With platforms booming, what happens to wholesale?

When online retailers like Zalando, for example, want to triple their platform business in a few years, this will have serious implications for the traditional wholesale business and the brands involved. All the more so because Zalando is just one example of several. What does it mean when more and more online retailers develop their traditional wholesale business model in the direction of a platform strategy? Direct sales are gradually moving from freestyle to compulsory for fashion brands.

When Zalando was founded as an e-commerce company in 2008, its business model was still based on traditional wholesale and retail concepts. Today, wholesale only accounts for around 70 percent of the group's gross merchandise volume (GMV), with the platform business accounting for the remainder. Since 2019, Zalando has communicated the goal of increasingly expanding its partner programs, namely the marketplace model and the integration of brick and mortar retailers (connected retail). According to the annual report, 30 percent of the GMV came from the partner program in 2021; in the first quarter of 2022 it was already 32 percent, and in three years, in 2025, it should account for half the GMV.

This development is not unique to Zalando: About You and Otto are drifting in the same direction, and traditional retailers are also integrating platform models, from Breuninger to Engelhorn. Even H&M has recently become a platform.

More flexibility and growth through partner programmes?

A marketplace is attractive for platform operators. While it generates fewer margins per product, it ties up less capital, reduces risk and does not require purchasing. “For them, the platform model, in contrast to the wholesale model, offers much more flexibility and a much wider range of products they can offer,” says Valerie Dichtl, marketplace expert and founder of Marketplace Uni, which specialises in the education and training of marketplace managers for the fashion, sports and footwear industries.

The crises of recent years, right up to the current war in Ukraine, have shown the fashion market more than ever how volatile this business segment is. If you do not want to go under, you have to stay flexible. “The Ukraine war is already the third crisis in my time at Zalando,” said Robert Gentz, co-CEO and co-founder of Zalando at the presentation of the first quarterly figures for the current year on 5th May 2022. “We have emerged stronger from all crises. The platform model opens up more flexibility for us to do so.”

Zalando is also pursuing ambitious growth targets in order to become the much-cited “starting point for fashion”. Zalando's “top priority is to achieve sustained strong growth that is significantly and permanently above that of the European online fashion market. In doing so, we are targeting a compound annual growth rate (CAGR) of 20 to 25 percent in GMV between 2020 and 2025,” states the 2021 annual report. “This exorbitant growth,” adds Dichtl, “can only be achieved via platforms.”

Not always voluntary: wholesale brands have to adapt to a B2C model

We asked Zalando how exactly one converts an ongoing wholesale model into a platform model? Through “continuous investments, for example in (self-)services and tools for brand partners and training, as well as through the gradual transition of selected wholesale partners into our partner program,” says a spokeswoman for the group.

Zalando leaves it open how voluntary this transition is. And brands are also keeping a low profile. “It's clear, and I see this again and again in my conversations, that many brands don't really realise this development yet, even if Zalando and other online retailers communicate it relatively openly,” explains Dichtl. “Brands that have a strong B2C approach are changing voluntarily, but there are also many that still have to switch.”

Wholesale will become “cherry-picking” in the future, according to Dichtl. “Only big brands will be bought, and only what is sure to sell well or where there are NOS programs behind it.” In the future, products with many sizes, such as underwear or jeans or lesser known brands, will have less of a chance of winning a wholesale spot.

Switching to direct-to-consumer requires planning for lost revenue

However, it makes a big difference for brands whether they sell their products wholesale or via a marketplace. “If a brand does not sell wholesale to a large customer, such as Zalando, it must stock that marketplace itself. This also means that the brand is allowed to place a pre-order itself but must therefore also pre-finance it. The goods are not paid for all at once at the beginning of the season, as in the wholesale business, but when the end customer buys them. This can initially lead to a brand’s challenges with liquidity.“

In addition, sales via a marketplace model are often initially lower than via a wholesale model. At least in case of Zalando, wholesale products are automatically sold in all 26 countries. The marketplace, on the other hand, operates country by country. “Very few will manage to serve all countries at once and compensate for the associated revenue losses,” explains Dichtl.

That leaves the algorithm: Of course, Zalando wants to sell its wholesale products first because that is where the most capital is tied up and where the most revenue can be generated. Products sold through the partner programs are ranked lower and are also subject to increased competition. Losses are to be expected here as well.

In order to master these challenges as smoothly as possible, brands have to adapt early on. Dichtl talks about six to three quarters of a year in advance. Companies will have to address many of their processes.

The pressure on wholesale brands is increasing

From today's perspective, the development toward marketplaces is irreversible. The pandemic did not create this development, but only accelerated it. “The future won't work without marketplaces,” emphasises Dichts. “You have to take off the blinkers. In Europe, there are around 40 to 50 marketplaces that are only relevant for the fashion market. This trend is currently on the rise.”

Brands need to consider what channels they want to and can serve in the future, and also which product should be sold where. “Many brands are already starting to take a closer look at individual channels and to develop targeted ranges for them,” she says. “It's all about getting out of the price spiral.”

In the end, the marketplace model offers great potential and opportunities - that also needs to be emphasised, says Dichtl. It is for good reason that classic D2C brands often consider nothing other than expanding to marketplaces because through them, they can continue to keep their products in their own hands, test new (country) markets, and the control over prices also remains in their hands.

This article was originally published on FashionUnited.de. Edited and translated by Simone Preuss.