The relationship between a brand and a retailer is complicated on many fronts and it is going to get a lot more complicated in the coming months and years. Since time began in this industry, the direct relationship with the customer was owned by the retailer and brands have been reliant on the retailer to manage these customer relationships. Most major brands have established their own flagship stores, especially at the luxury end of the market, but a very large chunk of the revenue still passes through the retailers’ doors and web stores.
I’ve had lots of conversations with fashion designers about retail. I usually start the conversation out by asking them if it is worth paying a retailer $600 to sell a product that is sold to the consumer for $1000 (assuming a fairly standard wholesale/retail mark-up of 2.5x). The response is almost always: “Oh you don’t understand. We sell it to the retailer for wholesale and then they mark it up”. I respond by telling them that if a customer is willing to establish an economic value for the product by paying $1000 of which they only get $400, those dollars are being paid to/taken by/stolen by someone, in this case, the retailer. At this point, as the dollar impact begins to set in, the designer starts to think that he/she is getting screwed somehow. But before I let them answer the question I tell them that the answer is undeniably yes, it is worth it. Why? The retailer displays the designer’s product in a beautiful location with attentive people who tell the customer how lovely they look in it and how they cannot live another day without it. The retailer puts its name behind the product and creates an emotional experience which results in an excited customer seeing the designer’s product, touching it, putting it on with the support of an attentive salesperson who gently guides the customer to purchase. Of course it’s worth it!
Now, how about the retailer selling it in their online store? Well, there is not a handsome/pretty sales person telling the customer how great they look and how they could not live without it. In fact, there is only a sweaty guy in coveralls in some gigantic fulfillment center some place stuffing the customer’s purchase in a box. There is not beautiful physical display – there’s only a picture on a web page in lots of rows of other pictures from competitors arranged much like the old Sears catalog where products are displayed not too much differently than cans of tuna are displayed in a grocery store. Is it worth it? Maybe. If I am a young designer and Bergdorf will put me on their website and get behind my brand, I would definitely pay. Someone else, it depends.
Now, how about a third scenario – the Google search. Go Google your favorite designer or brand and look who shows up at the top of the page – it’s almost always a paid ad from one of the retailers who carry the product for which you are searching (sometimes they don’t even carry the product, they just buy the brand as a keyword to acquire traffic. ”Illegal”, yes, but very common.). As a real-life example, let’s use Rick Owens (whom I don’t know, have never met, but do admire his work). If you Google “Rick Owens”, you get a series of retailers who carry his products on their site. There is one entry (his website which interestingly is not www.rickowens.com (owned by a squatter), but, rather www.rickowens.eu – I understand the drama and elegance of a .eu, but not to have the .com is insane). Now let’s get even more specific. Suppose you are searching for the Rick Owens Leather Biker Jacket that you just saw in Vogue. On that search, his site does not show up at all on any of the Google searches – it’s all retailers on both paid and organic. In this case, every transaction goes to the retailer even though the customer wanted that jacket from that designer and the retailer is irrelevant to the customer. For this $2000 jacket, they get to keep $1200 and poor Rick only $800.
Now the fun part of this exercise is the math around the cost of getting that sale. Google has two (among many other) amazing tools to help figure this out. Using the Google Keyword Tool (to access, Google “Google Keyword Tool”), one can find out how many searches for each keyword phrase is made each month. In the example above, the results are that 110,000 people search “Rick Owens” each month (5400 search “Rick Owens Leather Jacket” and 590 search “Rick Owens Biker Jacket”). Nice traffic. Now, using Google Traffic Estimator, you can find out what it cost to buy those keywords. In this case, $1.12 for “Rick Owens”, $1.54 for “Rick Owens Leather Jacket” and $1.39 for “Rick Owens Biker Jacket” – remember, you only pay this if someone actually clicks on link Google provides and comes to your site. Add into this the cost of the sweaty guy in the warehouse and other handling costs (let’s assume $8 or $9), the retailer has had a very nice day: $1190 in marginal profit! And all they had to do was buy some keywords on Google and pay their sweaty warehouse guy!
This is one of the greatest arbitrages of all time: a retailer can intercept a customer looking to interact with a brand by paying nickels and dimes for that customer with purchase intent and then gets to enjoy a really large profit margin without providing any value to the brand. There is no selling – the customer is already sold. There is not credibility – the customer already knows the brand and is already already sold on buying the product. The worst part about it is that the retailer could care less if the customer bought your brand or a competitors. All they want is a sale of a product, not necessarily yours, though.
Rick Owens in this case clearly gets screwed. He pays the retailer $1200 for almost nothing other than someone having someone picking their pockets. Harsh explanation? How else would you describe it. So is it worth it? Absolutely not.
In my mind, their are several outcomes here:
1) Brands will begin to use the retailers as a branding strategy, not a revenue strategy. That is, they will only sell through retailers who can provide tangible value to their brand.
2) Brands will forbid retailers from carrying their brands online, or at least forbid them from buying the brand name as a search term in Google.
3) The 2.2-2.5x mark-up will begin to change.
The 2.2 – 2.5x mark-up in the fashion industry is interesting. I’m sure that there is a reason for it, but nobody has been able to tell me its origins other than it seemed right. Some retailers demand extra funds because they can, but everyone pretty much toes the line here in apparel. Logic would predict that that arrangement will change for each retailer and for each brand. Some brands would pay dearly to be at a certain retailer. In this case, the retailer will take a larger portion of the total purchase. In fact, maybe more than 100%. Why would anyone do that? Think of it as a media buy. If you are a new brand starting out, how much credibility does Bergdorf provide you? More than an ad in the NY TImes, so why should you look at it differently. On the other hand, if you are Azzedine Alaia, you might feel that you bring more to the table than the retailer. So much so, that you might not even let the retailer take any margin out (a 0% mark-up) because having your product in their store brings an enormous amount of value in terms of attention and traffic. I know this sounds crazy, but it is a natural outcome of the all the changes that the internet is driving in this industry.