VOGUE BUSINESS | KATI CHITRAKORN
Luxury fashion retailers, brands and analysts weigh the consequences of an industry shift towards online concessions and consignments — the marketplace model.
–
The business model for selling luxury and fashion online could experience rapid transformation as e-concessions and e-consignments are introduced by more retailers. This marketplace model has emerged as a new industry favourite.
The luxury industry has traditionally operated a wholesale model, with retailers ranging from Net-a-Porter to Nordstrom purchasing and holding inventory from brands. While some department stores in Asia, the UK and Europe, such as Selfridges and Galeries Lafayette, operate concession models, they are less common in the US. Now that’s changing as retailers turn to e-concessions as a means of broadening their assortment without managing inventory costs. For brands, they offer greater control, but also increased risks.
The business trend towards marketplace formats, or hybrid formats that mix wholesale and e-concession, is accelerating in America. Saks.com is the latest name to start testing a marketplace, just weeks after Saks Fifth Avenue separated out the business as a standalone company. Hudson’s Bay, which, like Saks, is owned by Hudson’s Bay Co., already converted its website into a marketplace last March.
Nordstrom has also revealed plans to reduce traditional wholesale from 85 per cent to 50 per cent of overall sales, while Net-a-Porter is accelerating its transition to a hybrid model, mixing traditional wholesale and e-concessions. Net-a-Porter is following suit and Yoox is expected to join in too this year, Richemont’s chief executive Jérôme Lambert said during the group’s full-year earnings. LVMH-owned 24S is currently in conversations with potential brand partners about owning and controlling their own inventory.
Farfetch’s Positively Conscious campaign. JOYCE NG FOR FARFETCH
E-concessions — a model already operated by Farfetch, Alibaba’s Tmall and Amazon — enable brands to retain more control over their image, pricing and product assortment. The retailer provides a space for the brand and promotes it, taking a commission while the brand keeps most of the sale. The retailer avoids the risk of buying unwanted inventory, while the brand gains direct customer insights and can sidestep enforced markdowns.
Brands now recognise the value of having direct contact with customers without the mediation of another party, says Federica Levato, a partner at Bain & Company. Gucci, Prada and other big luxury brands began evaluating their wholesale relationships pre-pandemic, she says.
Luxury still lags behind other industries in its embrace of e-commerce, building on pre-pandemic online penetration of only 12 per cent, according to Bain data. Driven by the pandemic, that figure has almost doubled over the past year with rapid expansion of e-commerce capabilities and online stores, notes Levato.
It’s a big moment. “This is one of the most seismic changes in the retail industry that we’ve seen in decades. There was already a desire from brands to take more control as concession environments have built up more steam over the years. But the pandemic has given brands a chance to re-evaluate their dependency on multi-brand retailers,” says luxury industry advisor Robert Burke.
Concessions vs consignments
Wholesale can be profitable and low risk for brands if the terms are right. But brands rely on retailers to fulfil an agreement as to how their merchandise is sold, and these deals are sometimes abrogated by retailers during slow trading periods and lead to discount or buyback arrangements, says Burke. “Brands can’t control that and it’s always been a bone of contention.”
A hybrid approach, using both wholesale and marketplace models, has advantages for the consumer, says Paolo Mascio, president of the Yoox Net-a-Porter Group’s fashion division. “Several customers are fond of a specific online destination, like Net-a-Porter or Yoox, but what if we could offer them more? More means new categories and more fashion, which could make them even more loyal customers. We would ease their customer journey because they don’t need to go to other websites to find products or categories we don’t carry.”
Farfetch has built a reputation for supporting brands slow to adopt e-commerce. “E-concession is becoming very much of a buzzword, almost like omnichannel a few years ago,” says Giorgio Belloli, chief commercial and sustainability officer at Farfetch. “We have been operating e-concessions from day one; it’s been the base of our business model.”
Farfetch’s e-concessions are unusual because they are fully integrated with brands, says Belloli. “When brands sell their stock, it’s the retailer’s responsibility to send it to the final customer. We are integrated with the e-commerce warehouses of brands like Burberry and Gucci, so that creates a completely different efficiency. It is the same stock pool in the same warehouse. Our model is more scalable and more sustainable.”
E-consignments are also gaining ground; rather than hold inventory themselves, brands engage with a third party other than their retail partner to facilitate goods. Third-party platforms such as Amazon or Shopify make this possible, acting as brokers to process transactions and ship goods direct to customers, explains Mark A. Cohen, director of retail studies at Columbia University's Business School. “This happens when retailers don’t have efficient fulfilment facilities because they’ve never invested in this kind of technology.” Few retailers are able to compete with the speedy delivery and efficient return process of Amazon, he says.
The choice of online concession or consignment will vary from brand to brand, says Belloli. “It depends in some cases on their fiscal set-up, tax regulation or intercompany transfers. Maybe they cannot sell globally and they need to sell from a stop point within a specific region. There’s a lot of complexity so it’s not that one model is better than another.”
The risks and rewards
Underlying all this is an increasingly competitive market. Heightened customer expectations have put pressure on retailers to improve their performance, says Steve Dennis, a retail consultant and former strategy director at Neiman Marcus. “It’s hard enough to get people to your website, but if customers come to your site and they still don’t buy, it might be because you don’t have what they want. If retailers can increase conversion just a little bit, that still goes to the bottom line. With concessions, they don’t have to bear the cost of a larger inventory.”
But the marketplace model is unlikely to suit all e-commerce players. Bain’s Levato points to the virtues of curation and a tight edit, the formula successfully adopted by Mytheresa and MatchesFashion. “The original reason for customers to pick retailers is the opinion and leadership of these stores, so that could be something that they miss,” she notes.
Farfetch’s Positively Conscious campaign. JOYCE NG FOR FARFETCH
Bigger luxury brands are always in a position to flex their power because they can also sell goods through their own portals. But a marketplace model can be good for emerging brands, which may lack the resources to open their own stores, says Cohen. It can also be “a great way to test a partnership, on both sides, before striking a wholesale arrangement”, says Olivia Gentin, chief operating officer of womenswear brand Anine Bing.
L’Agence, a Californian womenswear brand, currently operates physical shop-in-shops, such as at Harrods. Co-founder Jeff Rudes, also the founder of J Brand, is eager to have conversations with retail partners about e-concessions. “We want to lean towards that because we know we can do better business if we somewhat control the inventory, the merchandising, and on the shop floor, the sales staff. [Retailers have] got so many brands and hundreds of square feet to cover, so they can’t have sales people designated directly to the brand like we can.” Wholesale currently represents 85 per cent of its business, with e-commerce at 10 per cent and direct sales at 5 per cent. The LA-based label would like to see a dramatic shift to direct sales, targeted to account for 50 per cent of business within three years.
Who wins?
The challenges are multiple, notes Robert Burke. “Every brand today has a website and is trying to get the consumer’s attention. With changes in online advertising and social media algorithms, brands and retailers are figuring out how to stand out.”
Brands and retailers must ask themselves whether their goal is to increase brand equity and build a relationship with customers or whether it is to convert a transaction, says retail consultant Steve Dennis. “When you relax the brand experience to convert a customer, that shopper may or may not be a good fit with your brand long-term — they may be a promiscuous shopper just searching the internet and trying to find the best deal or the fastest delivery on a particular product.”
A shift towards e-concessions could improve the luxury industry’s attitude to Amazon, which is “still viewed by many brands and retailers as beneath them”, says Cohen. “But brands also thought the internet was beneath them a few years ago, and they’re finding out in a big way that the customer loves e-commerce. The customer isn’t going to relinquish this increasingly powerful freedom.”
E-concessions can strengthen the relationship between brands and retailers, but the real prize is to improve the digital touchpoint with the customer, says Levato. “In the end, the customer should always be in the minds of all players. What matters the most is maximising the value and touchpoints in the customer’s eyes and mind.”