NEW YORK, United States — Young luxury labels are notoriously hard to scale. When a brand is just getting off the ground and producing only in small quantities, the per item costs of materials and manufacturing can run high. This squeezes margins. It can also push retail prices up, meaning fewer shoppers can afford to buy the brand and it’s harder to acquire customers.

But the rise of e-commerce and social media platforms like Facebook and Instagram has been a boon to young labels, enabling fashion start-ups, which typically lack the capital to launch their own retail stores, to connect directly with consumers, bypassing middlemen like department stores, boutiques and other wholesale partners. This not only means margins that can be three to four times higher, it also allows young labels to own the valuable interface with the customer, as well as the associated data.

“The most important thing is that the brand owns the customer,” says Lawrence Lenihan, co-founder and co-chief executive of Resonance Companies, which provides capital and operational support to start-up fashion labels. “To have that conversation without an intermediary is more rewarding for both the customer and the brand.”

The success of start-ups like Warby Parker and Everlane, which were both born online and have embraced direct-to-consumer strategies, is a testament to the potential of the approach. “The gross margins are better so you’re actually able to build a stronger business, to cover day-to-day costs and market so that people know you’re alive,” says Neil Blumenthal, co-founder and co-chief executive of Warby Parker, which was founded in 2010. “It also allows you to control your experience,” he continues. “When you’re wholesaling, you’re at the whims of retailers that can put your brand at discount, or not deliver a good customer experience. Those things can dilute a brand significantly and change a consumer’s perspective.”

In recent seasons, more young fashion labels have embraced direct-to-consumer strategies. Last November, the storied American brand Bill Blass, now under the creative direction of Chris Benz, relaunched with e-commerce. In December 2015, Thakoon Panichgul announced that he, too, would reboot his business with a direct-to-consumer model, backed by textiles and fashion mogulSilas Chou. More recently, New York-based designer Misha Nonoo announced that she would forgo a runway show during the latest New York Fashion Week in order to align future presentations with the retail calendar and prepare the business to refocus on direct-to-consumer sales. “I think the way people consume has changed dramatically over the past 10 years,” says Nonoo, who launched direct-to-consumer e-commerce at the beginning of 2015. In just one year, without any paid marketing, the site is already responsible for about 15 percent of her overall revenue. “If I was to start a brand today, I would go fully direct-to-consumer,” she adds.

Adopting a direct-to-consumer business model is much easier said than done, however. For large brands, which have the resources to build and operate their own sales channels — usually a combination of physical retail stores, shop-in-shops and e-commerce — along with hefty marketing budgets to attract consumers, shifting their business models from wholesale distribution to direct-to-consumer makes sense. Indeed, many of fashion’s biggest brands have been doing just this. But can smaller brands still aiming to scale their businesses really do so without wholesale partners?

“It was easier when we started,” Blumenthal of Warby Parker says of going direct-to-consumer. “It was more of a novel idea then. There were just fewer direct-to-consumer brands. With there being so many now, it’s become more difficult to grab a customer’s attention and break through.” It’s clear that one of the biggest challenges is the increasing cost of online marketing. “It was easier to grow organically six years ago,” Blumenthal continues. “Facebook continues to be a great channel for customer acquisition, but in the early days, we were able to obtain a lot of customers through Facebook without paying.”

While platforms like Instagram can still be effective for those without large marketing budgets, reaching consumers via Facebook and search marketing requires more resource today than in the past. “I get the sense that the most sought after role in fashion and retail is quickly becoming growth/paid marketing specialists,” says Ari Bloom, chief executive of Avametric, a Khosla Ventures-backed fashion-tech company. (Bloom also invests in and advises early stage fashion brands through his firm A2B Ventures.) “The web is increasingly crowded and it is getting very expensive to buy a customer these days,” he adds. “But the tactics that have gained in popularity and have thus become expensive to undertake, only became that way because they worked. It's up to growth brands and marketers to uncover new techniques.”

For some upstart fashion labels, going direct-to-consumer has its limits, however. When New York-based Nicole Najafi launched the upscale denim line Industry Standard in the spring of 2014, her goal was to offer American-made jeans for a fraction of what her competitors charge by routing around middlemen and selling directly to customers. Industry Standard’s classic styles are priced between $95 and $115, even though they are made in the same Los Angeles factory that produces pairs for $300 and up.

Over the past two years, Najafi has developed a loyal following of repeat customers, in part driven by a string of press in publications like Vogue.com and Refinery29. (Half of the shoppers who buy a pair of Industry Standard jeans buy at least one more pair within a year.) But the company’s rate of annual growth — 35 percent year-over-year from its first to second year — was less than what Najafi had aimed for.

In October 2015, she decided to take on her first wholesale account, selling to the well-regarded New York concept store Fivestory, where her $100 denim sits alongside $2,100 Giambattista Valli capes and $1,995 Olympia Le-Tan clutches. In just a few short months, sales at Fivestory generated 10 percent of Industry Standard’s overall revenue for 2015 and, in 2016, Najafi plans to take on additional wholesale partners in San Francisco, Los Angeles and Chicago. “In the beginning, I relied on press and word of mouth. If I wanted to keep growing online, I’d have to start paying to acquire customers,” Najafi explains. “Wholesale is really great because I get to access a new audience. It also gives me a storefront: a place people can come and try on the jeans in person. I think the desire to try something on before you purchase it still exists.”

On the other hand, Elizabeth Suzann, a Nashville-based fashion line started in late 2013 by designer Elizabeth Pape, has successfully deployed a direct-to-consumer e-commerce strategy. “At first I thought that selling in a few stores would be a good way to do some marketing,” Pape says. “But we quickly realised that our online customers were really loyal and doing a lot of our marketing for us through word of mouth.” Less than three years after starting the company, Pape’s business is entirely direct-to-consumer and projected to bring in just under $5 million in revenue in 2016. The company only began spending a small amount of money on paid marketing — on Facebook — at the end of 2015. “Our approach is pretty targeted,” she says. “What we’ve found is that speaking to people who are already fans or are friends of our fans is much more effective than trying to reach the whole of the World Wide Web.”

E-commerce platforms like Farfetch and Garmentory can also help young labels reach consumers directly. There’s also Spring, a “virtual shopping mall” mobile app that connects consumers directly with brands, which display their products in Instagram-like feeds, paying Spring a per-order transaction fee on sales. Many of the labels on Spring have never sold directly to consumers before.

“For many brands, we are their highest margin channel,” says Spring founder and chief executive Alan Tisch. The company also negotiates discounts on lower-cost e-commerce platforms like Magento and Shopify for its partners. “One of the things that we realised when we started Spring was that the business model of wholesale and department stores — the payment terms — is broken,” continues Tisch. “It’s the American dream to be sold in the best department stores. But direct-to-consumer margins [can be] four times [that]. Because of that, we’ve always believed that there is such an opportunity.”

Still, most young fashion labels find that a combination of direct-to-consumer and wholesale channels works best. LVMH Prize nominee Chris Gelinas has chosen a less orthodox approach: 60 percent of his revenue is generated through personal orders, mostly placed at physical trunk shows in cities like New York, Los Angeles and Toronto. “The first two seasons, I wasn’t very equipped to sell the collection, so I wasn’t chasing after wholesale very aggressively. I had friends of editors and friends requesting pieces, and I started very easily cutting a few pieces here and there, and that just grew steadily season by season,” Gelinas says. “At trunk shows, I went from 10 to 25 clients and orders of one to two pieces, to six to seven pieces. For a business as small as mine, that’s really impactful.”

This season, after his runway show at New York Fashion Week, Gelinas set up shop for two weeks in a gallery space, where wholesale buyers and personal clients alike can peruse the collection. “All of the sudden, the conversation with wholesalers has changed. I have the proof and the confidence that these are good clothes that women love to wear,” Gelinas says. “I don’t feel like I’m chasing after wholesale anymore. Exclusivity and control is the ultimate luxury. More and more brands want to take control back because the system doesn’t support younger brands the way it used to.”

Tull Price, founder of 10-year-old shoe brand Feit, spent the first part of his career working with wholesalers. (He sold his wholesale-only shoe company Royal Elastics to K-Swiss in 2001.) However Feit, which operates two brick-and-mortar stores in New York City and another in Australia, does 75 percent of its sales through direct-to-consumer channels. The rest is made through strategic wholesale partners like Dover Street Market, Need Supply and The Corner. “This way, we were able to control our own destiny,” says Price. “We’re not reliant on wholesale. And that’s a nice place to be.”

- Source: BOF     Photo: businessofffashion.com

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