Growing wholesale distribution via department stores has been the most valuable path to brand growth for many years. Is that changing with multi-brand retailers in crisis across Europe and the US? How do retail concessions hold up as alternative?
Every week we are faced with a new bankruptcy of a retail chain that, only a decade ago, people could not believe the world could exist without. But with all the big names failing and with rising financial losses, is building retail concessions the more viable way to grow?
Wholesale Distribution vs. Retail Concessions
For many years there was no doubt that the best way to sell to department stores was wholesale. Department stores’ buyers purchased pre-season from the brand’s collection and, unless managed very poorly, many brands made a good gross margin in their department store deals. The retailer was responsible for the handling and selling of the merchandise.
Another option for the brand to get into a department store are retail concessions. In retail concessions, the brand operates like a tenant – they rent a specific space and pay the department store a percentage of their sales for the floor space. For many years this model was practised mostly in the UK and in Spain, and most often by luxury brands or rather new market-entry brands that were trying to buy themselves into a new country via an important local department store.
But with more and more multi-brand retailers going into financial crisis, the retail concession model became a popular brand growth strategy with its own attractiveness, but also risks.
Are Retail Concessions the Right Choice for Your Brand?
Jumping into a retail concession is not an overnight decision. It needs to be part of your strategic plan, as you will need to invest into a location and own personnel. Likewise, a brand won’t want to operate retail concessions with a multi-brand retailer with a mediocre strategic perspective.
Growing via retail concessions comes with higher gross margins, but also at significantly higher cost, similar to the cost of your own brand stores in terms of staffing, furniture, and so on. And here comes the challenge. Retail concessions are most often smaller than own stores, and more complex to operate. A concession may also come with some restrictions by the hosting retailer, for example where dedicated window space, markdown management, store personnel or your own loyalty programme are concerned. Such restrictions may come into conflict with the brand’s interests and would not occur in a stand-alone store.
And not least, retail concessions come with a binding legal obligation. In any case, the concession should be a win-win for both the retailer and the brand: a concession can bring the brand a more stable position within a department store, instead of awaiting a wholesale order every season.
How to Begin Building A Retail Concession
First, think carefully about how a symbiotic relationship with a multi-brand retailer can benefit your brand. This isn’t a purely financial calculation, but also very much a strategic one. Consider, for instance, whether the retailer’s strategy is aligned with your own brand’s strategy and positioning. Will your brand flourish and attract more footfall in a retail concession?
Commodities are an ideal fit for the traditional wholesale model. They are easy to replenish and don’t require much storytelling. But for most other categories it’s much less straightforward. Moving away from the wholesale model means more control over distribution and pricing, strategy, as well as brand identity. But it also means a higher investment and thus an elevated risk. You will need to negotiate staff, location, data and branding. With retail concessions, the brand has more say on whether it wants to participate in loyalty programmes offered by the department store. While brands thus have more freedom than in the wholesale model, the retailer’s audience needs careful consideration in making such decisions, as its perceptions can in turn affect how well a brand does within the store.
Although the reasons to enter into a retail concession are often very brand specific, the main ones include:
- Entry to desirable retailer: Enjoying the foot traffic of a multi-brand environment while minimising the risks associated with operating own brand stores.
- Better brand appeal: Increased profitability by improved brand presentation, wider assortment and knowledgeable staff.
- Lack of expertise: Concessions in categories where the retailer lacks the necessary expertise, for example in fine jewellery or watches.
- Introduction of experimental brands: Who can better relate the brand story to customers than the brand itself?
The future of current brick and mortar department store may be uncertain. But the multi-brand environment in its new form, a blend between online retail and the physical store, is definitely here to stay. With increasing rents and landlords asking for long-term commitments, brands are looking for alternatives, and ‘online department stores’ like Zalando are also embracing the concession model now.
A retail concession can offer brands a huge upside with all its features, but also includes risks. The agreement comes with a lot of fine print. Building a retail concession solely to avoid the much higher costs associated with opening an own brick and mortar store is a recipe for failure. It’s all about creating partnerships for the right reasons.
About the Author
Roosmarijn de Rooij is a strategy consultant in the fashion & lifestyle industry and focusses on process optimisation. She started off her career in finance and then worked in leading positions at a department store for several years before starting her own business. She is very passionate about restructuring brands and retailers to get them ready for the future. Read Roosmarijn’s posts here or connect with her on LinkedIn.