Taking back control: the new power play in wholesale
The idea of paying to have something made, passing it on to someone else to sell, who will then pay you in a few months’ time, sounds like the cashflow diagram from hell. Unless the profit margins are huge – and even then it’s not ideal – wholesaling in fashion is difficult. Small brands, especially, need the constant stream of cash, traditionally have tighter margins, and need the crucial feedback of information with regards to successful products that can inform future decisions and where to put their limited resources.
The fashion wholesale model is broken and, now, even the big boys are deciding to step back. Luxury brands are also realising, finally, that the true value of selling directly to consumers is growing a database of customers and understanding exactly what they want in a shorter amount of time and being more reactive to those needs. Realising something is or isn’t selling in 3 to 6 months’ time is pointless and is what will suffocate even the biggest of brands.
Many luxury brands sat back and twiddled their thumbs over the past two decades while huge fashion corporations like YOOX/Net-A-Porter and Matchesfashion.com have grown with enviable customer lists and used huge amounts of information to improve their offer and grow further.
Now, the wholesale middle man is being pushed back to a point where brands want more control, know they will make more money directly and won’t be at the whims of a fashion buyer every season as to whether they’ve made the cut or not.
Prada announced last month that is would reduce its wholesale network in Italy and Europe in a push to have uniform prices for its products across different outlets and reduce markdowns. Before that, in March, the Milan-based company said it also would stop offering end-of-season promotions at its own shops in a bid to boost margins and protect its brand. It’s obviously been watching the success of Gucci’s no-sale model and product that continues over seasons and doesn’t seem to quickly date.
In a short filing with the Hong Kong stock exchange, where the company is listed, the company's chairman Carlo Mazzi stated, “The Prada Group considers it essential to ensure greater consistency in pricing policies across retail and digital channels. This strategic review is intended to further strengthen the Prada Group brands with the aim of supporting sustainable long-term growth.”
Prada said it would end relations with some Italian and European wholesale partners and gradually replace them with new digital and e-commerce players.
While it has tried to improve its website, added a broader selection and launched onto sites like Mr Porter, Prada is doing it at a time when the brand has lost momentum and isn’t quite as in demand as it once was. It said the leather goods category will be the most impacted with the changes and this is their biggest segment with the greatest margins.
This DTC (Direct to Consumer) approach is something born from the internet and social media. The brand owns the customer and has a direct relationship. It knows their e-mail and address. It also knows what they have bought before and, most likely, things that may interest them in the future. As personalisation increasingly becomes more sophisticated, this will also help to offer more choices and brands can follow their customers through their actions.
Physical retail third party wholesale accounts allow you less control and inject potential disruption in your cherished luxury supply chain to the customer and, as Prada says, you can keep the prices constant and consistent (probably higher) throughout one geographical region.
Just yesterday, British luxury house Mulberry revealed it had swung into a loss as a direct result of the collapse of department store chain House of Fraser. To protect its interests moving forward, it has been busy converting its presence in John Lewis from wholesale to concession and says that 90% of sales are now generated via Mulberry-owned channels.
Kering, owner of Gucci, Saint Laurent and Balenciaga, has announced it will take back control of its e-commerce operations, focusing on own branded sites where it can control its image and client data. Excluding Gucci, the YOOX/Net-A-Porter group operated e-commerce websites for most of the brands within the Kering group. The joint venture will now end in the second quarter of 2020. While not completely cutting off their nose to spite their face, Kering wants to turn more of its collaborations with third-party, multi-brand retailers such as Farfetch or Matchesfashion.com into what it calls “online concessions”, where it controls everything from the product assortment to their presentation. "Each time we move from wholesale to a concession we see our top line increase in a material way,” said Grégory Boutté, Kering’s Chief Client & Digital Officer, and former vice President of eBay. Kering has stated it was “not against wholesale”, and did not plan to end its relationships with third parties altogether.
This will be a play of power and something that I think will be difficult especially with the complexities of something like Farfetch coming from multiple retailers in different locations. This sounds like wanting your cake and eating it; we want your database, but in our own way. I’m not sure that many retailers will relinquish that amount of control, especially when you consider how many brands they sell and also the loyalty they now instil in these hard-won customers.
Kering's total online sales — when including the business done through third party platforms, calculated at retail and not at lower wholesale prices — came to 9.4% of the group's 2018 revenue. Web sales through its own brand websites and online concessions made up 4.7% of revenue. This has huge room to grow.
Boutté has built up his digital team from four people upon his arrival at Kering in 2017 to over 80 people, today. He has realised the power of data. “The more data we have, the more precise our algorithm is and the better the experience is. The other thing is that it should lead us to excellence in terms of our operations,” he said.
Across the luxury goods industry as a whole, e-commerce accounts for around 10% of business today and should reach 25% of sales by 2025, consultancy Bain estimates.
This is about information and control. Controlling discount, controlling points of sale and controlling presentation. You can control more online, even with third parties. You can see it from anywhere. It's those pockets of physical wholesale boutiques or department stores in small towns that are harder to police and often unsold stock disappears into the grey market and ends up on discount sites and with other retailers.
Where once luxury retailers didn’t want to get their hands dirty, they are now rolling up their sleeves and have their eyes on the online prize; higher prices, more full-price sell-throughs and control of that all-important “data”. This will get more ferocious as the market becomes more saturated, growth slows and customers get increasingly more expensive to acquire.
I predict many brands will try to be exclusive to their mono-brand websites if they don’t get what they want with their third-party partners, or possibly try the LVMH 24 Sèvres, now rebranded as 24S (an LVMH-owned multi brand site), route, but it will be hard. And expensive.
Retailers like FarFetch and Matchesfashion.com are decades ahead and thrive on new and small designers adding that colour and point of difference online. Luxury mono-brand websites often look boring, sterile and empty. People don’t shop in single brands, particularly when they are browsing. While the idea is logical and makes sense to reduce wholesale and take back more control, it will be far more complicated than that and add multiple costs to their business models.