Digital concessions can provide the answer to the question that has troubled brands for many years: how to cope with the growth of the online channel that has led to a loss of control over distribution, and in particular a loss of control over the price and presentation of the brand’s products.
For some brands the answer lies in using selective distribution systems. But in the last few years there has also been a new kid on the block – the digital concession.
Taking a concession on an online platform has become a way for a brand to reach new customers, whilst retaining control over price and presentation. In addition, the digital concession is a flexible model, as the brand and online platform can decide how much involvement each of them has in the customer order process.
The most obvious examples of online platforms which offers different options to brands wishing to sell on its platform are Amazon and Zalando. Brands can sell their products on Amazon and ship the product themselves, or opt for “Fulfilled by Amazon”, where the brand stores its products in Amazon’s distribution centre for delivery by Amazon. Amazon gets paid commission or subscription fees, depending on the precise model chosen. Zalando offers a similar range of options to brands via its Partner Programme.
Below we consider the legal issues and commercial benefits for brands using digital concessions.
The legal issues
The legal issues concerning digital concessions depend on the law governing the agreement between the online platform and the brand. As a result, determining the governing law of the agreement must be the starting point for any brand considering an agreement sent to it by an online platform.
The online platform may be based in and focused on another country, and indeed may have been chosen by the brand for that very reason, as the brand wishes to gain exposure to international customers. Whilst the brand should press for its own country’s law to govern the agreement, whether this attempt will be successful will come down to the brand’s negotiating strength. However, a brand which accepts an agreement governed by another country’s laws is also likely to be accepting that all disputes will be heard by that country’s courts. Brands should be aware that in this situation if a dispute arises with the online platform, they could be faced with having to pursue or defend legal proceedings in another country under an unfamiliar legal system.
Where English law applies, the legal issues which a digital concession raises include the following:
- Fulfilment of orders and returns by the online platform: If the online platform is to handle fulfilment of orders, then stock will need be transferred by the brand to the online platform’s distribution centre. As a result, it will be necessary for the agreement between the online platform and the brand to address the issue of when ownership of the stock and the attendant risk of loss or damage will pass from the brand to the online platform. Whilst ownership of the product will usually transfer to the online platform immediately before the product is sold to the end customer, it will be important to the brand that risk in the product transfers at the latest when the product reaches the online platform’s distribution centre. The brand will also want the agreement to contain robust obligations on the online platform to insure and take care of the products whilst they are held at the online platform’s distribution centre prior to their sale to the end customer.The same issues arise in relation to returns – the brand will be concerned that products which are returned to the online platform are insured and stored properly by the online platform once received, whereas the online platform will want the brand to commit to its returns policy.
- Fulfilment of orders by the brand: The principal issue here is the need for the online platform to ensure that its brand is not damaged by the fashion brand which has taken a digital concession.If the brand is to fulfil orders placed on the online platform’s website, the online platform is likely to want to impose strict obligations on the brand regarding delivery timescales which must be met and which are in line with what the online platform offers customers.
- Ensuring the smooth operation of the online platform’s website: One of the key advantages for a brand in selling on an online platform is the superior digital infrastructure and expertise of the online platform. The agreement will therefore need to include obligations on the online platform to maintain the smooth running of its website, and to rectify any problems promptly. If problems occur which cannot be rectified within the agreed timescales, the brand should consider what the agreement provides in terms of a remedy for the brand for the breach of contract by the online platform.
- Reporting on sales and stock levels: A brand will want to ensure that it has visibility of the sales made and the stock held by the online platform. With digital concessions, this should be more straightforward than with a bricks and mortar concession, as the online platform should be able to provide real-time information via the brand’s account page. However, the agreement must address the online platform’s obligations in this regard, including what is to happen if the online platform’s site is down or experiences technical issues.
- Maintaining stock levels: Reporting on stock levels is one thing. As in respect of fulfilment of orders (above), the online platform will want to ensure that the brand has the stock to meet the orders.
- Intellectual property right protections for brands: The brand will want to ensure that it restricts the right of the online platform to use its trade marks, and this should be addressed in the agreement.
- Personal data: How will personal data be collected by the online platform? Will it be shared with the brand? What of consumer consent?
- Termination: In order to maintain the flexibility of the digital concession arrangement for the brand, the agreement should allow for the brand to terminate the agreement by the giving of notice and “without cause” if the arrangement does not bring the benefits anticipated – and without incurring any charges!
The commercial benefits
Hugo Boss, Joules, and Fat Face are just three brands using digital concessions. So what are the commercial benefits for the brands?
For Hugo Boss it is a question of increasing control of the brand’s distribution online. The issues which it has said it is concerned with are:
- presentation; and
Hugo Boss sees the arrangement which it has with Zalando as recognition of what Hugo Boss as a brand does well and, more particularly, what Zalando can offer – namely digital infrastructure and expertise.
Flexibility, meanwhile, is the issue for Joules. In the case of its relationship with John Lewis the movement from wholesale to concession means that the brand determines the retail proposition and is not dependant on the relevant buyer’s budget for the season.
For Fat Face using an online platform (such as Zalando) enables it to test the demand for its brand in new markets.
Overall, using an online platform should enable the brand to retain control over the combination of product, brand representation and price.