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Is This the End of Wholesale, or the Beginning of Something Better?

Department stores are cancelling orders and delaying payments, pushing designers to breaking point and calling into question a system that has been challenged for years.
Inside the renovated Saks Fifth Avenue flagship completed in 2019 | Source: Mark Abramson/Bloomberg/Getty Images
By
  • Chantal Fernandez

NEW YORK, United States — Last week, designers who sell at Saks Fifth Avenue got some bad news: the department store planned to delay payments for up to three months, citing the Covid-19 pandemic.

The announcement, posted on Saks' vendor portal, was a body blow to many designers, who sell their collections to stores at a discounted price and count on the retailers to get their clothes, shoes and jewellery in front of shoppers. But Saks and most other department stores closed their doors last month and have struggled to convince worried consumers to shop online.

It was likely inevitable that wholesale retailers would pass along some of the financial pain to designers. Delayed payments, cancelled orders and earlier-than-normal online discounts are the new norm across the industry.

But these steps are putting many designers in a dangerous position. They are stuck with extra inventory and watching profits vanish before their eyes in a swarm of online fire sales. The decision by Saks Fifth Avenue and other large retailers to draw out reimbursement for 90 or even 120 days robs brands of cash they desperately need to survive this crisis. Many won’t make it.

The coronavirus financial crisis is an unprecedented global event, but the pressure it is putting on the wholesale fashion system is really just accelerating problems that have dogged retailers and the brands that depend on them since the 2008 financial crisis.

It was then that wholesale became addicted to deep discounting in order to attract customers. In order to compete with each other and growing online players, retailers started ordering more exclusive products and capsule collections. Brands became frustrated by the need to deliver coats in August and spring dresses in February, only to see their products lost in a sea of fashion that inevitably winds up on sales racks.

The question now is whether the chaos of the coronavirus pandemic forces the wholesale system to address its deep-rooted issues — or drives it further to the breaking point.

"The real tragedy will be if we come out of this, on the other side, with no changes," said Stefano Martinetto, chief executive of showroom and brand consultancy Tomorrow London. "If we now have a rush to the bottom with a global fight of markdowns to get rid of inventory, everybody will lose, not only wiping out a generation of young talent."

The real tragedy will be if we come out of this, on the other side, with no changes.

The outlook for the rest of the year is grim. Bain projects global luxury sales will fall by up to 35 percent this year, depending on how quickly stores can reopen.

Spring collections are already available for up to 30 percent off online at Saks Fifth Avenue and 40 percent at Bergdorf Goodman and Nordstrom, the sort of promotions not usually seen until May. Most retailers have cancelled orders, from spring to pre-fall (usually reaching stores in May) and beyond. Virtually all major luxury brands have cancelled their June resort shows. Some retailers have even begun cancelling fall collections, indicating they expect weak sales at least through September or October.

Behind the scenes, retailers are taking even more drastic steps. They are drawing on credit lines and furloughing thousands of employees. Moda Operandi is shuttering its men's business permanently. Neiman Marcus is reportedly exploring bankruptcy options.

In a statement, Neiman Marcus Chief Merchandising Officer Lana Todorovich said the store is holding “active conversations” with its brands to find solutions, and shifting some pre-fall collections to fall.

“This includes finding opportunities to review the content of our seasonal flow, shift seasons if necessary, and make thoughtful and innovative decisions together,” she said.

Representatives for Nordstrom and Bloomingdales declined to comment, while representatives for Saks Fifth Avenue and Bergdorf Goodman did not respond to requests for comment.

For brands, this unusual crisis provides a unique opportunity to take stock of their wholesale relationships. With so little money coming in from retailers, designers have less to lose in demanding more flexibility on when and how often they produce collections, or what prices they are sold for. If brands want to deliver winter coats when it’s actually cold out, or ask for more favourable terms on unsold inventory and markdown rules, now is the time to ask.

“All these seasons, all these markets, they are not a win for anybody and the consumer can’t understand anymore what they are seeing,” said Brian Bolke, co-founder of Dallas-based department store Forty Five Ten. “These are all made up industry things, and that’s what has to break.”

These are all made up industry things.

He recommends brands create just two collections per year, each split into an earlier and a later delivery with a core that is never marked down.

John Elliott, whose namesake streetwear line sells with Nordstrom, Saks Fifth Avenue and Need Supply, among others, is taking steps in that direction. He said after some wholesale order cancellations, he is focusing on his own e-commerce and a core collection of staples that are more likely to sell at full price.

“We are not going to be beholden to the system,” he said, describing the last five years as “herd mentality” in fashion. “I don’t want to hitch my wagon to seasonal fashion deliveries that require a ton of upfront investment…. We are entering a new phase of the wild west, where everyone is going to reset.”

For Isabel Marant, discounts were a point of contention well before the pandemic, and the brand is taking steps to keep markdowns from getting out of control, said Chief Executive Anouck Duranteau-Loeper.

She is asking department stores to protect some of the brand’s items from discounts, so it will be easier to sell them at full price when stores reopen. The brand’s fall/winter deliveries will be late due to production shutdowns, so if stores open in the summer, Isabel Marant wouldn’t have full-price items to offer until months later.

“We are faced with the problem that the markdown period in the US is so early that it does not make sense any more,” Duranteau-Loeper said.

Still, wholesale relationships are key.

“As a ready-to-wear seasonal brand I truly believe that wholesale distribution is important,” she said. “I think it is a good moment to have a strong discussion with them. If it’s not good for them, it’s not good for us either.”

What will the wholesale market look like if Isabel Marant, John Elliott and other brands get what they want?

It could lead to a rise in concession agreements, where brands rent a space in a store and hire their own sales associates. The new relationship between department stores and online, direct-to-consumer brands could also become another working model: in recent years, retailers have agreed to exclude DTC brand items from seasonal discounts and not to return unsold merchandise in order to get buzzy online players in stores.

Other independent brands may follow in the path of luxury leaders like Prada, which is cutting down wholesale orders to better control distribution and pricing.

Even small and mid-sized brands that can’t afford concessions or vast store networks of their own are likely to prioritise relationships with retailers that cater to their needs, and cut out those that can’t or won’t. Struggling brands and stores will close, reducing some of the fashion glut. Shoppers could shift to a quiet luxury that emphasises timeless collections over constant newness, as they did in 2008.

“There will be a recalibration of the size of the collections,” said Robert Burke, a retail consultant, adding that he thinks fewer items will be created just for runway shows. “I think everyone is going to have to be aspirational, but they are also going to have to be realistic.”

Everyone is going to have to be aspirational, but they are also going to have to be realistic.

Much of this would suit Laura Vinroot Poole, founder of Charlotte, N.C. specialty retailer Capitol, just fine. She wants more flexibility with the leading luxury brands, who sometimes require her to buy from all six seasonal deliveries. She would rather pick and choose, as some collections don’t appeal to her customers’ conservative tastes or North Carolina’s warm winters.

She also hopes brands simplify their market schedules, which require her to travel to Europe eight times a year, crisscrossing cities because brands rarely present collections on the same timelines. In addition to the hectic schedule, clothes featured on the runway can’t be sold for long at full price because they take so long to reach stores.

“I would be fine without runway deliveries,” she said. “Pre-collections are huge for us: they are less expensive and deliver early.”

Burke said independent stores like Capitol will have an easier time making changes to the seasonal system than department stores because they are smaller businesses and often have closer relationships with the kind of individual shoppers brands can’t reach on their own.

Duranteau-Loeper expects a further contraction in the department store market, following the closure of Barneys.

“The number of players in the US is decreasing,” she said. “It’s going to be a more easy situation to control.”

In the meantime, many are wondering what increased markdowns will mean for stores when they reopen.

Bolke expects there will be pent-up shopping demand after the lockdown ends. He recommends brands not produce much or any of their fall collections “because something has to give,” he said, and “what they should be doing is making the spring season last longer” so pre-fall collection can arrive in stores later when more people actually want to buy coats.

“Is cancelling orders and selling everything at 25 percent off — is that doing anything?” he asked. “No one is actually thinking about the consumer right now.”

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