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Can third-party brands provide a boost for major high street players?

Marcus Jaye
25 September 2019

To be a retailer today you need many fingers in many pies. Think a centipede Paul Hollywood and you’re getting some idea. So, it was with interest to hear the latest announcement from the world’s second largest fashion retailer, H&M. It has decided to start a pilot selling products from external brands.

While it has sold third party brands in some of its more premium chains before, it’s a first for the mother brand. H&M’s main, eponymous brand has been neglected and struggled as the company’s strategy was to roll out retail chains such as Arket, Weekday and & Other Stories.

The bottom end of the market is tough with margins continually squeezed. H&M’s huge undersold inventory, an undeveloped online offering and falling profits – for the eighth quarter in a row the Swedish fashion chain reported a decreasing profit, despite having recently achieved turnover growth – have taken their toll on this retail behemoth.

It needs a new strategy and has clearly been watching the likes of ASOS and Zalando be all things to all people and expand rapidly.

A company spokesman said: “The H&M brand will now develop our offer of external brands. The purpose is to complement our offer with external brands to add excitement and energy and we see great opportunities for growth and to find new customers.”

You can charge more for branded product without the need to hold large amounts of stock. It also widens your target market, especially amongst men who still like branded items. While it’s not clear which brands will be sold, it’s likely to be dominated by sportswear. This is an area that has seen huge growth with the likes of JD Sports smashing its earnings. JD Sports’ last half-year revenues jumped 47% to £2.7 billion on the back of a 10% surge in like-for-like sales. Sportswear has higher margins and appeals to more age demographics.

One of the more traditional high-street retailers to make this third party brand strategy work is Next. Its “LABEL” concept is now turning over £350 million in yearly sales with huge growth seen over the last few years. Brands such as River Island, adidas, Boss, Superdry and Fat Face sit alongside beauty and home. It’s the contemporary department store.

Next

In its latest financial statement, it says it “continues to develop the business through the addition of new brands, increasing the breadth of offer with existing brands and (from early this year) offering items stocked in our partners’ warehouses through Platform Plus."

"‘Platform Plus’ allows our customers to order un-stocked items directly from our partners’ warehouses to be delivered through our network.

“In March this year we started selling items in this way with three of our partner brands. These items are offered to customers on a 48-hour delivery promise. Items are injected into our warehouse and then delivered through our courier and store network. For example, a Platform Plus item ordered on a Monday, is transferred to our warehouse by Tuesday and delivered to the customer on Wednesday,” it says.

“When customers order Platform Plus items with other items stocked in a Next warehouse (available in 24 hours) they can choose to receive one consolidated delivery, offered in 48 hours. Alternatively, customers can choose to split their delivery and have stocked items delivered in 24 hours. There is no additional charge for the split delivery. Currently, 50% are choosing to consolidate their order.”

Next says Platform Plus is more than a marketplace. “Platform Plus differs from many marketplaces because, rather than despatching parcels directly to consumers from third-party warehouses, items are inducted into our distribution network. The advantages of operating in this way are: We can consolidate orders into one delivery which can materially reduce distribution costs. Items can be delivered through stores which currently receive 50% of all our Online orders and we have visibility and control of all orders through our own trusted networks and tracking systems. This allows us to ensure quality of service and in the event of any delivery issues or queries, customers have one point of contact.”

It seems to be working for Next with full price LABEL sales in the first half of this year up +26% and total sales (including markdown sales) up +29%. It expects full price sales in the second half top 2019 to be up around +13%, more in line with its original full year estimate of +15%. The expected slowdown in growth in the second half is mainly due to errors and stock shortages in its Lipsy – owned by Next – ranges which it believes will slowly be corrected.

For the full year, full price LABEL sales are forecast to be up +19%. Total sales (including markdown sales) are forecast to be up +21% with net margins, after central overheads, forecast to be around 15%. 

In this retail environment this is very impressive. Sales are a combination of wholesale and commission, and although they make lower net margins on commission sales, they encourage their partners to adopt this model because they believe it generates higher sales growth. In the first half of this year commission sales grew by +32% compared to wholesale which grew by +18.5%. It's also less risky.

As of August 2019, it has four clothing brands operating on Platform Plus and plan to add at least ten more later this year, with more to follow in 2020. 

Last month it also agreed a licensing deal with Ted Baker to create and sell Ted Baker children’s products. It intends to launch the first collection in Spring 2020.

Next, thanks to its Directory, has fine-tuned its delivery and database over many years and is trusted by its customers. H&M, on the other hand, doesn’t quite have the online reputation, but, being able to return to store could be a massive positive for consumers.

It will be interesting to see how fast and big it goes with this concept and the brands it decides to stock. Third party branded goods allow for a faster turnover of brands and product, less risk, especially under this commission model, and the subsequent cool and elevation that can rub off on a tired umbrella brand.

Consumers are addicted to newness and H&M needs to try something new. This idea has the potential to work, though it is getting increasingly competitive, it just needs to judge when the sportswear trend will finally end, which brands connect with their customer and what the next big trend will be.

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