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*Teaming up and buying together in order to reach scale economies seems like a natural step for international department stores, since the goal of these large retail organisations has always been to reach optimization in terms of procurement to maximize margins. In addition, since they are usually operating on national markets, an international collaboration seems logical.

This is the reason why international retail associations, such as the IADS, have explored the subject for years, trying to articulate a working solution for their members, be it at the material level for private labels, at the product or label level for national brands, or even by suggesting to team up to buy or create from scratch shared brands which could be seen as private labels for a group of stores.

We are reviewing in this paper a series of options drafted by the IADS dating back to 2001, in order to draw some conclusions and put them in comparison with what we know today.*

What are we talking about and why is it important in 2022?

Department stores are increasingly under the pressure of specialty retailers that have been developing internationally. Already back in 2001, as retail was becoming global, department stores' relative purchasing power was declining. The question of boosting their buying power was arising through international M&A activity, the development of synergistic formats or alliances, and through harnessing the strength of collective buying with several department stores. Post-Covid, the pressure is even stronger as brands are increasingly going directly to customers, as shown by luxury groups (LVMH, Kering) or large sports brands (Nike), to increase their margins at the expense of the retailers.

This overall situation is even more critical as competition is becoming much more aggressive, especially with the growth of e-commerce which challenges the margins that can be reached by retailers: while retail prices remain the same, customers now expect some services that were not generalized pre-Covid (such as the free delivery) which are putting pressure on the core business model. As a solution to recuperate some points of margin, department stores can work on their logistics (a notoriously difficult topic in 2021 and 2022), on their overall organization (size of the workforce, working methods and systems), adjust their business model (by monetizing their stores and digital platforms), but also by lowering their overall product and material acquisition costs.

But collaborative procurement is not just about "purchasing power". Even at a time when raw material prices are skyrocketing, most department shops compete on differentiation, style, and fashion rather than pricing. As a consequence, collaborative procurement is, first and foremost, a strategy to improve the attractiveness of the selection by elevating the status of department store-exclusive brands or collections.

To dig into the topic in a rational way, different aspects and constraints are to be taken into consideration:

• assess the issues with cultural differences and various consumer attitudes,
• review the different forms of collaborative procurement,
• review the framework and operational concerns for such a project.

Can collaborative procurement and cultural differences be reconciled?

There are 2 opposite ways to see cultural differences.

On one hand, customers are often considered too diverse to make international procurement successful and effective as tastes, styles, and sizes are too different. It is not difficult to figure out that ladies in Stuttgart will not be attracted to the same products as in Berlin, New York, or Paris. They can also have a different perception of brand names. Furthermore, customers’ rationale might also significantly differ: in one country, the price may be the most important element, whereas, in another, style is more significant. The lack of success or failure of some international retailers (Gap, Marks & Spencer or Muji for instance), when they trade outside their home country, highlights the challenge of dealing with the same concept in several countries. As a consequence, from this perspective, beyond all the operational challenges of joint procurement (quotas, price structures, import duties, sizes, etc…), the customer, who is the ultimate decision maker, does not buy in the same way, the same products, or in the same places. As a result, there might be no use in seeking collaborative buying.

On the other hand, customers are increasingly attracted to the same international brands, whether it’s Louis Vuitton, Ralph Lauren or H&M, Zara and now Shein. Such successes, especially vertical specialty retailers who hurt department stores most, prove that the same clothes can be sold all over the world. While brands are even more globalized in 2022 than in 2001, they are now succeeding in almost all countries, with harmonized image and communication channels making the brand’s perception equivalent everywhere.

Is there a way to reconcile both points of view? While cultural differences are unavoidable, many of the same products are sold at department stores (cosmetics, lingerie, hosiery, accessories, luggage...). An analyst stated: "The killer of department stores is going to be that they all think they're distinctive, while Mango feels it can sell anyplace." Although it may be simpler to organize common procurement in a single country, the retail environment shows that customers often respond to the same brands.

In 2022 though, department stores desperately need to differentiate if they want to survive against the competition, suggesting that department store-specific products might be worth considering, even at the international level between a handful of players sharing those exclusive items.

How can collaborative procurement be achieved?

As suggested in the introduction, there are many ways to consider joint procurement, at several different levels:

• Buying private labels from one another,
• Developing brands together,
• Subcontracting together special ranges,
• Harnessing buying power by teaming up,
• Acquiring a brand and operating it collectively.

When looking at each option in detail, there are pros and cons in each of them.

Buying from one another. Private label ranges are available at most department stores and may be of some interest to others. Differentiation has to be made between umbrella brands (Manor’s or Magasin du Nord’s store) for which often even the smaller stores can reach the minimum quantities required to make the labels work, and private brands which are me-too or exclusive life-style brands (The Mash Up at Breuninger or Chester & Peck at El Palacio de Hierro for instance) generating a higher mark-up and sales per square meter, but are at the same time much more expensive to develop and market.

Among the IADS department stores’ private brands, there are a few that others could pick up. A team could be given the task of putting together a catalogue of the main private brands as some of these might have the potential if several stores were interested to become successful international brands. One challenge would be to agree on an acceptable price structure making it possible to sell profitably, as well as to overcome internal opposition, as experiences in the past showed that the various buying teams could feel threatened by such a cooperation and therefore not really willing to work together.

Developing brands together. In this model, several stores get together in a structure that develops one or several brands. In the past, the initiative called EBO (European Brands Organization) was a joint venture between five department stores with equal ownership and entirely responsible for the collection's development (this structure does not seem active anymore nowadays). The first key learning from this venture is that it worked because stake-holding department stores had a similar size and positioning. The second one is that the venture must operate independently from its shareholders and have the latitude to sell to third parties as long as they do not compete with the shareholders. But building a lifestyle fashion brand is a long process and requires a long-term commitment from all parties involved. It may be easier to create brands for less glamorous non-apparel categories.

Joint subcontracting of special ranges. This model is all about commissioning existing well or less well-known manufacturers to develop exclusive ranges for a group of department stores, possibly with a separate brand name (the “Armani for Department Stores”, for instance). Nowadays, unique collaborations with brands could be seen as the modern variant of this model as any other variant does not seem valid anymore.

Harnessing buying power. An obvious option is to pool department store purchasing power on common items which could be easily listed. This would imply the creation of a purchasing organization that would act on behalf of the department stores when negotiating. In 2022, this option might be less relevant as some brands are questioning their very presence in department stores and are increasingly trying to go direct-to-consumer, meaning that such an option would relate to smaller, and somewhat less attractive brands, questioning the economic viability of this approach. With the supply chain disruptions and the high costs relating to digital, the department stores’ focus is put on margins as they are increasingly hard to maintain. Under such circumstances, harnessing the buying power on raw materials (cashmere, cotton threads, etc…) could represent an additional option.

Brand acquisition in collaboration. The ability to jointly acquire an existing or emerging brand is also a possibility for a group of department stores, although there is no modern example of such a venture. Other retailers do proceed to brand acquisitions, such as Farfetch with the acquisition of the New Guards Group (Heron Preston, Opening Ceremony…) or the cosmetic brand Violet Grey.

Anticipating the issues in order to move forward

In 2001, the attitude of buyers regarding collaborative procurement was not the most positive: their culture and training were focused on individual achievements, and in the past, they did not collaborate easily. Twenty years later, even though mindsets and working methods have evolved, it is likely that, to be successful, the human aspect and the international articulation and roles will be a critical point to be considered.

An alternative is to develop a separate organization. Creativity would be required when it comes to quotas and custom duties impacting price structure and quantities. Ordering procedures, logistics, and impacts on manufacturing quantities should not upset the position of the initial seller of the brand. Price structures should be reasonable as both the buyer and the seller should see some benefits. However, the key question remains to know whether retailers, who currently are steering their digital transformation and looking at all the CSR-induced changes they need to consider, would have enough resources and willpower to team up on a project managed with other companies, leaving them with a limited degree of control while requiring full involvement from their end.

We believe that there are some possibilities of collaboration between department stores. After all, they individually spend huge amounts of money in product development. As a consequence, it should be possible to tap into private labels and take a few of these brands global. Processes could be designed to facilitate collaborative action, especially if developed early on. However, a key element would be that all companies teaming up together are of the same size in order to avoid any lack of balance, or they should only focus on a specific aspect of the collaboration, and not its entirety.

Credits: IADS (Dr. Christopher Knee, modern reading by Justine Fanget)