WWD: Chanel to Transform U.S. Wholesale Business to Concession Model

WWD | LISA LOCKWOOD

In a dramatic shift for the company, Chanel Inc., the U.S. subsidiary of Chanel Ltd., is transforming its wholesale business into a concession model.

The company plans to operate concession departments in its major accounts, which include Neiman Marcus, Bergdorf Goodman, Saks Fifth Avenue, Nordstrom and Bloomingdale’s. The process began last year with Bloomingdale’s 59th Street location, and this year several others were converted, namely Saks in Greenwich, Conn., and Atlanta and Neiman Marcus in Atlanta. The rest will be phased in over the next year.

“You might be wondering why, after 12 years of relative silence, am I doing a real interview,” said John Galantic, president and chief operating officer of Chanel Inc. “It’s a time of pretty major change here. The old saying is ‘don’t waste a crisis.’ But I look at it the other way more, which is when the business is very strong and the demand very desirable, there’s much more leverage and leeway to make change.”

Luxury players such as Louis Vuitton, Dior, Gucci and Prada frequently operate concession models in department and specialty stores’ handbag departments in the U.S. American department stores are among the few worldwide that continue to operate primarily on a wholesale model; most department stores in Europe and Asia rely primarily on concessions, particularly for luxury brands.

According to Galantic, Chanel’s chief reasons for wanting to have a more direct-to-client relationship with its key partners are:

*Visibility of the client and her purchasing path, allowing Chanel to service her and communicate directly.

*Owned inventory and real-time visibility of inventory across all points of sale.

*Chanel employees in the multibrand retail boutiques will be closely connected to the house and will have access to training and development opportunities.

*Multibrand retail clients become part of the Chanel omni-touch point world and have access to the same e-services that exist in Chanel boutiques.

In addition, Chanel will bolster staffing levels in its freestanding boutiques in North America and shift to a blended model of compensation that focuses on rewarding fashion advisers whose teams work in a collaborative manner in serving the clients’ overall experience, said Galantic. In North America, Chanel has 23 freestanding boutiques for fashion, as well as watch and fine jewelry. There are also four fragrance and beauty stand-alone stores.

Among multibrand retailers, there are 55 doors/locations that carry all Chanel product lines, including ready-to-wear, shoes and accessories.

In discussing the rationale behind the move, Galantic said the brand came at it from a position of strength. The company has been showing very strong results across the board. “The first thing is the desirability of the brand and that always drives the business. The brand is more desirable than ever. On the business side, we are enjoying strong growth. We’re actually gaining share from fragrance to makeup in the doors we’re in, to ready-to-wear, across the board accessories, jewelry, watches,” he said.

He noted that there’s a lot of growth happening at the highest part of the pyramid. That means, high jewelry and pieces above $50,000, as well as the number of clients for couture and its Métiers d’Art collection. “Leading the way is the higher part of luxury, which is the way we want to grow the house,” said Galantic.

Another important metric for Chanel is the total purchasing power of its clients. He said that if the brand looks at certain retail partners, Chanel accounts for roughly 7 percent of their sales, which is significant. But if the company takes the total purchases of that Chanel customer throughout the chain into account, it’s over 30 percent. “When we open new distribution, we’re bringing brand image, and we’re bringing a very powerful shopper,” he said.

So if things are going so well, why change direction?

“There are some fundamentals at Chanel we have no intention of changing,” he said. “We always want to be creation-led, following the impulse of our creator across all our categories, rather than following a trend. We either make the trend, or observe a trend, but we don’t follow a trend.”

Second is human touch. He said that when it comes to human touch, the client expectations for luxury are evolving and are increasingly demanding. “The product makes her dream, and she’s looking for an experience that’s in line with a product at the same level. When we do our research and when we talk to our clients and when we learn, we find 50 percent of the brand image is determined by the experience. When you add brand to experience, you get image. A negative experience can detract from the image,” he said.

While there’s mythology that says that mass is convenience and luxury is experience, Galantic takes a different point of view. “In reality, it’s true for mass, but luxury with the new demands and expectations really has to be both — experience and convenience,” he said. Basically, he said, Chanel wants to make a shift in the way it controls its destiny. “That means to greatly enhance the client experience to become a more direct-to-client brand, with more of a one-on-one relationship,” he said.

Galantic stressed that the move does not mean the company wants to phase out its retail partners. In fact, just the opposite. He said it realizes that its retailers are often initiating the first-time experience a customer has with the Chanel brand. They also provide a multibrand experience, which in some cases the client favors. In addition, there are areas around the country where Chanel doesn’t have a freestanding boutique. “The only option to shop Chanel could be in a multibrand retailer, which is a big chunk of the business and an important part,” he said.

Further, he noted, “For the newer clients, we know the first visit can be intimidating and we know we have a lot of work to do there. In order to be able to handle all the traffic and exceed expectations for everyone, it takes a different model and takes more people. It takes a different kind of training and takes different kinds of rewards,” he said.

One of the biggest advantages is control of data. “It means owning the client experience and being able to connect the touch points for the shopper. So the visit to a Neiman’s or Saks or a Chanel boutique, whether it’s fashion, watch or fine jewelry, is part of the same brand and not happening in different silos,” said Galantic.

As a result of operating a concession model, Chanel plans to hire 700 people. Galantic said he expects this model to be in place by the end of 2019, and by early 2020, it should be finished. The plan is to do most of fashion next year, and then move on to watches and fine jewelry.

Bloomingdale’s 59th Street flagship was the first store to turn its Chanel accessories and ready-to-wear departments into a concession model in October 2017. “It’s doing extremely well,” said Frank Doroff, vice chairman of Bloomingdale’s. “The growth rates are very impressive. We’re very pleased. When they came to us, we always support our partners,” he said. He noted that the growth rates have “increased substantially” from the prior arrangement.

“From a client standpoint, from an employee standpoint, from a business standpoint, from a mix of sales, having the right assortment, we’re very pleased,” said Galantic, about Bloomingdale’s.

“We found that our retail partners have been very supportive of what we’re trying to do. There are advantages to them, in Chanel being able to create a connected business model,” said Galantic. Another advantage is that the customer will have access to an item which might not be in stock in a multibrand retailer. Further, a multibrand retailer might have clients who are significant for them, “but are very significant for us, but not big enough to be VIP level. When we add the purchases together, all of a sudden, they’re very high on our radar and may be invited to a Chanel show, which they wouldn’t have in the past. There are many advantages in the long run,” he said.

“Our partners have been cooperative in helping us engineer these changes and making sure the experience in the stores will continue to be seamless and that people who are helping a Chanel shopper outside the hard shop will continue to be part of the conversation, even though we now own the client data,” he added.

Galantic believes that these moves will elevate and enrich the client experience. “It’s now possible once we have all the touch points connected, it’s possible to really start to raise the bar in our boutiques and everywhere. We’re calling it ’boutique evolution,’ and what we’re doing is enhancing the client experience, reimagining the whole service model in terms of whom we recruit, how we reward our people.”

As a result, commissions will end.

“We are phasing out commission. We’re also rewarding much more collaborative work,” said Galantic. “It’s less of a solo effort and more of a team effort. That, in turn, creates some new career possibilities.”

He believes that collaborative work translates better into management than solo work, and that it’s a skillset that lends itself more to career advancement. A senior fashion adviser in a Chanel boutique in a multibrand retailer can become a boutique director and move onward from there. Galantic said that some people who are working in the Chanel boutiques at specialty or department stores and are on their payroll, will shift to Chanel’s payroll.

Connecting all the touch points is a critical element.

“What the client is really interested in is omni-touch points, the more connected experience. When she engages with Chanel, and it could be chanel.com, or an app, or a wish list or a virtual closet, or making an appointment, or a live chat or a call center, that once she enters any touch point, she’s entered all. Through her ‘My Account,’ she’s now part of a Chanel connection. We’re working very much on this, and we plan to be ready for an omni-touch point connected world in 2019,” he said.

In fashion, watch and fine jewelry, Chanel is adding people in the freestanding boutiques, as well as in multibrand retail, and in fragrance and beauty, it’s building out a combined channel of stand-alone doors and chanel.com, which is its fastest-growing channel in fragrance and beauty. “We’re also working on new retailer models where we’ll also have access to data. We’ll have access to our client data, they’re not strictly lease agreements, and some of them will have connections to our web site, some of them will have shared people. We’re experimenting with different models, but all on the same principal of being able to be more direct, one on one to our customer,” he said.

Ready-to-wear and handbags are not sold on chanel.com, and there are no plans to do that. Fragrance and beauty have been sold online since 2006. Sunglasses have been sold on the web site since 2015. Galantic noted that most of its fashion clients prepare their boutique visits by visiting chanel.com, or the app or call center.

This past summer, Chanel upgraded its web site and introduced a host of new features, including virtual try-ons for sunglasses, and soon, makeup. There are multiple features such as ‘make an appointment,’ wish list and live chat, and it plans to deploy the web site globally in 2019.

Does Galantic feel that the company is missing out on sales by not selling the handbags or ready-to-wear online?

“I think it’s quite the contrary. One of the things that’s special about Chanel and keeps us at the top of luxury is we favor and cultivate human contact so that there’s a human relationship with someone who knows you, with someone you make an appointment with, who takes care of you, who curates the collection for you, who styles you. For high luxury, that needs to happen in a boutique and not on a screen,” he said.

“True luxury is telling a seductive and irresistible story which has to happen in a human way,” said Galantic. He said e-commerce is “an algorithmic-based, anonymous transaction and therefore it’s antithetical with high luxury. That’s what open access e-commerce is,” he said.

Robert Burke, chairman and chief executive officer of consultanty Robert Burke Associates, sees the benefit to the concession model to a brand like Chanel. “Over the past several years, we’ve seen more of the brands go to concession models. Chanel is probably one of the most coveted brands by the consumers as well as the retailers and department stores. As a result, Chanel knows the value they add to the overall brand lineup in a department store, and I’m sure that they’ll negotiate accordingly.”

Two big moments for Chanel will occur in New York this fall when the company opens its renovated flagship on East 57th Street on Nov. 15 and will present the Metiers d’Art collection at the Metropolitan Museum of Art on Dec. 4.

The 57th Street store, designed by Peter Marino, will be increased from 7,100 to 14,000 square feet and will be expanded from three to five floors. “This will be a true global Chanel flagship. It’s reconfigured in a way which makes, in particular, the ground floor more spacious,” he said.

Furthermore, Galantic noted that despite published reports elsewhere, the New York office is not closing. He stressed that the majority of corporate functions moved to London, but that accounted for 47 jobs out of 20,000 global employees. There are 1,350 Chanel Inc. employees in the U.S. He noted that Alain Wertheimer, chairman and ceo of Chanel, is based in New York and is not relocating. Jobs that moved to London, where the Chanel Ltd. holding structure is based, were global functions in human resources, legal, CSR and finance. France remains the creative hub for Chanel, which had revenues last year of $9.62 billion.

Several functions, including innovation and corporate partnerships, are based in New York. “If we’re hiring 700 people, we’ll need someone to lead them along,” he said. In addition to hiring people in the boutiques, Galantic said they’ll be hiring staff in technology, analytics and data. “We now have a lot more data to understand, react to and figure out how to leverage in a human way,” he said.

Looking ahead, Galantic sees the biggest opportunities for the brand as watches, ready-to-wear and beauty.

In high jewelry, he said the company is doubling the business this year and expects to continue these growth rates. In fact, he noted that the brand recently had a $3 million transaction in Las Vegas. “It’s never going to be a big business in units, but it gives a halo of timelessness to the entire house that’s very important, so we tend to communicate about it quite a bit and will continue to do so,” he said.

Chanel is expanding the independent dealers where it sells watches and is adding fine jewelry. In 2018, 30 percent of its existing Chanel retail distribution received an expanded collection/ assortment of Chanel fine jewelry. The company expanded its fine jewelry distribution to five additional Neiman Marcus Chanel shops in Beverly Hills; Chicago; San Francisco; Palo Alto, Calif., and Houston this year. It also opened two independent jewelers with fine jewelry, in addition to Dover Street Market in Los Angeles, with a curated assortment. At present, Chanel has three stand-alone boutiques for high jewelry on Madison Avenue in New York, Beverly Hills, and South Coast Plaza in Costa Mesa, Calif.

In the next year, Chanel plans to open several new fragrance and beauty stand-alone boutiques in key markets.

In addition, a freestanding Chanel boutique is being built and will open at 65 East Oak Street in Chicago in January, replacing one that closed last year in the Drake Hotel.

Discussing what the presentation of the Métiers d’Art collection in New York will do for the Chanel brand, Galantic said, “It’s the ultimate experience for our clients and the echo and resonance around the show spreads around the country. For clients, and for our own employees, it’s incredibly energizing to have Karl [Lagerfeld] and the collection here.”