Entering the fashion industry and deciding on how to distribute your products can be complicated. What is retail and wholesale? Who uses them and why? What are retail and wholesale prices and why are they different? In this short background piece, FashionUnited dives into all the above and more.

The difference between retail and wholesale

1. Retail and wholesale definitions

The difference between retail and wholesale in fashion comes down to how products are sold and who they are sold to.

Retail refers to the sale of fashion items to consumers. This can happen in physical stores, online stores, or a combination of both.

Retailers are the businesses that sell directly to consumers. They buy fashion items from wholesalers (often the fashion brands themselves) or directly from the manufacturer and then sell them to consumers. These businesses range from independent retailers with one or more fashion stores to well-known department store chains. Retailers usually have a wide range of fashion items and focus on providing a high-quality shopping experience and customer service.

Wholesale refers to the sale of goods in large quantities to a "middleman" / other companies. Wholesalers supply fashion items to retailers, such as boutiques, department stores or online stores, who then sell the products to consumers.

2. Which fashion companies engage in wholesale and retail?

Many big names in the fashion industry operate both wholesale and retail. This means their brand is sold through multi-brand retailers (independent boutiques) and also through their own brand or flagship stores.

For the fashion industry, opening flagship stores is a relatively new development that has been embraced by more and more fashion brands since the late 1990s. Just think of major clothing brands, such as sports brands Nike and Adidas, for example. Their products are available at department stores, boutiques, and sneaker stores (or ‘intermediaries’), but also in the labels' own stores where they are sold directly to consumers.

Some fashion brands focus more on retail and others more on wholesale, but you usually see a mix of both retail and wholesale. For example, Garcia, Levi's, Filippa K, American Vintage, Daily Paper, Fabienne Chapot, G-star, Ganni, Maje, Ugg, Birkenstock, Triumph, Crocs, Xandres, Dstrezzed, Louis Vuitton and Totême all operate through both wholesale and retail.

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3. What is the difference between wholesale price and retail price?

The wholesale price is the price the retailer pays to buy a piece of clothing from a wholesaler or the manufacturer (usually the clothing brand).

The recommended retail price or retail price is the price that the consumer pays when he buys the product in the store.

How are these prices determined?

The wholesale price comprises costs of production, but also factors in the costs of transport and/or import costs, plus a profit margin for the manufacturer/product or wholesaler. The latter is the money the brand earns from selling a garment to the retailer.

The retail price/suggested retail price includes the wholesale price plus a retailer's operating costs (such as rent, staff salaries and marketing costs) and a profit margin for the retailer. The latter is the amount that the retailer earns from the sale of an item of clothing to the consumer.

Here is an example. A jacket from a clothing brand has a wholesale price of 200 euros. An independent retailer therefore pays the clothing brand 200 euros to purchase this jacket. In the retailer’s fashion store, the jacket goes on the shelves for 540 euros (because the margin is often around 2.7x the wholesale price of 200 euros.

"I think many people don't know that only a small part of what they pay for a product in a store goes towards a retailer’s profits," said independent retailer Marion Mulder in conversation with FashionUnited. "It’s not particularly transparent for the consumer."

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Pricing strategy and fashion clearances

If you shop at a flagship store or a brand's online store, you may find greater discounts than buying the same item from an independent retailer.. That is because if they sell directly to consumers in their brand, flagship or online store, they bypass the intermediate costs and margins of retailers. The brand has more room to offer discounts without sacrificing their profits.

In depth redenering:
- Purchase price versus wholesale price: When an independent retailer buys fashion products from a clothing brand, they buy them at the wholesale price. This price already includes a surcharge on top of the item's actual cost of production. As a result, the retailer already starts with a higher base price than the clothing brand itself.
- Margin: After purchasing at the wholesale price, the retailer then has to add its own profit margin to cover operational costs and make a profit. This increases the selling price for the consumer.
- Fixed Costs: In addition, both independent retailers and brand stores have their own operational costs, such as rent, personnel, and marketing. Depending on their location, size, and business model, these fees can vary, which can also affect the discounts they can offer.

"If I give a 30 percent discount (on the retail or recommended retail price, ed.), I'm essentially sacrificing my profit," Mulder explained .

4. You also have direct-to-consumer brands

A direct to consumer (D2C or DTC) brand sells products directly to the consumer, without going through traditional retailers or wholesalers, often through online platforms, but it can also be done through own-brand stores or pop-up stores. This gives them a direct relationship with their customers and allows them to avoid traditional distribution costs.

At the beginning of 2010, DTC brands really emerged as the trend took off. Well-known direct-to-consumer brands include Dutch eyewear brand Ace&Tate, clothing brand Reformation and sneaker brand Allbirds.

Direct to consumer brands have more flexibility in their pricing strategy. They can keep the margins that would otherwise go to intermediaries. As a result, they can benefit from higher profit margins and/or offer their products to consumers at lower prices. You also see some DTC brands choosing to be transparent about their cost structure, which can lead to a perception of "fairer" prices. For example, Everlane, a clothing brand that offers high-quality basics, makes it clear to consumers how much each product costs to make.

Sources:
- Interview Marion and John Mulder, owners of fashion store Mulder Mode in Waddinxveen, The Netherlands, November 2022.
- Parts of this article text were generated with an artificial intelligence (AI) tool and then edited.

This article was originally published on FashionUnited.NL, translated and edited to English.