The Increasingly Useless Middleman

Traditional retail, at its core, relies largely on being a middleman. The typical multi-brand retailer sits between the manufacturing community and its target consumers, performing valuable intermediary tasks like selecting the right products for the markets it serves, carrying local inventory, owning and creating attractive environments to sell the product, and so on. Alas, it’s precisely this other part of the middle that is now being squeezed.

The majority of great retailers in history achieved their success by building great stores, assembling a compelling mix of merchandise, presenting it in interesting ways, and providing service that meets or exceeds the customer’s expectations. A Saks Fifth Avenue or a Harrods, even if they carry a healthy percentage of their own private brands, still sells a wide assortment of other vendors’ stuff. But this aspect of their strategic advantage is increasingly being eroded.

Even before the significant growth of e-commerce, many manufacturers came to realize the value of selling directly to the consumer. Many did this because they wanted to control the distribution of excess merchandise and reach a more cash-strapped customer. Thus the era of the factory outlet store, and the malls that host them, was born. The first waves of these stores were not particularly glamorous, and most major outlet centers were located far from urban centers. Over time, outlet malls located themselves closer to (or within) major metropolitan areas and upscaled their designs, amenities, and tenant rosters. For some manufacturers, their own factory and outlet stores became major contributors to their overall corporate bottom lines.

Opportunities for their full-price business were pursued as well. Iconic luxury brand owners have long had flagship stores on the great boulevards of Paris, Shanghai, and New York. But in a bid to grow and showcase their brands even more powerfully, these (mostly higher end) brands have accelerated the opening of their own stores around the world. Today, brands like Louis Vuitton and Gucci each have more than 500 stores globally, with more on the way. These same companies, along with quite a few others that once shunned e-commerce, are now (at long last) investing heavily in all things digital. Less elite brands, from Michael Kors to The North Face, have all dramatically expanded their “owned” stores and online shopping presence while still maintaining their traditional wholesale businesses.

Manufacturers and owners of well-known brands have seized the reins of control in other ways as well. The power of the internet, married with shifting consumer preferences, now allows these vendors to have a direct one-on-one relationship with the end consumer. This shift is dramatic on many levels. First, manufacturer brands can now glean greater and greater consumer insights without having to rely solely on expensive primary research studies or the hope that their retail distribution partners will share their data. Second, this allows these companies to become direct marketers in ways they never could before. They can now build sizable customer databases through in-store clienteling and online direct-to-customer sales. For the most part, until fairly recently, a manufacturer’s ultimate consumer was largely anonymous and its wholesale retail partners owned the relationship. Now these brands can reach consumers directly—and generally cost-effectively—bypassing the once all-powerful intermediaries.

The underlying business model and economic shifts are seismic as well. Brick-and-mortar retail is, for the most part, a fixed-cost business. Retailers are saddled with lease, inventory, and a number of other operating-related costs that change very little or not at all once a store is open, irrespective of actual volume. As many traditional retailers struggle in the face of competition from online-only players, more powerful national and local competition, as well as their own suppliers, a small loss in volume can have strongly negative impacts on store economics. This is a key factor in the decision to close so many stores. As manufacturer brands lose volume with their traditional wholesale partners, they are pushed to make up for it through other channels. This, along with the potentially superior economics of going direct to consumer (either via e-commerce or through their own stores), is pushing more and more brands to open and invest behind their own direct sales channels.

Nike is a great example of a company that has doubled down on going direct to consumer. Starting (in public at least) in 2017 and dubbed the “consumer direct offense,” Nike is greatly bolstering digital spending, upping its product innovation, localization, and personalization efforts, pulling investment dollars away from “mediocre” partners in favor of “differentiated” ones, and expanding new retail concepts like the House of Innovation and Nike Rise, all in a bid to reach $16 billion in sales by the end of this year. So far results have been strong, with year-over-year direct-to-consumer growth in the low teens since inception and an e-commerce business that is on fire.

Traditional wholesale will not go away completely, but it will remain highly challenged. The pressure for the middlemen to demonstrate more value is becoming ever more intense. Here, too, even very good is no longer good enough.

This is post is adapted from Chapter 4 (“The Collapse of the Middle”) of my new book Remarkable Retail: How to Win & Keep Customers in the Age of Digital Disruption, available on Amazon and elsewhere.

The Remarkable Retail podcast launches September 29th. Subscribe at Apple or wherever you listen to your favorite podcasts.