During Nordstrom’s latest investor day, on Thursday, President Pete Nordstrom spoke about upcoming changes to the company’s strategy. Among them: It plans to grow its partner and shared revenue streams from 5% of the business to 30%, and concessions will be the primary method of doing so.
Concessions and e-concessions have become popular models in luxury fashion retail in the last year. Farfetch’s CEO Jose Neves said in August that the company has added 20 of its top brands to an e-concession model, and Kering has been on a hiring spree in the last three months to fill roles related to managing e-concession relationships with retailers.
But what are concessions, and why are retailers so interested in them?
In short, concessions and their online counterpart of e-concessions are ways for brands to sell through a retailer’s platform while retaining more control over pricing, marketing and product catalog than they can have with a traditional wholesale model.
The brand is responsible for designing a designated section of a retailer’s brick-and-mortar store — or its online store, in e-concessions — as well as defining the featured pricing, selecting the product and even hiring the store associates. For e-concessions, the brand is responsible for the shipping, as well. Meanwhile, the retailer is responsible for providing and maintaining the space for the brand. The brand keeps most of the sale, while the retailer takes a small commission. The retailer benefits from not having to take on the risk of buying inventory, while the brand benefits from gaining awareness while still maintaining more control, avoiding frequent sore spots like store-wide promotions.
For example, in late 2019, Suitsupply opened its own shop within six physical Nordstrom stores across the U.S. and Canada, setting its own prices and inventory and sharing the revenue from each sale with Nordstrom — Suitsupply didn’t pay for the space. The revenue breakdown for a concession varies across brands and retailers.
In a traditional wholesale model, Nordstrom would buy the clothes and have control over how they’re sold. Even a shop-in-shop, if not based on the concession model, the brand typically has no input on how the product is sold and at what price. In a concession model, the brand hires and pays for the staff and operations for their section of the store.
“Extending beyond our traditional wholesale model allows us to increase selection, sharing the benefit and risk with our partners,” Pete Nordstrom said on the investor call. He also noted that the concession model is more flexible, allowing brands to swap out new product on the fly to match trends, rather than Nordstrom being stuck with whatever inventory they bought until it’s sold.
E-concessions are the same idea, but in an e-commerce setting, as Farfetch has done with Mulberry, for example. Brands are given direct control of the pricing and photography of their product and have their own section of the online store that they can design. These programs are structured with the majority of the sale going to the brand and a commission going to the retailer. An e-concession is distinct from a marketplace model like Amazon’s and Farfetch’s standard online stores, which are not divided by brand and the brands are not given special control of how their product is displayed — although both Amazon and Farfetch do have separate e-concession sections.
The fastest growing version of the e-concession model for fashion brands is Alibaba and Tmall’s Luxury Pavilion, featuring a suite of online stores run by luxury brands from Coach to Valentino. Luxury Pavilion has exploded in popularity over the last year, adding more than 50 new stores with the help of Tmall’s head of fashion and luxury for Europe Christina Fontana, who’s shepherded the brands onto the 3-year-old platform. Amazon’s Luxury Stores, launched in September of last year, also runs on concession, with brands like La Perla and Oscar de la Renta having their own separate sections of the site.
A regular Amazon brand store, meanwhile, requires the payment of a fee for the store, while an e-concession only requires commission on each sale with no fee.
Concessions have historically been more popular in Asia and Europe — stores like Selfridges in the U.K. and Alibaba in China have been doing concessions for years — but they’ve only started catching on among U.S. retailers in the last three years. Retailers in the U.S. were wary for many years. Prada stopped selling at Barneys in 2011 after it requested to move to a concession model and was denied by Barneys.
The concession model and wholesale model both differ from drop-shipping, which is picking up traction on retailers’ e-commerce sites. Drop-shipping only means that the product is shipped straight from the brand, even if it is displayed on the retailer’s website. Drop-shipping does not imply that the brand has any control over pricing and it doesn’t grant the brand a designated section of the online store that they can customize.
The concession model currently holds a lot of appeal for both brands and retailers. The beginning of the pandemic put a wedge between wholesalers and brands, as retailers canceled orders and brands were forced to transition to more direct-to-consumer sales. The balance of power shifted heavily to the brands, which learned how to function without the help of retailers, which still need brands’ products to survive. That means brands can negotiate for concessions. With concessions, brands keep the control they’ve become accustomed to in their DTC businesses, while retailers can lure back the business that fled at the beginning of the pandemic.
In a concession model, the revenue brands earn is typically higher than in a traditional wholesale model, while retailers’ revenue lower, according to Kering. When the luxury group began shifting more of its retail partnerships to e-concessions in 2019, the company’s chief digital officer Gregory Boutte said in an investors’ call, “Each time we move from wholesale to a concession, we see our top line increase in a material way.”
With buy-in from brands and online retailers like Farfetch, and now more traditional retailers like Nordstrom coming around, e-concessions are on their way to making up a bigger share of brand-retailer partnerships in the future.
“Concession is primarily used with luxury brands,” Pete Nordstrom said. “It gives brands direct control of merchandising while gaining access to our customers. We see significant opportunity for revenue share that’s less transactional.”