Richard Birnbaum: We also noticed that the brands were beginning to end distributor contracts and were setting up their own distribution companies in the United States. For example, their cost of goods on an item was 8% of retail. Their biggest cost is not the cost of goods. It’s the marketing and advertising. It’s the romancing of the product.
Their business model was basically working on about 70% margins. Their cost on the goods would be 8% of retail. Then they would sell the goods to their offshore distributors for about 30% of retail. Those distributors would go out to the retail stores and wholesale for about 50% of retail. Some brands have 45% offline discount. That’s the way the model is built.
Since about 2015, we saw that these distributors were starting to disappear and the brands needed to take control of their product and stop fueling the gray market. How does one take control of the product? It’s by getting rid of all these import distributors.
They just went from a business model of owning goods for eight cents a dollar, to now selling it to their own import company. Now their margins skyrocketed to about 80% because the goods they own for eight cents are being sold for 50 cents.
They changed their business model by getting rid of the distributors. They basically told every retailer, “If we catch you back-dooring goods to the gray market once, you get a warning. The second time we catch you, we’re taking the brand away.” By getting rid of the import distributors and being totally vertical, we saw that there was really no place for these brands to move their excess inventory.
ShopWorn was born through a combination of the retailers getting out of the back-dooring business, the distributors losing their contracts, and also seeing how business in Europe was falling apart because the Russian tourists stopped traveling to the big tourist destinations in the Meditteranean. They depend on Russian tourists for their business.
Sramana Mitra: What was the thesis of ShopWorn?
Richard Birnbaum: For the consumer side, we realized that we would have a long, hard journey. It has been a couple of years now of proving the concept. The concept was two-fold. We needed to prove to ourselves that the consumer would accept buying goods that were gently handled, store-displayed merchandise, and virtually indistinguishable from new.
Most importantly, they’re not being sold as new because once you sell goods as new off-price, it’s gray market. That’s all there is to it. If you’re selling new and it’s off-price, it’s gray market. We needed to prove that the consumer would accept the shop-worn concept of goods that were not being advertised as new.
Then we also have to convince brands that all the goods that the stores need to continue to have the latest, newest, and the greatest on the floor at all times. Let’s work together where we can buy the store’s aged inventory. The brand will bill us directly. You’ll give the store a credit. You get to sell your authorized dealers more goods at full margin. We’ll buy the aged inventory.