Wholesale isn’t broken, just poorly managed — Intro

 

henry-ford

I’m going to embark on a lengthy series of posts about the wholesale business as it relates to fashion apparel, accessories, and footwear. It’s a big deal because the fashion industry is in dire straights at the moment and many brands are blaming the wholesale business as a key contributor.

Brands like Diane Von Furstenberg, Ralph Lauren (NYSE:RL), Nike (NYSE:NKE), Michael Kors (NYSE:KORS), Coach (NYSE:COH), Rag and Bone, and many, many others sell products to department stores like Macy’s (NYSE:M), Nordstrom (NYSE:JWN), and Bloomingdales, as well as Amazon.com (NASDAQ:AMZN) for that matter. The process of brands designing and producing products that are then sold in large quantities to retailers, including department stores and specialty stores, and whether online or through bricks and mortar, is called wholesale. Many, if not most brands are wholesalers and pretty much every wholesaler will tell you that the model is broken. Many including the 800 pound gorillas like Michael Kors and Coach are slowly exiting vast parts of their wholesale business from big retailers like Bloomingdales and Nordstrom. The reason? Doing business with department stores is killing them.

Naturally I have a somewhat different point of view. After being in the industry for many years and working on both sides of the wholesale/retail spectrum for some of the largest and most successful brands and retailers, I know first hand the tactics and strategies both sides of the industry use to conduct business with each other. My position is that wholesale isn’t broken, it’s just poorly managed. A hammer isn’t broken because you don’t know how to use it. Hammers are not defective because you continue to bash your fingers and pound holes in a wall. Don’t blame the tool, blame the focus.

The key to any optimal path of performance is knowing how to use your tools and technologies well along with logic and instinct. What is broken in the wholesale industry is its acumen. Both wholesalers and retailers continue to use and promote a business acumen that is poorly managed, weakly aligned, and severely outdated. So yes while department stores have indeed been killing business at many wholesalers, virtually all wholesalers have enabled the crime. Wholesalers and retailers are in a co-dependent relationship.

Something to keep in mind is that the fashion industry is an extremely complicated business. Many people think fashion is as simple as designing some great products, developing a cute marketing campaign, and then selling it to people in stores and online. It’s much more complicated than that. Think about what it takes to sell one shoe. More likely than not that shoe comes in several colors–black, brown, red, navy, etc. That shoe may also have several iterations of treatment—hardware, patterns, embellishments, and so on. Next factor in that in order to sell 1 shoe, you have to have 12 different sizes (multiple that by 2 or 3 if you include widths). So the complexity of fashion is this: take one style in multiple colors, with different treatments across many sizes, and then distribute it to hundreds if not thousands of stores, as well as across digital platforms, and what do you get? A big freaking headache if not well managed.

1 STYLE * 3 COLORS * 12 SIZES * 1200 DOORS = 43,200 UNIT INVESTMENT

But wait, it’s still not that simple. Some colors sell much better than others. There’s a vast difference in sales volumes generated in all the different stores. Climatic zones affect selling. Seasons affect sales. Demographics affect sales. Competition affects selling. And of course let’s not forget that trends affect selling. The bottomline is that the complexity of the fashion industry is immense. It’s why I’ve been drawn to it my entire career. If you think about it, fashion is as complicated as the capital markets. Trading stocks or commodities requires a broad set of skills and insights in order to know what to trade, how much to trade, when to trade it, and when to dispose of it in order to maximize upside and minimize downside. A good portfolio manager manages inventory (cash) in order to perform better than the market. If he or she does that well, a lot of money is made. If he or she does that poorly, a lot of money is lost. A merchant in the fashion industry likewise has to know how to allocate and managed a swiftly moving torrent of investments in a broad range of categories, styles, channels, and doors in order to maximize her returns while minimizing her risks.

The wholesale channel has a great purpose. Regardless of decreases in traffic to stores, there are millions and millions of people who shop in malls and at stores. Department and specialty stores offer a broad range of products and brands to consumers and that’s important. Furthermore, department and specialty stores are not the only option for wholesale. Amazon is a wholesale model, and they have quickly grown to be an 800 lbs gorilla in the industry. So walking away or moving away from the wholesale business is a lot like the statement Henry Ford said about advertising when he said “a man who stops advertising to save money is like a man who stops a clock to save time.” Brands should not walk away from wholesale, it has to be re-imagined and it needs to be utilized more effectively.

I’ll try to make these prolific posts as entertaining as possible. There is a great deal of complexity to fashion beyond the fashion. A lot of smart and well intentioned people work hard day in and day out trying to right this ship. My hope is that the industry begins to spend more time using data and technology to make fashion fashionable once again. The way business is done between brands and retailers has to be approached from a different angle. Less combative, more collaborative. Training and technology are a must. We need an industry that has the creative powers of New York City, Paris, and Milan combined with the marketing brilliance of Madison Avenue and the business acumen of Silicon Valley.

Ultimately we need an industry that trusts data more than opinion, and minimizes emotion in favor of logic. James Barksdale, former President and CEO of Netscape, said it best when he said, “If we have data, let’s look at data. If all we have are opinions, let’s go with mine.” Furthermore data needs to be complemented with logic. In 2010 the global apparel industry produced 150 billion garments. Yet there are less than 3 billion people on the planet that have the means to consume those goods. Nothing about producing 150 billion garments for fewer than 3 billion people is logical. The fashion industry’s greatest challenge is not under-consumption, but rather over-production. Less goods produced does not mean less sales obtained. Conversely it mean more full-price sales generated at higher gross margins and with less waste to the landfills.

Getting all of this right doesn’t have to be as hard as many have made it out to be. In fact the hardest thing to do is to make something simple, and simple works better than complicated things. The way to make something simple is to break critical steps into small, digestible parts with a focus on the handful of key signals that are critical to the operation. Even the best brain surgeons will tell you their work isn’t complicated when it’s broken down into little steps. That’s my goal. My goal is to identify and outline the handful of key signals, steps, and procedures a brand or retailers needs in order to become nimble, proactive, healthy and successful with a modern consumer.

Some, if not all, of these posts will be a lot of my ramblings. That’s the point of a blog and it does have my name on it so I apologize to you now. I’ll do my best to edit excess verbiage and focus the points around cohesive ideas. But one thing I’ve learned is that there is no easy path to success or brilliance. There’s a bunch of great ways to lose weight fast, but few ways to stay healthy forever unless it becomes part of who you are. Don’t look for easy answers, but there will be many quick-fixes. There are some fundamental things that brands and retailers can do quickly to find immediate results. Look for them and you’ll find them in the coming posts. But ultimately nothing happens without execution and that’s up to you in all cases.

All this being said, I hope and expect to learn from my readers. Be sure to pass this on to people you think would have something to gain from reading it, people you think would have much to add to it, and people you think would be pissed off that I wrote it. It’s all good. I do this to grow and hope you do as well.