Shopper holiday shopping browsing

As this past holiday shopping season has shown, shoppers are cautious about how and where they spend their money.

Subsequently, the department store segment is trying to seduce shoppers into their stores, which is why there’s been a lot of talk of the “in-store experience.”

And one approach — a strategy that has been deployed by luxury brands and department stores for years — is being reintroduced: the concession model, which is now expanding among non-luxury brands.

Essentially, the concession model involves a designated space in a department store that operates somewhat autonomously, where the brand often not only benefits from a physical separation, with its own signage, walls, furniture and displays, but also operates more independently, provides its own staff, and essentially has more control over distribution by moving away from the wholesale model and selling products direct to consumers.

Both the brands and the department stores are seeing the benefits of this model more and more. The concession model offers the brand a unique balance of prestige by association with the department store and individuality through distinguished brand identification. It also can give brands more flexibility than opening stand-alone stores, including financial flexibility. On the other hand, the concession model means department stores get to keep their customers under one roof, and can find a number of ways to market the concessions as a new feature of their store, which can add interest and a sense of excitement to the department store, while shifting onto the brands some of the risks inherent in the traditional retail distribution model.

Ultimately, both the department store and the brand should be profiting from the concession; both manage to attract more customers because of the foot traffic, popularity and/or novelty of the other, both benefit by sharing the load of otherwise burdensome rent, and both have a certain flexibility by permitting shorter lease terms, which allows more wiggle room for the brand and an opportunity for the department store to periodically revamp its image by rotating its resident concessions if desired.

From a legal standpoint, the concession agreement often requires some heavy lifting. The concession relationship falls somewhere in between a landlord-tenant relationship and a supplier-retail distributor relationship. I have shopping mall leases that come across my desk all the time that are upwards of 150 pages. Retail distribution agreements, on the other hand, can be concise, maybe 5 or 6 pages.

But the concession agreement has to borrow concepts from both; there are leasing aspects, employment issues, co-branding and intellectual property matters, privacy concerns. This makes the concession contract inherently more complex, and that doesn’t just mean more work for the lawyers, but it really gives the department stores and the brands more to think about. For instance, how can this symbiotic relationship benefit me?

For the department store, maybe it means offsetting the rent by leasing off some real estate and at the same time shifting some of the risk onto the brand by doing away with the wholesale model. This means that when items don’t sell it falls entirely on the brand. For the brand, it may mean a short-term lease, something shopping malls rarely offer, giving the brand some room for experimenting.

There are some challenges with the strategy, mostly centering on the concept of autonomy, where the brand and the department store are at odds. The brand looks at the concession as a way of maintaining independence while still getting the benefits of the department store’s foot traffic and name, but the department store wants to combat that autonomy and maintain a sense of control for both liability and business reasons. This presents challenges in areas such as employment, privacy and intellectual property and can substantially affect operations, including planning, logistics and accounting.

A significant challenge for department stores is how to maintain a cohesive presence in the eye of the consumer. That could be accomplished, for example, by requiring all transactions to go through the department store’s point of sale systems, by directing the brands to add a hangtag to the product showcasing the department store’s name, logo or trademark, or by making sure the brands use shopping bags bearing the department store’s name.

However, if the brands are using the department store’s point of sale system, it might become more difficult for them to gain access to critical consumer information and timely inventory reports and, sometimes, to effectively extend the reach of their onmichannel strategy to their department store concessions.

Allowing brands to hire their own personnel can also be challenging from a marketing, financial and legal perspective. Department stores want consistency with respect to the customer service offered to their shoppers. It could be harmful to a department store’s image if an employee of one of its concessions treated a customer poorly, because the customer may take to social media to complain not about the brand, but about the department store. So department stores want to ensure that any staff hired by the brand is subject to the department store’s policies and procedures.

But despite these challenges, a well-balanced concession model can be beneficial to both sides, as long as they structure the deal in a way that makes sense, taking into account both parties’ interests and concerns. The concession model works best when it is backed by a well-thought out, well-structured, well-drafted and balanced agreement, and a mutual understanding of all aspects of the arrangement. There are also a number of factors incentivizing brands and department stores to make the model work and contributing to the popularity of the trend.

For one, brands are moving away from the traditional distribution model in order to put their products directly in the consumer’s hands more quickly and efficiently, and to maintain better control. When brands have to sell their products in mass quantity to distributors at wholesale prices, the products have to be shipped to and inventoried by the distributor (the middle man). Then, often staff have to be trained on the new products before they can be offered for sale by the distributor.

The process of selling products in a department store through a distribution model may delay the sale in some way. In a time where fast fashion is all the rage, and e-commerce is becoming more and more prevalent, the delay caused by the traditional distribution model can be problematic. So the concession, like a stand-alone store would, allows for suppliers to sell directly to consumers, and yet it comes with many benefits that the stand-alone store doesn’t have.

Another reason why I think this trend is getting more popular is that desirable brick-and-mortar real estate has become very costly, with landlords continuing to look for long-term commitments from brands. In a tech-centric climate that is unstable for brick-and-mortar shopping on the whole, concessions cause brands to share the costs with their department store hosts. With the sharp rise in e-commerce channels and decline of in-store shopping, the concession may also offer consumers a more dynamic and more convenient experience than the experience of moving from mono-brand store to mono-brand store.

Concessions arguably enhance the shopping experience, like with the unique “pop-in” concept, where concessions take up temporary residences, offering shoppers something seemingly exclusive.

Ultimately, whatever brands and department stores can do to attract in-store customers these days it seems they will try, and the concession model seems to be one way to combat the growing malaise of the U.S. consumer, who would rather shop from the comfort of her couch than take a trip to the mall.

Giuliano Iannaccone is a partner at law firm Tarter Krinsky & Drogin, where he chairs the firm’s international and retail practice groups and leads its practice with Italian clients.

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