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The 5 Most Important Things a Brand Must Do When Building a Direct-to-Consumer Business

Labels that used to be available only at the local mall are changing their distribution models in order to build a direct, and hopefully more profitable, relationship with the consumer. But it's a tricky move to pull off.
Veronica Beard's store in the Pacific Palisades | Source: Courtesy
By
  • Brian Baskin
BoF PROFESSIONAL

LOS ANGELES, United States — On a balmy day last month, Jennifer, a woman in her mid-40s, walked into the L'Agence boutique on Melrose. The style she wanted from the elevated feminine basics label was sold out, but a salesperson convinced her to buy an army-green jacket and an ivory smoking jacket instead. Jennifer ended up spending over $1,000.

Upselling happens thousands of times every day in shops around the world. But these moments are much harder for L'Agence to engineer in one of the more than 300 department stores and other wholesalers that stock the brand. At Saks or Nordstrom, that same customer might have walked out after failing to find what she wanted - or been steered to a similar item from a competitor.

For contemporary brands like L’Agence, finding more Jennifers is a top priority. These labels, which in years past found enormous success filling the gap between mass and luxury at upscale department stores, are seeing cracks in that business model. Sales at American upscale department stores have fallen 17 percent in the last five years, according to Euromonitor. Brands that hand control over pricing, display and marketing to wholesalers are increasingly at a disadvantage to vertically integrated, fast-fashion and digital-native competitors that offer a similar product at lower prices.

It is all an ecosystem. We need to meet our customer wherever she is.

That's why brands best known to customers browsing the racks at Bloomingdale's and Neiman Marcus are launching shopping apps and opening their own stores on prime blocks in New York, Los Angeles and Miami. L'Agence opened its first store in a decade last year, in New York, and plans to open six more by the end of 2020. Veronica Beard, best known for its blazers, opened its first store in 2016 and will open its seventh in May, with a goal of a 50/50 wholesale-direct split, from 65/35 today and 87/13 in 2014. Refined basics seller Vince's stores and e-commerce generated 43 percent of sales in its fiscal year ending in February, up from 24 percent four years earlier.

A pivot to direct sales can be tricky to pull off. Opening stores and investing in e-commerce infrastructure isn’t cheap, and not every brand is able to attract a loyal following outside the confines of a department store. Tackling direct sales means taking on new responsibilities in marketing, logistics and store operations that were once managed by wholesale partners.

But if done right, brands can grow faster with higher margins. In the three years since Vince began exiting low-performing wholesalers and investing more in direct channels, gross margins have increased from 43.8 percent to 47.1 percent.

A mix of wholesale and direct sales can provide the best of both worlds.

“It is all an ecosystem,” said Stephanie Unwin, president of Veronica Beard. “We need to meet our customer wherever she is.”

Here are some key steps popular contemporary brands are taking to find success outside the department store:

1. Hone your story

Customers need a reason to enter a store - and the third blouse from the left on the contemporary floor at Saks isn’t it.

Wholesale brands need to take a cue from start-ups like Everlane that have a disciplined approach to the products they sell, and where it’s clear what the brand stands for, said Jeremy Bergstein, chief executive of The Science Project, a retail consulting firm that has worked with Veronica Beard and L’Agence, among others. Brands struggle to develop that sort of discipline in department stores, he added.

A lot of it is born from really understanding what are the most powerful attributes and ownable behaviours of a brand.

Going direct doesn’t necessarily mean opening conventional boutiques, either.

“It could be a flagship, a showroom, a popup or a series of events,” Bergstein said. “A lot of it is born from really understanding what are the most powerful attributes and ownable behaviours of a brand.”

Veronica Beard uses its website and stores to convey an image that straddles the line between accessible and cool, appealing to a wide age range. Each shop is designed to feel in sync with its location; the Pacific Palisades shop is decorated with hanging surfboards and bamboo furniture, while the Soho store has a cosy feel, with comfy pink couches and coffee table art books.

L’Agence chief executive Jeffrey Rudes said the key to building direct sales is to know his customer - often women between 35 and 50 looking to dress fashionable, youthful and sexy. He keeps the brand’s story simple as well: jeans (which make up about 40 percent of sales) and blouses, shirts and blazers that look good with jeans.

“We were doing gowns, selling six at a time for bridal showers,” said Rudes, who joined L’Agence in 2017. “I turned to the team and said, 'That’s not our business. We can’t be everything to everyone.’”

In that, he took a lesson from his previous venture, J Brand, where a push into direct sales around 2014 struggled in part because the design team filled out the brand’s jeans-centric offerings with high-priced “runway fashion,” Rudes said.

I turned to the team and said, 'That's not our business. We can't be everything to everyone.'

Vince shook up its story as well when preparing a renewed push into direct sales. The brand had come to rely on discounts to bring in customers, a strategy of diminishing returns that left the company in a perilous financial state in 2017. The brand has exited several discount-happy stockists, and is emphasising its California roots under brand manager Tomoko Ogura and creative director Caroline Belhumeur.

“Taking our own destiny into our hands is raising the profile of the brand,” said chief executive Brendan Hoffman.

2. Grow strategically

Wholesale-dependent brands tend to grow direct sales slowly, at least at first. Many of today’s retail casualties over-expanded during better times, leaving them financially stretched and saddled with underperforming stores as customers shifted to shopping online.

Rudes has ambitions to, over the next five years, turn L’Agence into a global brand with $350 million in annual revenue (up from around $75 million currently) and potentially someday hundreds of stores - but says he’d open no more than 15 or 20 himself before bringing in a strategic to oversee a more dramatic expansion.

Taking our own destiny into our hands is raising the profile of the brand.

Customer data generated by e-commerce sales and reports from wholesale partners can point the way to the next city to open a store. And stores can amplify sales rather than cannibalise wholesale business, by playing to a different set of customers and raising overall awareness, Unwin said.

Vince took the opposite approach - some of its newest shops opened close to department stores that formerly carried the brand. One shop that opened last year at the Mall at Short Hills in New Jersey is directly in front of the entrance to a Bloomingdale’s Vince had recently left.

3. Expand the playing field

If a brand is resonating with customers, and its stores and website reflect that image, it’s time to start introducing new products. Since they began investing more in direct sales, Vince, L’Agence and Veronica Beard have all added new categories.

Consumers tend to spend more with a brand in their own store than at a department store, and introducing merchandise at different price points can maximise that sales bump. A customer might walk into a boutique to buy a pair of jeans and walk out with a pair of shoes and some jewellery or perfume as well. Categories like home and fragrance give stores a vastly different feel, Hoffman said.

In today's world you want to be more diverse than just an apparel brand.

“In today’s world you want to be more diverse than just an apparel brand,” he said.

Of course, new products have to feel like extensions of the core brand, rather than cash grabs. Vince’s current handbag line is a relaunch after an earlier effort proved a poor fit with the brand’s apparel.

4. Experiment before committing

The retail apocalypse is an opportunity for growing brands. Nearly 6,000 store closings have been announced this year alone, leaving landlords in need of new tenants. They might offer flexible terms even in high-traffic areas, particularly if a brand indicates it’s willing to commit to a space long-term if the sales measure up to expectations.

That was Vince’s approach at the Short Hills Mall, where the company secured a short-term lease but plans to move into a larger space in the same mall.

It is a bear, it's not easy and it takes a lot of dedication and commitment.

Veronica Beard’s first store was a sublet on Madison Avenue for just under a year. The company used that time to figure out everything from what fixtures to install to how much product it needed to stock.

“That was an incredible gift we received,” Unwin said. “While each [store] is a little bit different, we do have a formula that makes it easier every time we do this.”

Veronica Beard now looks for leases of three to five years, with an option to renew, she said.

The same philosophy applies to new products. Brands often test the waters with a capsule collection before adding accessories or homewares. L’Agence is partnering with influencers and other brands to release handbags, footwear and other products on its website and in its stores, with an eye on producing some of these items on its own if they prove successful.

Brands can take advantage of the total control over data gathering that comes with direct sales. L’Agence sales associates write up short profiles of customers - their age, whether they’re locals or tourists, whether they’re new to the brand and what they buy. Veronica Beard is in the middle of a survey of online customers.

5. Don’t forget your wholesale partners

Vince is in fewer doors that it used to be, but its sales are growing again. The lesson: better to work with a few quality partners than more mediocre ones.

Fast-growing brands can negotiate favourable terms with department stores, from increased floor space to more-detailed customer data.

Having our partners feature our brand to millions of eyeballs as a new jeans resource or new footwear resource gives us a lot of credibility.

Wholesale offers other advantages. “Having our partners feature our brand to millions of eyeballs as a new jeans resource or new footwear resource gives us a lot of credibility,” Unwin said.

Department stores are still thriving in Asia, the Middle East and parts of Europe, and L’Agence plans to primarily rely on wholesalers at first to expand internationally.

To be truly successful, brands need to support every sales channel, even if some are still in their infancy. That means ensuring that everything from the design team to inventory management systems is built for a future where sales are coming from a variety of sources. Otherwise, they risk being stuck with systems geared toward department store sales when the best opportunities are online or in brand-operated stores.

“It is a bear, it’s not easy and it takes a lot of dedication and commitment,” Unwin said. “We’re so lucky we're still young we’re not entrenched in an old way of doing things.”

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