The internet turned the world upside down and gave legacy and new disruptor brands the stage to connect directly with their customers. Most legacy brands now control a large chunk of their own distribution with their own retail stores and their own websites (now called “DTC” or “Direct to Consumer”).
At a recent Retail Marketing Society meeting, several subject matter experts shared their insights on how the retail industry got to this point and what lies ahead for wholesale brands. The panel, moderated by Richard Baum, founder and managing partner of Consumer Growth Partners, included Paul Charron, former CEO of Liz Claiborne; Allie Egan, president and CEO of Cynthia Rowley; Steve Sadove, former chairman and CEO of Saks Inc. and Mark Talucci, CEO of The Sak.
Do Brands Need Wholesale Distribution?
Talucci: The amount of whole distribution that a brand needs depends on several factors, such as strength and capital structure, as well as the price point of the company. If it’s a company like Louis Vuitton where they are dealing in designer price points, and the customer really wants a highly engaged, exclusive experience, I would say they do not need wholesale distribution. But if it is a brand that does not have as strong a capital structure, has a lower price point and wants to leverage platforms where consumers are spending a lot of time, then I would say they need the wholesale distribution.
It’s also important to distinguish when we say “wholesale:” is it online or brick-and-mortar? I think there is a real shift today in the marketplace between the two. The transparency of price and assortment online is so visible today that I believe brands need to be much more disciplined about their wholesale strategy online, whereas brick-and-mortar, because it is less transparent, does not need to be quite as disciplined.
Charron: It also depends on an understanding of the brand’s target customer and its point of difference, its angle. Don’t bother to go into wholesale with an undifferentiated product that is based only on cost.
Egan: If you think as a brand, you develop a deep story that will resonate. And then you need more opportunities to connect with customers. Then, quite frankly, you should not really care where they buy. You should organize your economics so that it makes sense no matter what, and allow them to purchase in whatever channel that works. Reach them through wholesale or whatever other means you have.
The Model for Department Stores
Sadove: The biggest question is the existential one: what’s the future of department stores? Traffic is down, and this is year after year. I do a bunch of stuff with MasterCard; if you look at the trends year-to-date, they are down 5%. And it was down that kind of rate last year. You get store closures; you get consolidation. This is an industry phenomenon that’s been going on for years and years. The question is: can the industry survive? There’ll be individual survivors within it, but it must fundamentally change. If you go outside of the U.S., the department stores are doing quite nicely. Most of them have moved to a concession model. If I go to Japan, a department store is basically 90% concession. In Europe, it is about 60% concession. Here, [it’s] maybe 15% concession.
Charron: If you’re contemplating going into the wholesale business in whatever channel, you must recognize that you will never control your own destiny. There’ve been way too many doors in this country for 30 or 40 years. We have five times the [retail] square footage per capita that they have in Europe — way too much. So, as a supplier to department stores or Kohl’s, or any of these other places, you must recognize that you’re interested in building a brand forever. Brands are forever to the brand manager. That’s what makes us special. Retailers have a very different mindset. They’ve got a very short-term orientation.
The Drop-Ship Opportunity
Talucci: There is a big opportunity in drop-ship wholesale. This could be the next frontier for wholesale relationships online with established brick-and-mortar players, like Macy’s. The wholesale or the brand can control price because the retailer doesn’t own the inventory, so this is an asset-light structure for the retailer. They don’t own any inventory; they don’t have to take any markdowns. So that gives the brand the ability to control the price.
It’s also a more efficient structure, because you’re not double dipping on freight. It also enables us to control the feed and have a digital asset feed, differentiate assortments and manage exclusives, because we can publish and change every second. The one challenge is that the financial relationship with the department stores, which is based on margin guarantees and markdowns, needs to change, because there are no markdowns in a drop-ship model.
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