In late may Prada said it was cutting back on its online and offline wholesale distribution channels, citing "the increasing complexity and fragmentation of the wholesale market".
Wholesale means selling products at a discount to department stores, which then sell them.This marketing model does not account for much of Prada's business.Today, 82% of Prada's sales come from direct retail channels, including more than 630 stores and e-commerce businesses.But publicly announcing further cuts in wholesale distribution is a move that cannot be ignored.Prada's move is striking given the struggles of multibrand retailers trying to maintain online sales growth while retaining store customers.
Prada group marketing communications director Lorenzo Bertelli in email correspondence with BoF explained that although in the wholesale distribution channel in Prada still has a "supplementary role", but direct retail is to promote the brand value and image, enhance brand and control business strategy customer relationship, strengthening the brand "is the most appropriate, but also the most effective means of".
Luxury brands with good retail channels feel the same way.Kering, the French luxury group that owns brands such as Gucci and Bottega Veneta, accounted for 77 per cent of its annual sales in 2018, with total direct retail sales up 31 per cent and online sales up 71 per cent year-on-year.
LVMH owns more than 70 brands including Louis Vuitton, Christian Dior and Givenchy.In 2018, there were 4,592 stores, up from 3,948 two years earlier.Louis Vuitton, its biggest fashion brand, with annual sales of more than $10 billion, is moving further to burnish its image or open new stores in cities like Bogota, London and st. Petersburg.
This shift is reflected in the poor performance of us department stores, which operate almost entirely on a wholesale basis, as a result of a radical change in the way consumers buy goods.The success of multi-brand retailers, such as department stores, is because the format makes shopping more convenient.However, thanks to Internet marketing, people can buy any goods anytime and anywhere more conveniently.
Selling exclusive products will help.Some retailers compensate for this popularity by investing in it, but the high cost of doing so means that it only works where it is most profitable.If you have 40, 50 or 100 stores, most retailers can only afford to upgrade their highest-volume flagship stores.
Over the past four years, the Hudson's Bay department store has lost nearly 80 percent of its value, even as it has done everything it can to boost profitability, including selling real estate, closing stores and streamlining operations.(today, Saks Fifth Avenue owners are vying for privatization, as are rivals Neiman Marcus Group and Barneys New York.)
Even if these companies are able to boost sales at similar stores, many are still Mired in debt and have no way of turning themselves around.Falling discount rates make it hard to achieve good margins.
"It's really a quick way to increase sales, but brands are starting to question: 'what's the price to pay?'"
Online sales of multi-brand websites continue to grow, but so do the once-challengers and now the main sellers.
"Luxury brands are only beginning to understand the impact of third-party electronic distribution," Luca Solca, luxury goods analyst at Bernstein, wrote in a recent report.Mega-brands, which now dominate the luxury industry, gain little (long-term) by supplying Winner Take All's third-party distribution platforms.We expect Gucci and Prada to realise that soon."
It all comes down to distribution.Indeed, the best multi-brand retailers provide entertainment and advice in a unique way, which in turn increases customer loyalty.But it is essentially a matter of convenience.However, distribution is no longer a challenge for brands, especially big brands.Direct sales can not only bring higher profits, but also establish a one-to-one relationship between brands and consumers, which is convenient for brands to collect more data.
Robert Burke, a retail consultant, says: "everyone realised that if they sold products directly they would have much higher margins.That's how young brands see it today, and they want to be able to control distribution."
So, what about wholesale?
Partnerships with multi-brand retailers, most of which still operate on a wholesale basis, are still important for emerging brands seeking recognition.
"Most young brands cannot afford to invest enough in digital marketing to gain influence and competitiveness through their own channels," says Julie Gilhart, a business consultant.If the wholesale business is included in the initial stage of the business strategy, it can have a positive effect."
The new Galeries Lafayette on the champs-elysees in Paris, for example, includes brands including Maryam Nassir Zadeh and popular logo Noah from New York, John Elliott in Los Angeles and Hillier Bartley in London.These brands may not be able to open branded stores in Paris on their own.As a valuable marketing opportunity, the presentation of these brands on the champs-elysees attracts not only large Numbers of visitors, but also local people working in the surrounding office space.
Moreover, regardless of the size of the enterprise, specific wholesale partnerships can help brand positioning.But as brands gain positive momentum, many are demanding stricter terms from their retail partners or breaking up their relationships altogether.After all, excessive distribution can negatively impact brands.Brands including Michael Kors and Ralph Lauren have been streamlining their wholesale distribution operations over the past few years to better control market intentions.However, eliminating the negative effects of overdistribution will not be easy without sufficient capital on hand to cope with the short-term sales shock.
Retail futurologist Doug Stephens said: "on the one hand, wholesale distribution can help brands achieve high market penetration, which is a real way to quickly increase sales, as opposed to the financial needs of a brand operating directly in its own stores. But brands are starting to ask, 'at what cost?'many brands have come to the conclusion that their retail partners have not lived up to their expectations and have siphoned off rather than increased equity."
For multi-brand retailers using this model, building a reputation as a "good partner" -- offering favourable sales terms, scrapping discounts and developing exclusive products -- has been a way to attract brands.In addition, many retailers have invested heavily in experience areas to increase foot traffic, which in the case of restaurants means higher revenues."We should focus more on customer experience than business," Gilhart said.
Saks fifth avenue's sales have been growing since its flagship store reopened in New York;The renovation includes a modern beauty floor and the opening of the first restaurant in New York on L 'avenue in Paris.But that's not the answer to every problem.
Multi-brand retailing does have one important thing to do.While the Internet has given people access to everything, and direct retailing offers all products of a particular brand, this tyranny of choice is likely to continue to drive consumers into stores with a certain point of view."That's the only real competitive advantage," Burke says.
Strong editing ability, combined with good customer service, to create a loyal customer base.But to be successful, multi-brand retailers must be more aggressive in integrating products.
Burke adds: "there is a aversion to risk because the business has always been challenging.That's why consumers see nothing as unusual or interesting."
So what else can retailers that adopt a wholesale model do to survive?Discounting is the main driver of sales, particularly in the us, where removing it would certainly hit revenues in the short term, but it is imperative.
Big changes have to be implemented within multi-brand retailers to attract big brands to wholesale business," says Mr Gilhart.They can negotiate pricing policies: lower sticker prices, end of season promotions to avoid losing business and ensure that brand reputation is effectively maintained."
The next step is to deepen the "franchising" model, in which the brand essentially rents space in a department store, usually employing its own sales staff, with the brand responsible for displaying and selling products.While this is more expensive for brands and less profitable for department stores, the risks are smaller because department stores don't need to buy products in advance.It also gives brands more control over their positioning.
Successful department stores, including Selfridges in the UK and Le Bon Marche in France, have adopted a business model that combines wholesale and franchising: brands are guided by the overall data of department store consumers.But department stores shouldn't worry too much about building up large inventories at the end of the season.Sales at Selfridges reached 1.7 billion pounds ($2.2 billion), up nearly 12 percent from a year earlier, according to its recently released fiscal year report.
But perhaps the most important lesson is this: to get better, the wholesale business must be slow, not too big.In all, selfridges has only four physical stores, plus online sales.Dover Street Market, a concept store that has inspired many major retailers, has just six stores worldwide.Saks fifth avenue, niman and Nordstrom have 43 full-price, 43 and 119 stores, respectively, across the country.
"The problem is that the importance of the store is about to show up," Burke says.But it's not as important as having a store in every city in the United States."