If online retailers such as Zalando want to triple their platform business in a few years, this has serious consequences for the traditional wholesale business and the corresponding brands. Especially because Zalando is just one example of many. What does it mean when more and more online retailers develop their classic wholesale business model in the direction of a platform strategy? Direct selling is gradually becoming a requirement for fashion brands.
When Zalando was founded as an e-commerce company in 2008, the business model was still based on classic wholesaling and retailing (wholesale). Today, wholesale accounts for only around 70 percent of the group’s gross merchandise volume (GMV), with the remainder being made up of the platform business. Since 2019, Zalando has been communicating the goal of wanting to expand its partner programs, i.e. the marketplace model and the integration of stationary retailers (connected retail). According to the annual report, 30 percent of the GMV came from the partner program in 2021, in the first quarter of 2022 it was already 32 percent, and in three years, i.e. 2025, it should already account for half of the GMV. This development is not unique to Zalando: About You and Otto are trending in the same direction, and traditional retailers are also integrating platform models, from Breuninger to Engelhorn. Even H&M is now a platform.
More flexibility and growth through partner programs
A marketplace is attractive for platform operators. Although it generates a lower margin per product, it ties up less capital, reduces risk and does not need to be purchased. “In contrast to the wholesale model, the platform model offers them much more flexibility and a much larger range of products that they can offer,” says Valerie Dichtl, marketplace expert and founder of the Marketplace Uni, who specializes in education and training in the marketplace -Managers specializing in the fashion, sports and shoe industries.
The crises of the last few years up to the current Ukraine war have shown the fashion market more than ever how volatile this business field is. If you don’t want to go under, you have to remain flexible. “The Ukraine war is already the third crisis in my time at Zalando,” said Robert Gentz, Co-CEO and co-founder of Zalando, when presenting the first quarterly figures for the current year on May 5, 2022. “We have emerged stronger from all crises. The platform model gives us more flexibility for this.”
In addition, Zalando is pursuing ambitious growth targets in order to become the much-cited “Starting Point for Fashion”. It is Zalando’s “top priority to realize continued strong growth that is significantly and consistently above that of the European online fashion market. We are aiming for an average annual growth rate (CAGR) of 20 to 25 percent for GMV between 2020 and 2025,” says the 2021 annual report. “This exorbitant growth,” Dichtl continues, “can only be achieved via platforms.”
Not always voluntarily: Wholesale brands have to be prepared for direct business
But how exactly do you convert an ongoing wholesale model into a platform model, we asked Zalando? Through “continuous investments, for example in (self-)services and tools for brand partners and training courses, as well as through the gradual transition of selected wholesale partners to our partner program,” says a spokeswoman for the group.
Of course, Zalando leaves it open how voluntary this transition is. And the brands are also keeping a low profile. “It is clear, and I see this again and again in my conversations, that many brands are not yet really realizing this development, even if Zalando and other online retailers are communicating this relatively openly,” explains Dichtl. “Brands that have a strong B2C approach switch voluntarily, but there are also many who have to switch.”
According to Dichtl, wholesale will become “cherry picking” in the future. Dichtl: “Only big brands are bought, and only what is sure to sell well or has NOS programs behind it.” In the future, products with many sizes, such as underwear or jeans, or lesser known brands. Transition to Direct-to-ConsumerC: plan for lost sales
However, it makes a big difference for brands whether they sell their products through wholesale or through a marketplace. Dichtl: “If a brand does not have wholesale for a large customer such as Zalando, it has to stock their marketplace itself. This also means that the brand itself can take care of pre-orders and must therefore also pre-finance them. The goods are not paid for all at once at the beginning of the season upon delivery, as is the case in the wholesale business, but when the end customer buys the goods. This can initially lead to liquidity challenges for the brand.”
In addition, sales in the marketplace model are often lower at first compared to the wholesale model. At least in the case of Zalando, wholesale products are automatically displayed in all 26 countries. The marketplace, on the other hand, operates country by country. “Very few will be able to serve all countries at once and compensate for the associated loss of sales,” explains Dichtl.
That leaves the algorithm: Of course, Zalando wants to sell its wholesale products first, because that’s where the most capital is tied up and the most sales can be generated. Products that are sold through the partner programs are ranked lower and are also exposed to increased competition. Here, too, losses are to be expected.
In order to master these challenges as smoothly as possible, the brands have to adapt at an early stage. Dichtl speaks of a lead time of six months to three quarters of a year. Many processes in the company would have to be touched.
The pressure on wholesale brands is growing
From today’s perspective, the development towards marketplaces is irreversible. The pandemic did not create this development, only accelerated it. “The future will no longer work without marketplaces,” Dichtl is convinced. “You have to take off the blinders. In Europe there are around 40 to 50 marketplaces that are only relevant to the fashion market. The trend is currently rising.” Brands have to consider which channels they want and can use in the future and also which product should be sold where. “Many are already starting to take a closer look at the individual channels and develop targeted product ranges for them,” she says. “It’s about getting out of the price spiral.”
After all, the marketplace model offers great potential and opportunities – that too must be emphasized, says Dichtl. It is not for nothing that classic DTC brands often do nothing other than expand to the marketplaces. Via the marketplaces, they can continue to keep their products in their own hands, test new (national) markets and they also remain in control of prices.