There has been no shortage of commentary on the merits of direct sourcing in recent years, either from the analysts circling the retail sector or the decision makers steering the ship at some of the industry’s biggest brands.
Millions have been invested in cutting out the middleman, particularly in apparel, with Kmart leading the local charge as international players such as H&M and Uniqlo make the merits of the model clear for all to see.
Indeed, the recent collapse of Topshop was, in the words of its operator Hilton Seskin, largely driven by convoluted franchise sourcing, and Surfstitch, which went into administration only weeks ago, was investing heavily in direct sourcing as part of a turnaround in the final days of the operation.
It’s too little too late for former Surfstitch CEO Mike Sonand, but perhaps not so for the likes of Big W and Target, which are both looking to replicate Kmart’s vertically integrated success.
There are two well-understood factors driving the shift: speed to market and marginal cost of production.
The ability of so-called ‘stack-it-high, watch-it-fly’ retailers such as H&M and Uniqlo to utilise direct sourcing to drive comparative advantage in margins has created a cascading effect on the markets they enter, and Australia is perhaps a perfect textbook example. Price deflation sets in, discounting becomes almost systemic and those with the most well-oiled supply-chain come out on top.
As Scott Bradley, the sports and outdoor retail operations manager for Australian Retailers Limited (ARL) explains, things are speeding up. ARL is the buying group for 500 independent retailers nationwide, including the Toyworld and Sports Power brands,
“The world’s becoming a smaller place, product that traditionally may have lasted on shelves for 12-24 months now lasts around three. If you aren’t selling it by then, you have to…cut your losses, turn it into cash and go again,” he says.
Needless to say, there’s not much room in that picture for the intermediary that’s traditionally cushioned the space between factories and high street – the retail buying agent.
It’s leading some to make adverse predictions about the future of what was once the pillar underpinning late 20th century consumerism throughout western markets.
Is the retail buying agent on the way out? Wassim Gazal, the managing director of Hotsprings, a provider of branded, licenced and private label apparel to the likes of Nordstrom, Harrods, David Jones, Myer, Big W, The Iconic and Best & Less, thinks so.
“It’s not about when it’s going to happen, it’s already happening and we’ve been seeing it happen,” he tells IRW.
“[Buying agents] are going to be a thing of the past…you’ve got a lot of factories now dealing directly with retailers, so any business in their right mind isn’t going to pay someone a commission.”
Gazal reckons an increasing number of local traders will take Wesfarmers’ discount department store guru Guy Russo’s experience with Kmart onboard in the coming years to remain competitive, further stressing an already disrupted industry.
But not everyone has such a grim assessment, Sam Cooper, the managing director of Asmara Australia – the local arm of an international buying agent that works with Zara, DKNY, Harris Scarfe, Country Road, Portmans and Super Retail Group – believes there’s still room for a middle man.
“It really comes down to how you actually define the buying agent,” he tells IRW. “If they are nothing more than a mailbox that acts as an intermediary between the retailer and the factory then yeah – their time is incredibly limited and we’ve seen a million examples of that happening.”
“But if you really understand what the requirements are and the challenges that retailers have…there’s a very strong argument that agents have never been more relevant.”
Asmara is increasingly seeking to redefine itself as an educated voice in the world that can value-add with advice, trend forecasting and product collaborations, and has been engaged by retailers with withstanding vertical integration such as Zara and Abercrombie & Fitch to provide diversified product lines.
“There’s undoubtedly a part of their business where they’ve developed a direct model, but they rely upon those additional skills to be able to be brought into the mix to ensure that there’s some diversity in their gene pool,” Cooper said.
“The biggest conversation that we’re involved in with our customers is where they take a garment to their supplier, who says ‘No problem we can make this’. But then when the retailer asks, ‘What comes next?’, the supplier says, ‘We don’t know. You haven’t told us’.”
Gazal agrees on that point, noting that buying agents with specific specialisations are likely to fare better than those without, and that many retailers are increasingly realising that complete vertical integration, e.g. ripping out most of the brand value in the merchandise mix, doesn’t win over shoppers.
He argues that speed-to-market has been a little bit over-done by the sector, and that retailers ultimately still need third-party partners to stand out from the crowd in some capacity.
“It comes down to: how many $2 t-shirts can you actually sell? To pursue growth, these [retailers] are shifting back to some value-add products…but they did disenfranchise lots of suppliers and have lost the opportunity to get intellectual property from third parties with years of experience,” Gazal said.
Cooper believes speed-to-market means nothing unless product is fundamentally correct,
“It’s about relative speed to market – you have to fundamentally have the right product, otherwise speed to market just accelerates the rate at which you disappoint your customer,” he says.
Bradley’s experience is that consumers are still in the market for household names, and that direct sourcing is something ARL uses primarily to fill product gaps where third-party suppliers either don’t have the right offer or aren’t fast enough to market.
“Consumers want brands that they see walking down the street. If you line up three apparel brands next to each other and you’ve got a random person, the chances are they’re probably going to want the brand,” he says.
Either way, he says that third parties will need to get faster in the coming years as consumer expectations continue to increase, particularly as 24-hour product turnarounds hit the horizon.