Retail Sales and Distribution — How does it work?
Primary industry of focus : Fashion
There are 2 common ways to expand a fashion line; traditionally via distributors/retails/boutiques and at present digital sales. Both have their perks and downside. A common understanding in the fashion world is that distributors mark up the price unnecessarily, hence customers pay way more than they do when they buy online. Do they really though?
Distributors vs online sales
Let’s take a closer look. When it comes to distributors, high volume sales of products leaving factories are sold at wholesale price. Once it lands, distributors buy it at landing price which includes wholesale + duty + shipment charges + warehousing. The distributor then provides sales agents commission to sell it to retails and boutiques and spreads out sales, hence increasing demands.
Online sales however may seem simpler. A brand sells the product at a much cheaper price. But spends a lot more on marketing. To give some perspective, Prada spend under $100 million on digital advertising in 2021. Customers will buy online but will end up paying for the duty and shipment of the products, on top of the price of the product itself.
Now of course this is a simplified version. The depth of the conversations that arise out of this could be geographical-centric, a coherent environment with both online sales and distribution, a high import tariff and duty ie US and EU, etc
There are several rules of thumb when it comes to fashion and surprisingly not easily available. One is on price determination when you are creating the product from scratch. A generic mark up from factory cost would be to multiply by 2 to cater in for operating cost and internal profit margin. Say if the cost is $10, then the factory price or wholesale price is $20. To get the retail price, this differs a lot based on the type of sales and distribution. Assuming it’s via distributors, in the US, factory price is multiplied by 2.1 to 2.3 to get the retail price. In Europe, factory price is multiplied by 2.5 to 2.8, hence for the factory price of $20, the retail price is $56. Cost-wise one may see it as only $10, but bear in mind there is factory operating cost, logistic, duty, sales, and marketing spread out to sales agents and boutiques. To expand these rules of thumb, an income loss statement would yield back to the same figures.
Duty and Tariffs.
This is an important part of the distribution and depends on who pays what. An 11–13% tariff on US footwear caused footwear retail prices to spike, though the main reason was to prioritise local manufacturers. However, as local players are dwindling rapidly hence like it or not there is a heavy import need to be met in order to put shoes on the feet of Americans. To understand this better, refer to my previous article on logistics for startups.
What happens after it reaches distributors?
A distributor generally will have a few retailers, boutiques, and agents working for them. Say a distributor buys at 50% off retail + landing cost+ warehousing + internal transportation. A boutique may buy the shoes off a distributor at around 25–35% discount. A sales agent would take a 12–15% commission of that discounted retail price. Hence even with the mark up of 2.1 to 2.8, for a distributor to make money, one needs to sell a lot of products. This then comes down to distributors taking up a certain region be it country, state, city, etc, and distributing to the local retail and boutiques ensuring incoming sales within those areas. The benefit to a customer is that they will have quicker and easier access to the products.
This is an interesting no-string-attached job. A sales agent’s role typically would be to commission sales to boutiques and retail outlets. The commission is based on the n number of shoes sold and based on the discounted price to the retail. So for example, if it’s a heavy retail discount for a few pairs of shoes, a sales agent’s commission will be lower and vice versa. The chart calculation of sales agents at Mestrae bringing in orders of a few hundred pairs every month yields roughly $5k — $10k plus-minus.
Boutiques are ever decreasing but the importance of it still shows whereby a lot of customers prefer to try and buy, or see its physical appearance instead of size and feel estimation. While digital sales have expanded greatly, the smaller retail and boutiques are adopting to localising physical and digital sales to their customers in their areas. For shoes, as there is a wider range of sizes to buy, design, colour, etc, most often boutiques would take a 40% discount off retail. There is a 20% buffer for customer discounts, hence as a rule of thumb, unless if its year-end of warehouse clearance, customer discount typically does not exceed this range
There is a growing need for digital sales to ease up purchases regardless of where a customer is located and this is evident during Covid19 lock-down periods. Fashion technology is creating a more immersive experience around virtual realities and this enables a customer to see how the product fits them better at the comfort of their home. Cost to the brands however includes incorporating these techs as well as digital marketing which can take up most of the margin of sales. Customers on receiving end will still end up paying for the shipment of the product and duty charges but can get past a high cost if the product is lower priced and smaller in its volumetric measurements.
Fashion Sales round up
A lot of time fashion brands have amazing products but have a hard time selling to customers. There is a definite weighing in on what works. At Mestrae we have many trials and errors and fine-tuning that led us to optimising our process, and we will continue to improvise this as the brand gets bigger. Smaller brands have lesser opportunities to make errors or experts that can assist them, hence I hope this article is helpful to whomever is reading it.
Fashion Consultant Thierry Bayle of Global Fashion Management, London