The US wholesale model is hurting everyone

This article on US wholesale is part of our Vogue Business Membership package. To enjoy unlimited access to Member-only reporting and insights, our NFT Tracker, Beauty Trend Tracker and TikTok Trend Tracker, weekly Technology, Beauty and Sustainability Edits and exclusive event invitations, sign up for Membership here. When his uncle was kidnapped for ransom, Ahmed Zaidi concluded fashion manufacturing was a broken system. After several big brands cancelled apparel orders from his grandparents’ Pakistan factory, leaving his family unable to pay their angry suppliers, says Zaidi, “They came with guns.” His relatives bought his uncle’s release by selling family real estate, but they quit manufacturing, and Zaidi wished his family had worked further up the fashion food chain. “I thought my grandparents should have started a brand because brands make all the money.” Yet, Joseph Keefer, New York-based fashion consultant and creative director of J Keefer colourfully described in an August thread on X (formerly known as Twitter) how brands struggle. “What small designers have to go through just to produce a collection, let alone a show, it’s a miracle any of us are still here… Retailers regularly hit up designers for consignment… Crazy payment terms, net 45/60, like these small companies are miracle banks… It’s a fucked system and we’re all trying.” Things aren’t so rosy at the tail end of the supply chain either, as retail giants devour one another in a Darwinian evolution of discounting that pressures margins, which leads to cost cutting, and furthers the cycle. Saks has been reported to be in talks to buy Neiman Marcus, which has struggled with debt and high inventories, and bankruptcy reorganisation in recent years. Everyone, it seems, is suffering in the wholesale fashion system. “At its core, it’s broken in so many ways,” says Mara Hoffman, who founded her eponymous New York label 24 years ago. “I think there has been a breakdown between the brands and the channels through which they sell,” says Neil Saunders, a retail analyst at analytics firm Globaldata. “A lot of the mainstream stores don’t do what the brands would like.” In the US, many retailers were built before the dot-com era, with “ginormous” footprints, Saunders says, which require them to carry more product than makes sense today. Saunders has taken to visiting stores such as Macy’s, Nordstrom, JCPenney and others to cheekily document their woes on social media, such as messy display tables and stacks of e-commerce packaging out in the open. “How does this persuade hard-pressed consumers to part with their money? As we see from today’s results, it does not!” Saunders wrote days after Macy’s reported its second-quarter earnings were down 8 per cent from a year ago. Macy’s shares are trading at roughly the same price they sold for in June 1995, before the advent of online direct-to-consumer selling and fast-fashion forever altered the retail fashion landscape. Designer Nanette Lepore, who lost control of her eponymous brand after taking on outside investors, says an early sign of trouble was the margin squeeze she experienced when department stores placed large orders. Fees for marketing and advertising, and then chargebacks for discounting when collections failed to sell through sliced her margins at Saks to 5 per cent and at Neiman Marcus to 8 per cent, she recalls. She recently launched a new label called Maria Cecilia, which will sell direct-to-consumer and at pop-ups that she controls. “I have no intention of doing the wholesale thing again,” Lepore says. The common thread through these companies’ experiences, from a Pakistan apparel manufacturer to Hoffman and Macy’s, is a flood of apparel and accessories weighing on companies’ balance sheets and flowing ultimately into discount outlets and landfills. Pressure to produce more Thirty years of just-in-time production methods and supposedly sophisticated modern consumer demand tracking have failed to reduce costly inventories. The bottom line plaguing retailers is that there’s simply too much stuff. US inventories of clothing and accessories reached an all-time high this summer of more than $65 billion, nearly three times what it was in 1992, according to US Census Bureau records. Galahad Clark, scion of the Clarks shoe family and co-founder of Vivobarefoot shoes, believes that widespread overproduction is in part due to pressures from fashion investors — private equity, venture capital, and public shareholders who understand little about the industry’s workings but expect fast growth and double-digit returns. There are plenty of those investors, pockets heavy with cash these days. He says he faces a near-weekly barrage of offers from private equity, banks and other financial groups asking to invest in Vivobarefoot. The UK company has annual sales of roughly $100 million, which is a sweet spot at the tipping point of becoming a big brand. “There’s potentially a life-changing amount of money” in these offers, says Clark, who insists he and his co-founder have no intention of accepting any such deals, which routinely lead brands to cut employee costs, switch to lower-cost manufactures, and increase production. That leads to cycles of discounting in order to move ageing inventory out of the way to make room for the next deliveries. Clark argues that the incentive structure to maximise short term profits is all wrong. “If you point the monkeys at the banana tree, don’t blame the monkey for running up the tree to get the bananas,” he says. He hopes to form a collective of independent brands that would support each other in resisting the temptations of investment capital and production incentives. Yet, the temptations are hard to resist. Three years into designing her New York brand Melke, designer Emma Gage is hoping to land her first wholesale orders, which would raise her brand’s profile. She has considered that a future investor could help ramp up sales, though it might require her to cede control and her brand values. “I would love to hold on to Melke for as long as possible,” Gage says. “I’ve thought about private equity. It would be nice, I suppose. I’d like to hang on to our sustainability goals, and I might have to sacrifice that.” Maintaining control An entire economy of investors seeks to buy fashion brands and amplify them with various forms of efficiencies. Among recent high profile deals, Authentic Brands has scooped up labels from Vince and Quiksilver to Hunter. Tapestry, owner of Coach, is closing in on its purchase of Capri Holdings, which will add to its portfolio Michael Kors, Versace and Jimmy Choo. Still, a few fashion subsets are managing to thrive — one model via rigid control, and the other via extreme cooperation. After they were caught in desperate rounds of department store discounting during the 2008 financial crisis, French luxury conglomerates Kering and LVMH began taking over the entire chains of production and distribution. Through their own channels of stores and department store shop-in-shops, their brands control production, merchandising, prices and even sales personnel. At the opposite extreme are small independent retailers such as Elyse Walker, whose handful of stores have bested years of predictions that indies would soon be extinct. With sales nearing $100 million annually, Walker has carved a narrow lane for herself with carefully edited buys that keep her clients personally in mind — more than half her business in one of her eight stores is private styling for clients who never set foot in the shop — while similarly caretaking the brands she sells. Small, essentially, is beautiful. Maintaining a partnership with the brands she sells can be tricky. “When we go in, they’ll sometimes say, ‘this is Demna’s favourite piece’,” Walker says of buying sessions, which often result in compromise. “We might say, ‘that [piece is] a little aggressive for our client, but we absolutely want to support you’.” Discounting without brands’ agreement is a no-go, she says. “We are told what to mark down at what date and what rate.” Some small brands, independent enough to resist investor pressures, are seeking the right balance between wholesale and direct-to-consumer sales. Jonathan Cohen, an eponymous brand founded by the designer and his business partner Sarah Leff in 2011 in New York, have carefully tended those channels. Wholesale represents about half of their sales, Leff said on Saturday at the label’s fashion week presentation at the Bard Room of the Chelsea Hotel. And, while focused on growing custom business (about 20 per cent of sales) and direct-to-consumer, the wholesale business offers a special opportunity to introduce the label to new shoppers. “We use wholesale as our marketing tool,” Leff says. In truth, there is no getting away from wholesale for most small to medium size labels. Hoffman turned dramatically to direct-to-consumer sales during the pandemic, shifting her sales from 70 per cent wholesale to 30 per cent. That meant funding production on her own — walking a financial tightrope. Now, she hopes to bring on more wholesale accounts to bring that business to about 50 per cent. “I need the (cash) stream,” she said at her presentation this week. “I need the support of my production.” Keefer held a presentation in Brooklyn this week for the punk-inflected J Keefer menswear label he is bootstrapping. It’s heavily influenced by Helmut Lang, with prices ranging from a $210 T-shirt to a $2,350 leather moto jacket with four gusseted interior pockets. Nordstrom has picked up the line, which Keefer views as a blessing, despite his general disgust with the wholesale system. Nordstrom gave him an exemption from using Electronic Data Interchange, commonly called EDI, an order technology that retailers love and independent brands find costly, and isn’t charging for marketing support. “It’s surreal,” Keefer says. “They want to do their own imagery — no fee.” Zaidi, the former manufacturer, says he later concluded that his hypothesis about brands was all wrong, largely because the wholesale cycle depends on avoiding discounting by accurately predicting demand months or years in advance. He is now a Cambridge University researcher, using artificial intelligence to close that gap. “You have brands that are predicting what they’re going to buy the following year and they’re essentially just guessing,” Zaidi says. “The big brands have so much power that the suppliers don’t trust them.” He believes the answer lies in what essentially amounts to arbitrage of fabric and other materials — something that isn’t new to other industries where the inputs are more expensive. “This analysis is being done in automobile manufacturing and the semiconductor industry,” he says. It’s also similar to the system that has been implemented by ultra fast fashion giant Shein, which produces in small batches using fabric that’s held on stock. Zaidi is working with a large Scandinavian brand, which he won’t name, on a system to reduce the lead time of orders from six months to 45 days — which he says can increase gross profit margins by 20 per cent. Ultimately, much like Clark at Vivobarefoot, Zaidi hopes to build a collaborative platform that would benefit manufacturers and brands, who would produce less, but at a higher profit per unit, benefiting everyone. “There is a long tail end of brands that don’t make that much money. They come and go,” he says. “At the end of the day, it’s about the supply chain.” Comments, questions or feedback? Email us at feedback@voguebusiness.com. More from this author: Can New York Fashion Week bridge its global reputation gap? Behind a new Barneys collab, Forever 21 is quietly reinventing itself Is leather the new fur? Protestors crash Coach show during NYFW

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