As traditional retail undergoes a transformation, the established wholesale model goes under the microscope—and in many cases, by the wayside—as direct-to-consumer channels gain strength. The new strategy for established retailers and digitally native newbies alike is to use customer data to develop trend-right product for fans who have bought into the brand’s lifestyle.
Speaking on a slate of panels at Recode’s Code Commerce forum earlier this month, Reformation, Theory, Glossier and Nike executives discussed how their direct-to-consumer sales models are evolving, alongside—or to the exclusion of—a wholesale approach.
For apparel line Reformation, the advantage of only selling direct is being able to operate a lean business. One that isn’t bogged down by inventory that was designed months in advance and could become an overstock burden if it doesn’t connect with consumers. The direct model, along with operating her own factory in Los Angeles, allows founder Yael Aflalo to control production, and therefore increase turns and reduce promotions.
“Traditional retail puts a lot of pressure on planning and inventory so we removed that pressure on planning and inventory and put it on supply chain,” she explained. “One thing we found was it really only takes 10 days to cut and sew something. What you’re doing with most supply chains is waiting in line, so we just took out the line.”
But what the company has gained in speed by producing close to home, it pays for, literally, with higher operating costs, though Aflalo said it pays off in the end. “If we make it in 42 days, then we’ve sold it multiple times in the same amount of time a typical retailer sells it once, so if our cost is 5 or 10 percent more expensive, then we’re easily making more profit,” she said.
The fast turnaround time also allows the Reformation team to react quickly to items that are blowing out in store or online. Aflalo said they know within 24 hours of posting an item online if the style is a hit, which allows them to immediately increase production on it and start designing new iterations on that theme.
While e-commerce provides instantaneous feedback, the brand’s stores play an equally important role. First, they provide a cost-effective channel for customer acquisition, which Aflalo says is a key concern for any direct-to-consumer business. But what the company has found as it’s started to track its fans over the last few months that it’s not just quantity, it’s quality that counts. Aflalo said in-store shoppers are twice as valuable as those who discover Reformation online.
For beauty brand Glossier, the company’s sole retail location is built around experiences. “The reason she’s coming to the store, we’ve learned, is less to do with trying on product and more to do with experiencing the brand,” said founder Emily Weiss. “We think less about how do we optimize sales per square foot and more about why would she even leave her house when she can get it delivered.”
This experiences over transactions mindset mirrors Weiss’ connection with her fans, who first encountered her via her blog, Into the Gloss. The site, which preceded Glossier by three years, is where Weiss developed a dialogue and a trust among beauty fans—a community that she said is predisposed to sharing content and evangelizing about their favorite products. It’s also where Weiss and her team turn first when they want to test new ideas. “We rely on our customers as co-creators and co-conspirators for our company’” Weiss said. “We see everyone of our customs as an influencer.”
Based on the engagement she developed with her readers, Glossier launched as an immediate fan favorite. The sustained enthusiasm for the brand and the site means about 80 percent of sales are generated from peer-to-peer recommendations.
To thank them, the Glossier team has been developing a loyalty program, designed with their needs in mind.
“Because we know who those people are, being a data driven technology company, we’re able to incentivize and reward her for promoting Glossier,” Weiss said, adding her fans are so loyal, they’re not looking for discounts. “The women are much more interested in experiential rewards or working closer with us or early product access than they are in monetary rewards,” Weiss said.
At Nike, getting fans engaged with the brand is a key focus as it looks to double its direct-to-consumer business over the next three years.
Heidi O’Neill, president of direct to consumer at Nike, said a key driver is the company’s focus on connecting with consumers’ lifestyles and interests through a variety of specialized apps. One example is Nike Run Club, which allows fans to get personalized coaching, compare their fitness levels with friends and track their progress. While consumers are getting all of those benefits, Nike is getting a ton of data, both from the tidbits users provide as well as the behavioral information the company gleans as they interact with the technology.
“The more we know them, the better we can serve our members. We’re seeing a really nice return from knowing them,” O’Neill said. “Our members are worth 3x the value of an anonymous consumer.”
By providing more “elevated experiences,” like the company’s SNKRS app, which gamifies the hunt for new kicks, Nike is cultivating a rabid fan base.
That’s not to say retail relationships aren’t important to the brand, which sells to almost every imaginable door from mid-tier department stores like Kohl’s to exclusive shops like Bergdorf Goodman.
The athletic wear company is exploring ways to foster more digital sales through its partners as well. In additional to traditional retailers, Nike sells direct via the Zalando marketplace and it’s available on Tmall in China where, during the country’s Double Ninth Festival sales, it was able to fulfill orders directly from stores last year, racking up 1,000 sales in one day, according to O’Neill.
Nike recently made headlines with its decision to launch a pilot program with Amazon. While some in the industry see it as potentially detrimental to its wholesale partners, O’Neill calls the move “a consumer-centric decision.” “We’re trying to keep the consumer at the center of everything we do so we’re watching the marketplace and watching the channels,” she said. “And obviously Amazon is a strong proposition.”
Though he’s part of the established fashion guard, having founded Theory 30 years ago, Andrew Rosen agrees that these days you have to keep an open mind and continue to experiment with different retail channels.
That willingness to try new things has lead Rosen to sell on Amazon and partner with Stitchfix, making Theory one of 100 new brands to join the subscription box company in the last month. “I’m not afraid of experimenting with things,” he said. “As long as you have a partnership, I think us experimenting with new companies and new methodologies is important.”
While exploring these new concepts, Rosen, who’s also an investor in a variety of fashion firms including Alice & Olivia, Rag & Bone and Reformation, continues to evolve Theory’s operational strategies. Internally, that means removing silos to allow for faster decision making. Externally, he’s rethinking wholesale relationships.
“The future of the wholesale business is to be more selective about your distribution,” Rosen said. “The new model of picking and choosing your partners and being more important to them and letting them be more important to you is the name of the game.”
While Rosen still prefers to launch a new brand through wholesale because it allows him to learn his customers and hone the line before going direct to consumer, he knows the retail landscape is changing drastically. In particular, he said department stores “haven’t hit bottom yet” though once they do, he anticipates they’ll be greatly changed. In the meantime, he has his eye on retailers like Kith and Supreme, which he credited for tapping into pop culture.
“A lot of the department stores are in the process of reinventing themselves, and I think there’s going to be a lot of energy and excitement out of the Barney’s and the Bergdorfs and the Nordstroms of the world,” he said “but really what’s making the noise right now are retail companies that are less than five years old.”