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Is There Hope for Wholesale?

In the age of access, the wholesale distribution model, which comes with inventory risk and high working-capital requirements, no longer makes a lot of sense.
A Prada store in China | Photo: Shutterstock
By
  • Lauren Sherman
BoF PROFESSIONAL

MILAN, Italy — In late May, the Prada Group announced that it would streamline its wholesale distribution both online and in stores, citing the "growing complexity and fragmentation of the wholesale market."

Wholesale — which means selling your product to a store at a discounted price so that the store can do the work of selling it to the public — is not even that big a part of Prada's current business. Right now, 82 percent of Prada's sales already come from its direct retail, which includes more than 630 owned stores and e-commerce. But publicly declaring that it would contract further was a move impossible to ignore. Especially given the current state of multi-brand retail, which is struggling offline to retain customers and struggling online to maintain growth.

In an email exchange with BoF, Lorenzo Bertelli, the Prada Group's the Head of Marketing and Communications, explained that while wholesale still has a "complementary role" in Prada's distribution, direct retail is "the most appropriate and effective way to drive the brands' value and identity, to strengthen the relationship with our customers and to have greater control on our commercial strategy."

Every luxury brand with a decent retail network feels this way. At French luxury conglomerate Kering, owner of Gucci, Bottega Veneta and others, direct sales made up 77 percent of the group's revenue in 2018. Direct retail sales were up 31 percent overall, while online sales were up 71 percent from a year earlier.

At LVMH, which owns more than 70 brands including Louis Vuitton, Christian Dior and Givenchy, the number of directly owned retail stores increased to 4,592 in 2018, up from 3,948 just two years earlier. Louis Vuitton, its biggest fashion brand generating more than $10 billion a year in sales, continues to upgrade or open stores in cities including Bogota, London and Saint Petersburg.

Weak performance at American department stores, which operate almost exclusively via the wholesale model, reflects this shift, spurred by an absolute change in the way consumers access goods. Department stores and other multi-brand retailers were successful because they made it more convenient to buy things. But online commerce has made it easier than ever to purchase anything, anywhere.

Selling exclusive product helps. And some have worked to make up for ubiquity by investing in experience, but that comes at a cost that can only be applied to the most profitable locations. If you have a fleet of 40 or 50 — or 100 — stores, most retailers can only afford to upgrade the volume-driving flagship.

At department store group Hudson's Bay Company, share prices have fallen nearly 80 percent over the past four years, despite the fact that the group has done everything it can to improve margins, including selling off real estate, closing stores and streamlining operations. (Now, the Saks Fifth Avenue owner is bidding to go private like competitors Neiman Marcus Group and Barneys New York.)

Even when these companies are able to increase comparable store sales, many are ladened with so much debt that it's almost impossible to envision a positive outcome. Discounting remains rampant, which makes achieving a good margin difficult.

Yes, it provides a quick means of achieving volume, but brands are beginning to ask, 'At what cost?'

Online, sales at multi-brand sites continue to grow, but these companies — once challengers, now incumbents — are not immune, either.

“Luxury brands have only just started to grasp the effect of third-party digital distribution,” Luca Solca, a luxury analyst at Bernstein, wrote in a recent note. “Mega-brands — which dominate the luxury industry today — have little to gain [long-term] from feeding ‘winner takes all’ third-party distribution platforms. We’d expect Gucci and Prada will soon realise this.”

It all comes down to distribution. Yes, the best multi-brand retailers serve to entertain and advise their customers in a one-of-a-kind way that in turn generates loyalty. But at their core, they were about convenience. Distribution, however, is no longer a challenge for brands — especially big ones. Selling directly is not only more profitable, but it allows brands to create a one-to-one relationship with the consumer, gathering more data along the way.

“Everyone woke up to the fact that if they sold product directly, their margins could be so much higher,” said Robert Burke, a retail consultant. “This is how younger brands are looking at it today. They want to control their distribution.”

So, is there hope for wholesale?

For emerging labels looking to gain name recognition, partnering with multi-brand retailers, most of which operate within the wholesale model, remains important.

"Most young brands can't afford to spend enough on digital marketing to get the presence and competitiveness they need through their own channels," said Julie Gilhart, a business consultant. "Wholesale can prove to be beneficial if added into their strategy in the initial stages of their business."

For instance, at the newly opened Galeries Lafayette on Paris' Champs-Élysées, racks from labels including New York-based Maryam Nassir Zadeh and Noah sit alongside Los Angeles' John Elliott and London's Hillier Bartley. These brands probably can't afford to open their own stores in Paris. Being on display on the Champs-Élysées, which attracts plenty of tourists but also locals who work at corporate offices nearby, is an invaluable marketing opportunity.

And no matter what the size of the business, specific wholesale partnerships can help with brand positioning. But as brands gain positive momentum, many of them are demanding stricter terms from their retail partners, or dissolving partnerships altogether. After all, over-distribution can have a brand-damaging effect. Brands like Michael Kors and Ralph Lauren have spent the past few years pruning wholesale distribution in order to better control market perception. Over-distribution is hard to recover from, however, if you don't have the cash reserves on hand to take the short term hit it can have on sales.

“On the one hand, wholesale distribution can be a solution for brands that want to achieve wide distribution of their product without the capital requirements of operating their own stores,” said retail industry futurist Doug Stephens. “Yes, it provides a quick means of achieving volume, but brands are beginning to ask, ‘At what cost?’ Many are coming to the conclusion that their retail partners are letting them down and actually draining equity from their brands rather than enhancing it.”

For multi-brand retailers that operate within this model, establishing a reputation of being “a good partner” — offering favourable selling terms, holding back on discounts and developing exclusive items — has been one way to keep brands interested. Many have also invested heavily in experience, which can generate more foot traffic and, in the case of restaurants, more revenue. “There should be a greater emphasis on the customer’s experience, rather than just commerce,” Gilhart said.

Because the business has been challenging, there is an aversion to risk.

Saks Fifth Avenue has seen a rise in sales since the unveiling of its revamped New York City flagship, which includes a modernised beauty floor and an outpost of Paris restaurant L’Avenue. But it's not a fix-everything solution.

Multi-brand retail does have one major thing going for it. While the internet offers access to everything, and direct retail offers access to everything within the confines of one brand, the tyranny of choice might continue to drive consumers into stores with a point of view. “It’s the only real competitive advantage,” Burke said.

A strong edit, combined with good customer service, creates a devoted customer base. But in order to succeed, multi-brand retailers must be more audacious when it comes to the products they pull together.

“Because the business has been challenging, there is an aversion to risk,” Burke added. “And because of the aversion, the consumer feels like nothing is exciting and nothing is interesting.”

So, what else can retailers that operate within the wholesale model do to survive? Pulling back on discounts — a major driver of sales, especially in the US — is essential, no matter how much it hurts the top line in the short term.

“There has to be major transformation among the multi-brand retailers to attract great brands into wholesale,” Gilhart said. “They can negotiate pricing policies: lower markups and no end-of-season sales to avoid losing business and ensuring the brand's reputation will be protected.”

Another step is to move further into the “concession” model, in which a brand essentially rents space at a department store, often hiring its own salespeople to work the floor and taking care of its own displays and merchandising. While the cost is higher for the brand and the rewards lower for the store — which makes less money — there is less risk involved as the store doesn't have to buy the product up front. And it gives the brand more control over its positioning.

Successful department stores including Selfridges in the UK and Le Bon Marché in France operate within a hybrid wholesale-concession model: this allows them to guide brands by offering overall store data on their customers. But they don't have to worry so much about that crush of leftover inventory at the end of the season. In its most recently reported fiscal year, Selfridges' sales were £1.7 billion ($2.2 billion), up nearly 12 percent from a year earlier.

But perhaps the most important lesson here is that wholesale will have to be smaller in footprint to be better. Selfridges only operates four physical stores, plus online. Dover Street Market, the concept store from which many major retailers have taken inspiration, has just six locations worldwide. In the US, Saks Fifth Avenue has 43 full-price stores. Neiman Marcus has 43. Nordstrom, 119.

“The thing is, the stores are going to be important,” Burke said. “But not important to the degree that you have to have one in every city in America.”

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