With the rise of platforms: what about 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, especially as Zalando is just one example. Especially since Zalando is just one example of several. What does it mean when more and more online retailers evolve their platform into the realm of traditional wholesale business? Direct selling is gradually moving from being a free practice to becoming mandatory for fashion brands.

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

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

More flexibility and growth through partner programmes?
A marketplace is attractive for platform operators. Although it generates lower margins per product, it ties up less capital, reduces risk and does not require buyouts. “For them, the platform model, in contrast to the wholesale model, offers much more flexibility and a much wider range of products to offer,” says Valerie Dichtl, marketplace expert and founder of Marketplace Uni, which specialises in educating and training marketplace managers for the fashion, sports and footwear industries.

The crises of recent years, right up to the current war in Ukraine, have demonstrated more than ever the volatility of the fashion market. If you don’t want to go under, you have to be flexible. “The war in Ukraine 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 5 May 2022. “We have emerged stronger from all crises. The platform model opens up greater flexibility for us to do so.”

Zalando is also pursuing ambitious growth targets to become the oft-cited “fashion starting point”. Zalando’s “top priority is to achieve sustained strong growth that is significantly and permanently ahead of the European online fashion market. To this end, we are targeting a compound annual growth rate (CAGR) of 20 to 25 percent at GMV between 2020 and 2025,” they state in the 2021 annual report. “This exorbitant growth,” Dichtl adds, “can only be achieved through platforms.”

Not always voluntary: wholesale brands have to adapt to a B2C model
We asked Zalando how exactly a wholesale model is converted to a platform. 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 to our partner programme,” a spokeswoman for the group says.

Zalando leaves open the possibility that this transition will be voluntary. And the brands are also silent on the matter. “It is clear, and I see it again and again in my conversations, that many brands are not yet aware of this development, although Zalando and other online retailers communicate this relatively openly,” Dichtl explains. “Brands that have a strong B2C focus are voluntarily changing, but there are also many that have yet to change.”

Wholesale clothing will become very selective in the future, according to Dichtl. “Only the big brands will be bought, and only what is likely to sell well or where there are NOS programmes behind it.” In the future, products with many sizes, such as underwear or jeans, or lesser-known brands, will have less chance of getting a place in the wholesale market.

Moving to direct-to-consumer requires planning for loss of revenue.
However, it makes a big difference for brands whether they sell their products wholesale or through a marketplace. “If a brand does not wholesale to a large customer, such as Zalando, it has to source from the marketplace itself. This also means that the brand can place an order itself, but must also pre-finance it. The products 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 pose a liquidity challenge for the brand.

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

That leaves the algorithm: Of course, Zalando wants to sell its products wholesale first, because that is where the most capital is tied up and where the most revenue can be generated. Products sold through partner programmes rank lower and are also subject to greater competition. Here, too, losses are to be expected.

To master these challenges in the best possible way, brands have to adapt from the outset. Dichtl talks about six to three quarters of a year in advance. Companies will have to address many of their processes.

Pressure on wholesale brands increases
From today’s perspective, the evolution towards marketplaces is irreversible. The pandemic did not create this evolution, but it did accelerate it: “The future will not work without marketplaces,” Dichts stresses, “You have to take the blinders off. In Europe, there are 40 to 50 marketplaces that are only relevant for the fashion market. This trend is growing.

Brands have to consider which channels they want and can serve in the future, and also which product should be sold where. “Many brands are already starting to look at the different channels and develop specific ranges for them,” he says. “It’s about getting out of the price spiral.”

Ultimately, the marketplace model offers great potential and opportunities, something that Dichtl says should also be emphasised. It is for good reason that classic D2C brands often do not consider anything else than expanding into marketplaces, because through them they can still keep their products in their hands, test new (country) markets and the price control also remains in their hands.