For brands that are just beginning to test the fashion waters, a wholesale approach is not only not recommended, but also probably not an option – as there is little to no proof that the newest entry into an already crowded field can move significant units to appease fickle middlemen.
Although many dream of seeing their products alongside other fashion stalwarts in major box stores and well-curated boutiques with similar, humble origins, more and more brands are beginning to understand that a “direct to consumer” method is the coal necessary to power the hype train.
For decades, there has been a major disconnect between producers and consumers. Retailers have forged a divide between capitalism and opportunity by creating an exorbitant markup on products.
According to the Keystone Markup, a pricing methodology, each rung that is added between the initial creator and the final purchaser is multiplied by a value of two (and in the cases of jewelry 5x). Thus, if a shirt costs $20 USD dollars for a brand to produce, it’s sold to the retailer for $40 USD. In turn, the retailer sells it to the general public for $80 USD and so on. By the time a piece of fabric has gone from an artisan’s hands and touched a buyer’s body, the consumer has already been taken for a ride – doubling along the way – but hardly hummed as if a Disney tune.
According to Entrepreneur Magazine, “Although it is true that higher volumes will make up for lower prices to some extent, unless you can sell as much as a Kmart or Wal-Mart, you absolutely need at least a 50 percent markup (keystone) to survive in a small retail shop. Although doubling the price may sound outrageous, it does not result in excessive profits when you consider the expenses for rent, taxes, insurance, supplies, labor, etc., that you must pay.”
Thanks to the power of the Internet and the popularity and convenience of e-commerce, several pioneering brands looked to reinvent how retail works. Most notably, eyewear brand Warby Parker and fashion outlets that promote a direct-to-consumer approach like Everlane, AYR and Cuyana. Everlane specifically, whose tagline is “Radical transparency,” explains to its customers precisely why each item costs what it does. For millennials, experience and ease are the benchmark attributes for maintaining customer satisfaction.
Eyewear may perhaps be the biggest perpetrator of the Keystone Markup run amok. Luxottica, an Italian eyewear company, controls over 80 percent of the market – resulting in a customer base where half-a-billion people with eyewear needs relied on a Luxottica product.
One of Luxottica’s biggest victories came when they purchased Ray-Ban. After taking them out of the marketplace for a year (when they cost $29 USD), they are now regularly purchased by many for $150 USD.
Luxottica owns the middlemen as well – pushing their Luxottica-owned products through retail channels like LensCrafters, Pearle Vision, Oliver Peoples, Sunglass Hut, Target Optical and Sears Optical. Essentially, the consumer believes it has a choice, when in actuality the only decision to be made is on Luxottica’s behalf when it decides if double the markup is the best they can really do when it owns each step in the journey to the bridge of your nose.
“I had been to the factories and knew what it costs to manufacture glasses and knew the cost didn’t warrant a $700 price tag,” said Neil Blumenthal, a founder of Warby Parker, in speaking with The New York Times. Produced in the same Chinese factories as Luxottica products, Warby Parker claims that its decision to go direct-to-consumer not only allows the consumer to get a pair of glasses normally priced at $700 USD for $95 USD a pair, it also lessens the burden on brands and creates demand so that an influx of inventory doesn’t ever go un-monetized.
The fundamental question being asked in the new paradigm is, “Should I buy something I’ve heard of and have trusted, or should I buy something that is cheaper from a brand that is more transparent in their practices?” Perhaps there’s a reason why the H&M x Balmain caused such a stir. It was the perfect storm of what consumers want; major branding at prices that are deemed “affordable.”
Direct to consumer is not a new phenomenon. In fact, luxury brands like Dior, Louis Vuitton and others have relied on going directly after consumers for several years now. Of course, these stalwart houses have centuries’ worth of history and connotations associated with their products that make them decidedly bigger fish in the direct to consumer pond. Yet, the strategy remains the same; create the buzz, and get the shopper to come directly to you.
The direct to consumer approach may be more of a byproduct of the era we live in than a change of heart when it comes to ethical markup practices. In 1999, department store revenues totaled $27 billion USD in the United States. By 2013, sales were $14 billion USD.
Ralph Lauren is one brand that thrived in the department store setting. Yet, they’ve been forced to consider their position in the marketplace when it comes to dealing with the notion that it is an archaic way of shopping. As Bloomberg notes, Ralph Lauren has shifted it’s focus from wholesale to retail – with an eventual hope of having 60 percent of its revenue invested in a direct-to consumer strategy. They’re not necessarily hitching everything to their horse/polo player logo and riding off into the dot com sunset, but it’s clear that even the biggest brands can recognize the warning signs and understand that a third-party roof isn’t exactly the best place to seek shelter under.
In the last several years, several brands have emerged with a direct-to-consumer approach from the outset – including The Arrivals, Leonard and Church, DSTLD, Victor Athletics, Outdoor Voices, Jack Erwin and Proper Cloth. Each has a shared vision of getting the consumer quality products without abandoning craftsmanship.
On paper, it’s great to buy a shirt for $60 USD when it would normally be $120 USD in a store. However, the brand isn’t always abandoning that extra money in the spirit of friendship and fair-play – this is commerce and capitalism after all.
As Jack Erwin founders Lane Gerson and Ariel Nelson noted, “We thought if we could produce a shoe for less than $100 and sell it direct to consumer for $200, we had a business model we could work with.” If the Keystone Methodology is any reference, brands could hypothetically pocket the revenue usually set aside for the middleman. Instead of making double on a product, a brand could potentially make triple on a product while still operating under the ethos that the consumer was getting a better deal than if a department store had been involved.
One of the latest brands to adopt a direct-to-consumer approach is Parabellum, saying, “After many years selling through other stores, we are now able to embrace the direct-to-consumer model, which allows us to make the same incredible product and pass along the value to our loyal customers.”
Parabellum’s announcement comes following ISAORA’s similar shift in strategy. Having been stocked in 150 retailers such as Barneys New York, Bloomingdale’s, Opening Ceremony and Lane Crawford, ISAORA partners, partners Marc Daniels and Ricky Hendry said, “By not having a wholesale focus would enable us to drop our prices. We’d also be able to deliver when we wanted instead of being tied to a traditional timeline with retailers.”
While both Parabellum and ISAORA’s shifts come under the guise of better value for the consumer, it does present the question if this marks a step backwards for each having already spent years working and thriving in the old system. Whereas a brand like Ralph Lauren can realign its focus thanks to name recognition alone, the latter still have a challenge in front of them in bringing greater awareness to their brands themselves when they don’t have the support of stores whose job it is to move units.
Although a wholesale approach can feel old hat for some, it does put you directly on the shelves and in locations where people are looking to spend money – whether seeking out specific items or engaging in spur-of-the-moment impulse purchases. With direct-to-consumer, it relies solely on the brand believing that the customer only wants to peruse garments from a single designer. In that respect, the onus and gamble is solely on the creator to bring in revenue.
Black Friday is arguably the best thing department stores have going for themselves in a contemporary setting. U.S. shoppers spent $9.1 billion USD in stores last buying season – lured out into the chaos with promises of the best deals imaginable. Here’s where direct-to-consumer brands are at their biggest disadvantage. If they’ve already tipped their hands and told consumers that their methods provide the best deals possible for a customer, they’ve allowed themselves no wiggle room for scenarios where billions of dollars are being spent. Wholesalers and department stores can at any times make themselves more attractive to consumers by lowering prices. If direct-to-consumer brands do the same, they’re either pushing items that haven’t sold well, or are acknowledging that a price decrease still allows them to meet their margins – which dispels the notion that the consumer is getting the absolute fairest value.
It remains to be seen what strategy will ultimately be consumers’ preference. It is, after all, the ones with the purchasing power that are the key to the retail revolution. Without the swipe of a credit card, or the crumple of dollar bills, shopping carts in stores and in browsers will all be empty.