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Brands Reconsider Retail Model

Weighing the benefits of the retail model.

For the past six years or so, many top fashion and luxury brands have been calorie counting, trimming the “fat” of wholesale distribution in favor of a leaner—and potentially profit-loaded—retail model.

Mulberry, Gucci, Hugo Boss, Burberry and a host of other major brands have been undertaking the regimen, which comes with its sacrifices—a slowdown in sales growth, higher capital expenditure and severed relationships with long-standing accounts—but offers the promise of higher profits, a more streamlined distribution network and tighter control over brand image.

“The most profitable brands in the world are the ones that run their own stores,” says Sagra Maceira de Rosen, a former luxury analyst and investment adviser, and the recently appointed chief executive officer of British designer brand Amanda Wakeley. “I have been a big believer in directly operated retail for ages. It gives you control over your brand: If you want to launch a product, you can just do it without having to sell it to anybody but the end customer. Plus, once you cover your fixed costs, it’s a very profitable model.”

William Susman, founder of Threadstone Partners, a boutique consultancy specializing in the consumer and retail sectors, agrees, noting that direct-owned retail “will have higher margin, you get to control inventory, the price conversation and the presentation of the brand. You are seeing that trend globally.”

A case in point is Hugo Boss: In 2008, wholesale volume generated 70 percent of the group’s revenue. In 2012, wholesale and retail each made up 49 percent of group sales, and by 2015, its own retail will account for 55 percent of group sales. From 2008 to 2012, the brand’s directly operated stores grew to 840 from 390, and about 50 new stores are planned for 2013.

“In retail, we have the opportunity to get in direct contact with the customer for the first time,” says Dr. Hjördis Kettenbach, head of corporate communications at Hugo Boss. “We can learn what the customer wants and can react to it immediately. We have everyday response from our biggest stores and can change the merchandising of those stores on a weekly basis, if needed.”

Boss will continue to work with wholesale partners, “who operate on the high level where we see ourselves. There are wholesalers who are doing a very good job and with whom we want to continue to build relationships,” Kettenbach adds.

Mulberry’s new ceo Bruno Guillon is taking a similar approach. As Guillon seeks to build Mulberry’s international profile, he’s set a target of opening 15 to 20 stores annually for the next four to five years. Simultaneously, he’s been slimming down the brand’s wholesale accounts.

Guillon says he’s been trimming those wholesale accounts that haven’t been ordering consistently every season, or the ones that choose to buy bits and pieces of the collection. “Some of our accounts were even buying merchandise—and then re-exporting the goods to Asia to be sold online. You need to be very careful.”

Still, the slim down, while strategic for Mulberry, has not been easy. Last October, the brand issued a profit warning for the fiscal year ended March 31, which it blamed on the ongoing cull of its wholesale network, more cautious Asian wholesale accounts and the investment in international retail expansion.

Mulberry is not alone in experiencing growing pains. Over the past seven years, Burberry has been moving steadily from a wholesale to a retail model. In the third and most recent quarter, retail sales generated more than 75 percent of revenue, while wholesale made up about 20 percent.

Burberry’s ongoing strategy has been to focus on large-format stores in flagship markets. In the 2011–2012 fiscal year, stores in such key markets as London, New York, Hong Kong and Shanghai generated about 60 percent of its revenue.

Last September, Burberry warned the markets that same-store retail sales in the first 10 weeks of the second quarter were flat, and that the slowdown was evident in all geographic regions. The warning sent Burberry’s stock price plummeting nearly 21 percent, and drew fire from some analysts. The Burberry share price has since rebounded, closing at 12.82 pounds, or $19.47 at current exchange, on April 3. The stock is still, however, down 20.1 percent from its 52-week high of 16.05 pounds, or $24.37, reached April 16, 2012.

Thomas Mesmin, a luxury analyst at Crédit Agricole Cheuvreux, said the industry as a whole has been too focused on top-line growth.

“Between 2007 and 2012, many brands moved very fast from wholesale to retail models, incurring more fixed costs, which put profits at risk,” he wrote in a note following Burberry’s September announcement. “I don’t think Burberry’s retail model is appropriate—I think the stores are too big.”

And while luxury retail rollouts will certainly rumble ahead, most industry observers agree there is room for both wholesale and retail in the marketplace.

“The customer still enjoys the department-store experience. It offers choice, service. The two will have to coexist,” says Threadstone’s Susman. “The challenge that companies need to remember is that a good wholesaler does not necessarily make a good retailer—and vice versa. They are different skill sets.”

Mulberry’s Guillon notes that wholesale partners can be a major brand asset. “It’s very important to ensure that our image at retail and at wholesale is consistent, and we have very good partnerships with stores such as Le Bon Marché, La Rinascente and Printemps. A high-end department store will protect the brand. We’re happy with them doing the buy, and they’re very professional and understanding of the work we’re doing.”

Ed Burstell, managing director of Liberty, points out that a successful brand needs both channels.

“Own retail stores drive brand-specific traffic, but a brand also needs wholesale accounts to drive a bigger footprint, especially in the U.K. and Europe, which do not have shopping-mall cultures. People are time-poor and they have come to like the edit and focus that a multibrand store can give. And while they will want to shop the individual stores, they also like to be offered a choice.”