Swimming With The Current

While there are exceptions to every rule, there is no question that throughout the history of commercial enterprise, the companies who have strategically positioned themselves to move in the direction of dominant environmental and industry trends have enjoyed greater chance of success than those who chose to operate outside, or worse, against the trends. As we survey the landscape of the consumer sector today, there are clearly identifiable components which are present in the strategies of the majority of the most successful consumer companies. We share them with you knowing there are no guarantees that these strategies lead to success and the exceptions will no doubt be pointed out by contrarians. We’re only highlighting the dominant themes that influence success.

Owning the brand is critical

In our opinion, Mickey Drexler was directionally correct with his statements at a Financo event a few years ago when he duked up with Burt Tansky, the then CEO of Neiman Marcus. Mickey’s conviction was that selling someone else’s brand as a retailer, or for that matter, wholesaling your brand to a third-party retailer, were just plain stupid strategies for consumer brands. We agree, and have no faith in strategies built on a foundation other than brand ownership, but with the caveat that some transactions with third parties can still in fact provide highly profitable and brand enhancing opportunities for owners of the brand.

The pattern of advantage for brand ownership is apparent in the performance of brand owner companies whose business structures are quite diverse. The power and performance of Neal Cole’s Iconix licensing business is an extraordinary example. Compare brand owner Iconix’s profitability and valuation to that of any of its licensees, those renting vs. owning the brand. And, compare the performance and valuation of Michael Kors, the brand owner, to any third-party seller of the Kors brand. Vertical retail structures also prove the point. The incredible growth and profitability of Les Wexner’s Victoria’s Secret compared to any third-party retailer selling intimate apparel is dramatic, as is the valuation placed on his company which owns its brands.

There are many structural advantages to ownership of a powerful brand: control of distribution, control of pricing, control of advertising, marketing and PR, control of presentation to the consumer in retail environments, control of product line, etc. All of these elements being managed by one hand versus many ensures harmony across all consumer facing components of the brand strategy and significantly increases the power of the brand’s message in the marketplace. However, the even greater advantage is in the valuation placed on companies who own powerful brands supported and maintained through these controls. They are key to superior margin performance, which leads to greater profitability and increased enterprise value.

Omni-channel is not just the buzz phrase of the moment

Everything that has been written or broadcast regarding the empowered consumer is spot on. The contemporary customer wants access to everything in the product universe, they want to buy it where and when they choose, and at a price they believe to be competitive. Therefore any brand who chooses to ignore any viable channel for its products will forego transactions and relationships with customers who prefer to shop in that channel.

Third-party retailers, department stores, multi-brand specialty stores, big box category killers, are all still very much alive and kicking although it is apparent that those who have boldly ventured into other channels have thrived and others have failed. The marvelous revival of Macy’s, the success of Intermix, the dominance of Sephora, and the stubborn survival of Best Buy all point to the fact that brick and mortar, third-party retailing has not disappeared as many had predicted. Nor has supplying these retailers with product through wholesale structures failed for those who have learned to abandon the traditional adversarial relationships between vendor and retailer, and instead have formed true partnerships which generate mutual success.

Brand owned/operated retail stores, whether grown from wholesale or retail roots, also continue as highly successful when properly managed. Coach, Lacoste, Kate Spade, Ashley Furniture, even Legos are all proving that taking a wholesale brand to company owned retail is a winner. And, of course the brands whose roots are retail are also proving that brick and mortar is not dead. H&M, Uniqlo, Aldo, Zara are all brands developed from retail roots which enjoy enviable market leading positions.

Direct marketers are thriving with the lion’s share of the growth being generated by ecommerce, but many successes like Restoration Hardware and Vineyard Vines are also supporting the on-line growth with catalogs. There is no question that direct in all of its forms, particularly those driven by technology, is the fastest growing channel and participation here is a must for any brand’s success.

And finally, in today’s brand obsessed world, every strong brand, regardless of its beginnings, has tremendous growth potential for brand extension and extraordinary profit impact through licensing of the brand. Obviously choice of licensing partners and control of distribution are mandatory, but reaching more consumers with more brand consistent product categories grows the brand footprint and enhances the brand’s performance in the core channels.

So, it really is an omni-channel world ready for exploitation by any brand which has proven itself with its core categories in its core distribution channels. Moving quickly and boldly into the new channels is absolutely key to a “go with the flow” strategy in our industry.

Vertical is good but not necessarily the entire answer

For years we have been predicting the death of third-party retailers, particularly department stores and were quoted in the press as saying that no one, not even Terry Lundgren, could save the channel. Well obviously, Lundgren has proven us wrong, but only by replacing the old and outdated department store strategies and in the process enabling today’s Macy’s to enjoy many of the advantages of a vertical structure. He has substituted real partnership relationships, almost joint venture structures, with key vendors like Martha Stewart, Tommy Hilfiger, Kenneth Cole, etc. And, he has also developed some of the most powerful brands in the industry in house, which Macy’s owns. These brands enable the store to enjoy the same extraordinary initial markups as vertical retailers, allowing Macy’s to bank the full margin, or aggressively promote these brands, while still selling at what would be full margin for third-party brands currently sold in the store.

And, there is still a place in the third-party retailer’s assortment for brands sold through classic wholesale structures. While not likely to match the profitability of other channels including company owned stores, outlet stores, licensing, ecommerce, etc., so long as there is some profit to be attained by vendors selling in the channel, the channel is worth maintaining not only for the incremental profitability, but also for the increased brand exposure. And, as we said above, brand power drives valuations beyond normal earnings multiples. One need only imagine what the outrageous valuation of Michael Kors would be today without the company’s wholesale distribution. Or think about the likelihood of the recent successful Vince IPO had the brand’s distribution been confined to only company owned retail channels

We believe that multi-channel strategies are the most likely to succeed, that a dominance of vertical structure in the distribution strategy is preferable, but that third-party retail distribution can still contribute to a brand’s success and that third-party retailers can still find ways to survive and prosper by cleverly incorporating tricks from the vertical retailer’s bag.

The Marketplace is Global

For years, my former boss, Les Wexner, absolutely, and at times almost violently resisted the concept of international expansion of Limited Inc.’s stable of brands. “No oceans between me and my stores!” Instead he mandated building more brands focused on selling apparel, beauty, and accessory products to the American customer we understood in retail environments where we were experts. I believe he was correct in his stance because it worked, allowing the company to become one of the most successful in the history of retailing.

But the world has shrunk dramatically. Not only are Victoria’s Secret and Bath and Body now expanding aggressively into international markets with Wexner’s blessing, but virtually all major brands who are doing the same are learning that international expansion produces two important returns on the investment in the strategy. Obviously, the brands find new customers in the new markets and therefore expand their distribution in a 100% incremental fashion. Additionally, the brands who succeed in the international markets bounce back to the US market as stronger, more powerful and when all is said and done, “cooler”, more desirable brands, due to their international presence. International expansion is today, in our opinion, a key component to a fully developed brand strategy.

It’s a nasty game, but you gotta play

At a minimum, I quote weekly, the late Marshall Field, one the greatest merchants of all time, who summed up effective retail strategy in six words: “Give the lady what she wants”. At this point in time, and in our opinion, particularly given the growth of the web for comparison shopping, the lady wants and will continue to want a deal! The prevalence of selling at discounted, promoted, sale, “twofer”, “bogo” pricing is overwhelming in the distribution strategies of successful brands.

Total aggregate sales for the five largest off-price retailers in the U.S. increased 6% during 2013 (on top of 11% and 6% increases in the prior two years). This compares to a 1% increase for total national apparel sales, according to data published by the NPD Group, Inc. The TJX Companies (TJ Maxx, Marshalls and Home Goods) and Ross Stores have been among the fastest growers in the retail industry as they have opened close to a combined net total of 800 new stores since 2008. And, in fact, when the growth of discounted pricing featured by ecommerce sites is combined with the growth of discounting in other channels, factory outlets, the discount clubs, dollar stores, department stores, Wal-Mart, etc., it far exceeds the growth rate of on-line retailing. While ecommerce is the channel which is constantly touted as the most powerful trend in the industry, its growth pales by comparison to the growth of discounting. The star of the ecommerce world, Amazon, is, in fact one big on-line discount store giving the customer a path to the lowest available price for virtually any product in any category. Add ebay to the picture and it’s readily apparent that the portion of on-line sales at regular price is almost insignificant.

So, what’s a brand to do? We all hate the monster we’ve created, but our customer loves it. For the answer, look to Marshall Field and “give the lady what she wants.” Any brand which fails to weave into its distribution strategy a meaningful promotionally priced component will likely miss the opportunity to sell to a huge percentage of the market. Those who fear the negative brand impact of this strategy obviously fail to recognize the importance of promotion and discounting to the most successful brands in the world.

Visit any factory outlet center and observe the brand lineup: Ralph Lauren, Michael Kors, Brooks Brothers, Ann Taylor, Under Armour, Nike, Tory Burch, the list goes on and on and includes both mainstream and ultra luxury brands. For many of these brands, the outlet channel is, if fully developed, clearly the largest contributor to total company profits.

Check the racks at TJX where you will once again find the leading brands strongly represented with not only close out products, but with products which were made specifically for the discounter. The same is true for Costco and to a lesser degree, Sam’s Club, but they are there. Selling “packages” to these wholesale customers, while at lower margins, also presents a “no risk” transaction structure vs. the “ain’t over ‘til it’s over” relationship with the department stores who ultimately, in many cases, ask the vendor to bear the entire risk of inventory ownership through sell-thru and maintained margin support.

Vendors must be as adept at playing the promotional game with their “regular price” customers and with their discount channel customers when selling to the department stores, no matter what the tier, from Kohl’s to Saks, because the vendor knows that the majority of the units sold by the store will be sold at some form of discounted price.

Maintaining a halo of new, exciting, differentiated product intended to be sold at ticket prices in one’s own stores, on one’s own site, or in one’s wholesale customers’ stores is crucial to maintaining brand image and desirability. However it’s increasingly evident that this is not where the big money is to be made. Success demands learning to play a game we don’t enjoy and learning to play it well.