighting for eyeballs on Instagram and Facebook becomes more and more crowded, the cost of acquiring customers is spiralling out of control. Many brands are reaching the conclusion that it’s worth accepting slimmer margins with a wholesaler rather than going it alone online.

“Lots of brands underestimate the cost of growing ... without any wholesale support,” said Joel Jeffery, co-founder of sleepwear brand Desmond & Dempsey, which started partnering with wholesalers about two years after launching in September 2014 (today, wholesale makes up 20 percent of the business). “So much of your marketing budget is going on that customer acquisition piece.”

Deciding to go wholesale is one thing, knowing which stores to work with and how aggressively to pursue this strategy is another. Here are five tips to help any direct-to-consumer business get started.

Decide Wholesale’s Share of Sales Up Front

A brand needs to set goals for what it wants out of its wholesale and direct-to-consumer businesses. Wholesale potentially brings higher sales and greater brand awareness, but lower margins; carefully controlling the size of the wholesale business will take less of a toll on the bottom line. La Ligne, an elevated basics brand founded in 2016, keeps wholesale at 20 percent of the overall business.

“You’re essentially getting paid for customer acquisition, brand awareness, all of that kind of stuff. I think of it as a marketing cost, a customer acquisition cost, that’s how I model it out for the overall business,” said Molly Howard, the brand’s co-founder and chief executive.

Brands should build some flexibility into their model, however. Hatch, a maternity wear brand founded in 2011, generates 10 percent of sales from wholesale, but is aiming to shrink that share as its direct business continues to grow, said Ariane Goldman, the brand's founder. She said the return on wholesale isn't healthy enough to justify taking focus off the core business.

“The advantages are there, but the expenses are there as well, and the expenses are not just dollars. It’s the bandwidth of the team,” Goldman said. “If you’re making half the profit on a wholesale relationship, and you have to hire a team to manage it, you might even be breaking even at the end of the day, and you have to weigh whether or not the exposure is worth that.”

Be Prepared: Wholesale Is Hard Work

Partnering with even one or two wholesale accounts can be a challenging shift. Direct-to-consumer brands must learn how to mock up wholesale inventory line sheets, find time to schedule sales meetings with buyers and ensure that orders arrive on time to avoid fees.

“Logistically it’s a lot of work, straight up,” Howard said. “It’s a whole other world of business.”

Many stores still set their buying budgets according to the traditional wholesale calendar, which can disadvantage direct-to-consumer brands used to releasing new styles at their own pace online. Even if a wholesaler is excited about a brand, they may have less appetite for ordering sweaters in September or swimsuits in May. Out-of-season items are also more likely to be put on sale, further squeezing margins.

Logistically it's a lot of work, straight up. It's a whole other world of business.

It is possible. La Ligne works with retailers like Net-a-Porter and Nordstrom that are more flexible with budgets and lead times. Nordstrom, for example, places monthly orders with La Ligne to align with the brand's monthly drops model.

But aligning business with the wholesale calendar can increase a brand’s wholesale ROI. Desmond & Dempsey saw 300 percent growth in wholesale when it aligned its product releases to the buying calendar, Jeffery said. Offering new wholesale accounts a selection of core product that sold year-round helped to alleviate pressure during the transition period.

Brands should budget ample time to make these adjustments. It took Aeyde a full year to recalibrate its business and align itself with the longer lead times of the traditional calendar most wholesalers work by. All teams — from product design, to product development, to press and marketing — had to get on board. At one point, the brand was designing two seasonal collections simultaneously.

Choose Retail Partners Wisely

It can be hard for new brands desperate for money and exposure to turn down big retailers who come knocking. But it should be a two-way relationship. By keeping stockists tightly curated, a brand can better ensure it enters into partnerships that are worth the trade-offs.

Direct-to-consumer brands should consider the customer they’re trying to reach, what support they need from a retailer and which other brands they want to be associated with.

It's like dating. It's really important to meet with as many retailers as possible.

“It’s like dating,” said La Ligne’s Howard. “It’s really important to meet with as many [retailers] as possible … and think about them being people you can grow with.”

Playing hard to get can also work to a brand’s advantage, she said.

“I think the longer we spent not doing wholesale, the more attractive we become to wholesale partners, because they wanted what they couldn’t have,” Howard said.

Think Beyond Customer Acquisition

A wholesale business can be used to help manage cash flow and even inform product design. Increased product volumes can lead to better negotiating power with factories. Desmond & Dempsey used wholesale orders to secure a bank loan needed to fund product production.

Aeyde looks to its wholesale business for trend forecasting. During sales appointments, Krogmann gets feedback on her new collection from buyers and hears about which trends they’re excited about for the coming season. It’s also a way to gauge which styles are likely to be top sellers when they hit the website.

“They give us a very good style indication and prediction, and then we use it for our direct-to-consumer order placement and optimise [exclusive product] for Aeyde.com,” said Krogmann.

Keep on Top of Data

By closely monitoring the sell-through of different products with wholesalers, brands can better estimate the amount of stock their wholesale partners should carry and limit buybacks at the end of a season.

“When we have some of the stock returned to us, it’s a huge hit on our books and we have a big issue on our hand of what do we do with this merchandise,” said Hatch’s Goldman. “I’d rather have [retailers] wanting more than actually having us with such a surplus of inventory.”

I'd rather have retailers wanting more than actually having us with a surplus of inventory.

Aeyde’s Krogmann prefers to keep initial wholesale buys relatively small to protect the brand from being discounted if a style doesn’t sell well.

“There is the inherent risk that they put you on discount early on,” she said. Throughout the season, the brand is able to replenish strong-selling product relatively easily as all the Berlin-based brand’s production happens in Italy. “It’s quite quick to place reorders.”

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