Affairs

The downward spiral: Why Everlane, Mizzen+Main, and Lululemon don’t discount.

On more than one occasion in recent months, discounting has been called a drug that’s hard to quit. Mizzen + Main co-founder Kevin Lavelle wrote that its effects were devastating for both shoppers and companies, a powerful addiction “that completely alters one’s perspective [and makes it] almost impossible to function without it.” Speaking to the Business of Fashion, Tiffany Hogan, retail analyst for Kantar Retail, likened it to a dopamine hit, a tap of the vein, upon which consumers quickly develop dependency. What happens, she asked, once the drug is taken away? Not unlike true addicts themselves, a brand’s customers “just kind of [melt] away”.

No maneuver in retail appears to be as easy to roll out, yet no strategy is as detrimental to a retailer’s long term prospects as the heavy discount. It is a palliative pill: wonderful for the consumer in the short run, but ultimately bad for both business and shoppers over time. It commoditizes the brand, forcing companies to differentiate on price. Margins are eroded, and shoppers come to expect (and then only buy) the markdown price, rather than full retail. This leads, eventually and inevitably, to a slow decay in product quality and value.

It’s a slippery slope, and a race to the bottom — as sharp-eyed retail expert, Robin Lewis, is fond of describing it — a “cutthroat” strategy that yields few long-lasting benefits. “The great ‘value strategy’ charade is that retailers actually believe discounting to be a whole new market for them,” he recently wrote at The Robin Report. “What they are really succumbing to is a competition for cheap, cheaper and cheapest, when they should be pursuing good, better and best.”

If deep discounting characterizes the old guard, its rejection signifies a new generation of thinkers, leaders, owners, and companies.

Three big problems.

That, of course, might be asking too much of them. Bold, transformative thinking does not come easy for stagnant corporations, who tend to be as agile, graceful, and swift in changing direction as a late-career Shaquille O’Neal. That helps to explain, in part, why they resort to sales slashes, particularly the 40 percent-and-above renditions shoppers have come to expect recently. Still, what other problems are to blame?

The first, and most predictable, is the betrayal of product integrity for the purposes of scale. Witness the onslaught of outlet stores (which have been increasing over the years, and for some retailers outnumber their standard stores), the deep sales dives among the likes of J.Crew, Bloomingdale’s, Macy’s, Gap — even Nordstrom, which, though having shown good foresight in the acquisitions of web-based upstarts Trunk Club and Hautelook, has experienced recent setbacks since entering the discount stakes.

The second problem, also related to scale, is systemic to the industry itself: The need to constantly add more and more products at regular intervals, flooding the marketplace with goods that are newer, but rarely better. The thinking here is breadth instead of depth. Rather than editing, refining, and slowing down, discount-heavy brands continue to add. This perpetuates an endless cycle: there will always be excess inventory, which must then be sold, which begets outlet stores, which begets cut rate sales — all for the cycle to repeat itself again and again.

The cruel irony here is that the size of say, J.Crew and Macy’s, and the fact that they’re public companies, leaves them with a lack of options. This is problem number three. Readers will notice that of the many established brands that are struggling today, each is massive, bloated, lurching. This leaves them exposed, vulnerable in times of economic distress (i.e., recession, and consumer tightening). As excess inventory goes unsold each season, unwanted, undesired, these retailers are left in need of shedding a few pounds. The lure of the discount, then, becomes too hard to resist. It provides a short term boost to the bottom line and the illusion of growth, but at the expense of brand reputation and sustainable profit — two vital arteries for a business’s overall health.

Modern luxury companies are asking why.

But leave it to the young and naive to ask the improper questions and ruffle feathers. For decades, the received wisdom has been to overstock on merchandise, and sell the excess at near wholesale prices at the end of the season. But the smart thinkers have rightly questioned the merits of this. Is that the best route, they ask, just because that is the way it has always been done, or is there a better way?

For them, the answer is yes. Modern luxury companies have figured out the formula, and it’s remarkably simple: create less merchandise than will sell (and predict, if possible, the sell-through rate, with pre-orders), keep demand high. Embrace the waiting list, as Everlane, Glossier, Caraa, and Alala, among others, often do. Never discount; preserve the standing of the brand. These tactics certainly do not work, however, or at least for very long, if product standards are below par. And each of these modern luxury brands are fundamentally product-driven before all else.

Yet if deep discounting characterizes the old guard, the big and the rotund, its rejection signifies a new generation of thinkers, leaders, owners, and companies. Starting from scratch and with a blank slate, these brands and their founders have bucked convention and given the practice a swift kick to the backside.

So far, we have already been introduced to Mr. Lavelle of Mizzen + Main. Alongside him sit two figures our readers will surely be familiar with, Michael Preysman, a man who preaches “radical transparency” as chief of web-based luxury basics label, Everlane; plus the pugnacious Chip Wilson, who currently heads family-operated Everlane (and Lululemon) competitor, Kit & Ace. In founding Lululemon in 1998, he established a strict no discounts policy — a tradition that’s continued, for the most part, under subsequent CEOs Christine Day and now Laurent Potdevin, since Mr. Wilson stepped down in 2012.

Mr. Lavelle’s, Mr. Preysman’s, and Mr. Wilson’s chosen avenue is, without question, a lonely one. Few retailers have to courage to take this road, and traditionally it has been the blue hair firms residing at highest end of the luxury spectrum that have upheld it. Hermes, for instance, is notorious for never slashing prices. Its products carry a prestige because of that, and there is always a demand, no matter how frivolous the item. And they certainly are not above testing the limits of consumer devotion: It has even gone so far as to repackage its cutting floor leather scraps to sell them as high-priced gift boxes.

It makes sense that modern luxury leaders are boycotting discounts.

Of the three founders, Mr. Wilson was the earliest to embrace the idea of boycotting the discount, but Mr. Lavelle and Mr. Preysman have so far been the most steadfast, given that Mr. Wilson’s Kit and Ace does discount its products. Between them, Mr. Lavelle is the most vocal and most fervent in the stance; Mr. Preysman has relented once: During the 2015 post-Christmas season, he offered a one-off sale, with a sly twist that was very much an Everlane move. He called it the “Choose Your Price” promotion, and items were offered at three price points. More than just a sale, shoppers were confronted with what effectively amounted to a moral decision — to purchase the item at cost plus shipping (which did not cover staff overhead), to purchase at a price where Everlane would break even (and cover the staff), or to buy at the highest price point which would see Everlane pay its staff, meet all costs, and make a profit (or invest in growth, as the brand cleverly rephrased it).

Once a brand has crossed over into “masstige” and lowered its standing among consumers, it becomes an immensely difficult battle, when they decide to swim upmarket again, to shed that nasty image.

While creative, it was reminiscent of the unspoken moral limits of the endless vacation policy flaunted around Silicon Valley: take as many vacation days you want, they insist with a wink, but everyone knows they certainly never mean that. Everlane’s implied directive was perhaps a more overt, a little more “transparent,” as it were. Still, 90 percent of shoppers chose the lowest price.

That opposition to discounting would come from founders within the emerging modern luxury industry is no coincidence. For one, it displays the trademark sense of calm confidence in the product that this group is quickly becoming known for. This dedication to product is a modern luxury standby, and a characteristic of specialist brands in particular.

Still, it is the people behind these companies that give them this spark. Take our man Mr. Lavelle, who refuses to discount“because we believe in the quality of our product, our commitment to our supply chain, and delivering the best possible customer service experience we can.” He is keenly aware that his company’s products are not for everyone, and only for the right set of shoppers. He is comfortable in that knowledge; larger retailers most certainly are not.

As for Mr. Preysman, the full price mantra feeds into his mission to constantly refine the product, to make it better, and push it ever closer to perfection according to the standards of the brand. This is not a man who is prone to what the brilliant author Nassim Taleb calls neomania, which means chasing novelty for its own sake. At Everlane, products are developed one at a time, based on what Mr. Preysman, creative director and Lean Luxe subscriber Rebekka Bay, and team think is needed. They order less than they think they will sell in order to avoid excess merchandise and there are no seasonal collections.

Surprisingly, rejecting the discount is also quite consumer-centric. The eternally-wise Ben Franklin said it best, of course, when he offered this observation: “The bitterness of poor quality remains long after the sweetness of low price is forgotten.” For shoppers, the heavy markdown may alluring, but the “no sales ever” stance, rather than a negative, is a strong signifier of trustworthiness in a brand.

The statements from Mr. Preysman’s Everlane, Lululemon, and Mr. Lavelle’s Mizzen+Main are bold and unflinching. Shoppers can rest assured knowing that quality standards will not erode (Lululemon’s sheer legging anomaly aside), and that these brands are not resorting to overcharging customers for products that are unworthy from the start. They are also saying, “Yes our products are worth the retail price and as a customer, you will cherish it more because of it.”

But this stance also requires foresight and discipline. It takes superb maturity and a great deal of resilience to fight the urge for the temporary discount boost at the expense of preserving a long term reputation. Once a brand has crossed over into “masstige” and lowered its standing among consumers through practices of ubiquity, it becomes an immensely difficult battle, when they decide to swim upmarket again, to shed that nasty image. Likewise, as companies bow to the discount, they face an uphill climb to repair their reputation in the minds of shoppers as a brand to cherish.

It’s likely that if more retailers were to follow the example of Everlane, Mizzen+Main, and Lululemon, they would find themselves suffering from far less anxiety. It might require a longer wait, but these tactics can turn out to be quite worthwhile, provided brands and their leadership have the courage and the foresight to hold the line. The 2015 holiday season for Lululemon, is a wonderful illustration. As 40 and 50 percent promotions swirled around them — as they tend to do around Christmas — the company held firm like a rock in heavy seas. It ended up selling 90 percent of its merchandise at full price that season.

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