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The pros and cons of wholesale

by team Holly & Co

 

How many times have you heard people say that they’ll feel like they’ve made it if they see their product on the shelves of Selfridges or Liberty, for example? These are incredible brands so it’s no wonder that for many, that’s what success looks like. But would it be right for you and your business? 

Imagine the phone rings and a buyer from an equally well-known retailer calls to talk to you about stocking your product. Firstly CONGRATULATIONS. Your product is ‘out there’. Someone has recognised that customers want what you’ve created and there’s a demand for it. It’s a wonderful feeling and so it should be. Many people running these wholesale operations have plenty of experience of what sells and what doesn’t and they’ve chosen you. 

As the focus and demand for wonderful independent products grows, some of the power now lies in our hands as they want to form more meaningful unions. In particular, fashion players are moving away from negotiating hard with transactional relationships. 73% of the sourcing community expected the trend towards deeper partnerships to accelerate over the coming year¹, which is heartening news indeed.

But before you ring that sales bell or start planning global expansion, it’s good to understand the points you’ll need to consider and negotiate. Take a read of the following before deciding if the world of wholesale with the big guns is right for you. 

The pandemic has had a dramatic impact on the sector, with many department stores in particular having to pivot, rethink their offering or change the way they work with others. Many more have had to exit the high street altogether. However, there are still some out there with a large, loyal customer base who treat small businesses fairly and may be able to help increase your revenue and drive growth for your business. 

In fact, it can give you the kind of exposure and kudos you’ve been dreaming of. Here are some key factors to consider if you’re ever approached.

In particular, fashion players are moving away from negotiating hard with transactional relationships. 73% of the sourcing community expected the trend towards deeper partnerships to accelerate over the coming year1, which is heartening news indeed.

Firstly, does the retailer align with your brand and business?

Does it feel like a good fit? It sounds obvious, but even if other brands you know have sold well with them, do you believe you would? Is there anything this bigger brand (or the people who run it) might do that wouldn’t align with your values? Once you’re stocked by them and contracts are signed, you’d have little power to distance yourself from them if you ever wanted or needed to, so it’s wise to do your research beforehand. 

Really think about what price you would agree to

The big retailers are likely to want to take as little risk as possible and also use their size and customer power to negotiate the best deal for them. This customer power may limit the amount of negotiating power you have, so do spend time thinking about what you can afford to agree to and how this will impact your business, both in the short and long term.

One of the first factors to negotiate will be the wholesale price

If the retailer’s looking to purchase large volumes, they’ll expect to pay less per item for bulk buying, which could result in lower margins for you. Remember that age-old saying, ‘Revenue is vanity, profit is sanity’? You will need to ensure that you have strong enough margins to be able to still make a profit on the deal that is struck. 

It’s also worth considering that a good wholesale price might not be the only thing they are looking for. Lots of big retailers also ask for a marketing charge and a share of growth in sales. The marketing charge will be to help them drive sales by surfacing your products in the best position in store or on their site, and retailers will then take a percentage of sales for products in this premium retail space. They may also start to track how your products perform and will reward themselves if your sales performance grows over time. That’s why you need to not only consider the price you are selling your goods for, but also any additional costs that may come your way.

Then discuss the retail price

In a competitive market, many large retailers want to offer big reductions to customers and look to undercut the competition. If they do decide to do that with your product, how would your loyal customers feel if they could find your product cheaper elsewhere? How would your other wholesalers feel if they also offer your product but couldn’t compete? It’s worth understanding if there’s a way to maintain control of the retail price. Can you negotiate a sales agreement that protects your prices for you and for all of your customers?  

The big retailers are likely to want to take as little risk as possible and also use their size and customer power to negotiate the best deal for them.

Consider the stock agreement

When it comes to ordering stock, it’s good to understand the retailers’ buying patterns. Do they buy around seasons? How much stock do they hold? When will their peak ordering times be? This may differ to how your business typically sees sales. Some large retailers (and this is particularly common in travel retail) look to reduce their stock risk by taking goods on a ‘sale or return’ basis. This means that they will order stock but on an agreement that they can send back any unsold goods which you won’t then get the money for. This can result in you being left with out-of-season stock to try to shift yourself or items in unsaleable condition. Be sure to ask exactly what ordering and stock agreement you are entering into.

Before you sign, you should also check the product agreement

Many large retailers will be looking for some products they can offer that will differentiate them from their competitors. In these cases, they often ask for some form of exclusivity. It might be a specific colour or style that’s not available elsewhere. Think about how long this exclusivity will last. What if this becomes your bestseller and you can only offer it through one sales channel? Think about the knock-on effect and whether this is something you can afford.

Explore the length of the agreement

A long contract could mean that you have guaranteed sales for a longer timeframe which is great — but conversely, it also means you could be tied into a deal that isn’t working for you as well as you’d hoped. It’s worth exploring all possibilities to see what you’re comfortable with. Ultimately, there are always risks you’ll need to take for the chance to reap the rewards. It’s just always wise to do your homework so you can make an informed choice. Then once you have an idea of what you are going to be selling, the price and the terms of the agreement, you will need to turn your attention inwards.

Do you have the resources available to fulfil an increase in demand?  

It’s really important to have enough staff and materials in place to fulfil orders. Otherwise, you risk damaging relationships or even being fined by retailers if your orders can’t be fulfilled on time. It’s not just making the goods either, but also managing the sales relationships (which can often include getting your head around a large retailer’s internal systems as well as chasing payments and receivables, for example).

Have you considered how your agreement might affect your cash flow?

There’s often very little negotiation with retailers on the standard 90-day payment terms, which means you will have to wait quite a long time for the money to roll in. Do you have the funds available to allow for this time lag? In some cases you can negotiate a payment discount where you receive the money sooner but it does mean you’ll receive a lower percentage from sales which will then eat into your margins and profit.

Watch out for becoming reliant on this income

There are undoubtedly real potential benefits of having your product stocked by a large retailer — dramatically increasing your product sales, gaining brand awareness and reaching new customers, for example. But if it does take off, it’s wise not to get too carried away so that you become solely reliant on this income. Retail can be a fickle industry. What would happen if this revenue stream suddenly stops? Are you diversified enough to survive? 

This probably all feels like a lot to get your head around but remember you will always be learning throughout this relationship and it’s useful to make sure you’ve weighed up the pros and cons before you agree to anything. The big retailers will not be afraid to ask for what they want so neither should you. Since the pandemic, retail models are changing and evolving in all sorts of ways, from pop-ups to internal markets. The way of doing wholesale is likely to change too. Plus if this interests you or there’s a shop you’d deeply love to see your products in, what’s stopping you? As we always say at Holly & Co, there is never a ‘right time’ to start something. So maybe it’s not about sitting around waiting for them to call. Perhaps you should go knocking on their door instead? 

A long contract could mean that you have guaranteed sales for a longer timeframe which is great — but conversely, it also means you could be tied into a deal that isn’t working for you as well as you’d hoped. It’s worth exploring all possibilities to see what you’re comfortable with.

Key takeaways:

  • Large retailers are going to want to take as little risk as possible using their customer power to negotiate 
  • Spend time thinking about what you can afford to agree to and how this will impact your business in the short and long term
  • Make sure you understand all aspects of the agreement before you sign anything 
  • Look inwards to ensure you have the necessary resources available and won’t become reliant solely on this income 
  • Times are changing, so don’t be afraid to ask for what you want

Source:

  1. McKinsey The State of Fashion 2021

Images:

Embroidered receipt: Emma Giacolone.

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