The retail and wholesale business models, separately and in conjunction with each other, are collapsing. Along with their demise, the actual terms, retail and wholesale, will literally cease to exist. In fact, as I write this article, major traditional wholesale brands such as The North Face, Timberland and other VF Corporation brands, along with PVH brands, Calvin Klein and Tommy Hilfiger, among many other giant wholesale brands, are achieving faster and more profitable growth in what they are referring to as their DTC (direct to consumer, including e-commerce) business, than through their traditional wholesale to retail to consumer model. Essentially the DTC model that these wholesale brands are adopting is simply the branded apparel specialty retail model that was launched by the Gap, Esprit and other brands in the 1960s. A phrase often used to describe the model is “the brand on the door is the brand in the store.” Likewise, and to some degree in response to their branded wholesale vendors’ accelerating focus on the DTC model, traditional retailers — from Nordstrom and Macy’s to Walmart –- and across all retail sectors, will be forced to transform their business models to better control and accelerate their own brands’ direct engagement with consumers. In fact, Nordstrom and Macy’s, to cite two examples, are proactively beginning to transform their models.

My co-author Michael Dart and I predict in our recently updated edition of The New Rules of Retail that the final transformed model for these traditional departmentalized retailers, will resemble enclosed mini-malls or lifestyle centers as powerful “go-to” entertainment destinations which will include events, restaurants, shows, “how-to” seminars, etc. They will also house their own private or exclusive branded “boutiques” (up to 70% to 80% of total merchandise), and the remaining space will be leased and operated by select, compatible outside brands, creating what some refer to as the “concession” model, widely used throughout Europe and Asia Furthermore, we predicted these soon-to-be-transformed traditional retailers, will also roll out their own private branded specialty chains, such as Macy’s INC or Alfani brands.

The collapse of the old retail/wholesale model is being driven by the 21st Century consumer, who is technologically empowered to an unprecedented level. Their expectations today are that they must be able to get whatever their hearts desire, wherever, whenever, how, and how often they so desire, instantaneously, affordably and with an awesome experience to boot – all because they can.

Simply put, the old traditional retail/wholesale model cannot provide the new consumer that level of satisfaction. The traditional model is conflictive, adversarial, complicated and is not supportive or enhancing of either the retail or wholesale brand.

The only way traditional retail or wholesale brands can deliver the expectations of today’s consumer is by having total control over their value chains. Thus, from a macro perspective, all winning brands and retailers will be, if they are not already, pursuing direct-to-consumer business models on multiple distribution platforms, meaning maximum control (ownership or highly collaborative) over all elements of the value chain from creation to consumption.

Quantitative Research Supports The Collapse

Further support for our prediction comes from a recently released study conducted by Wells Fargo Securities, which analyzed five years of data on retail and wholesale performance. The study compared 11 branded apparel and footwear companies with 42 retailers, across the department, discount and grocery store sectors. Brands such as Calvin Klein and Tommy Hilfiger within the PVH corporation; Seven for All Mankind, Vans, Timberland, Wrangler and Lee within VF Corporation; Nike, Hanesbrands and Ralph Lauren were compared to retailers including Macy’s Inc., Kohl’s, JCPenney, Gap, The TJX Cos., and Urban Outfitters Inc.

In general, the analysis revealed that the wholesale brands were generating more profitable growth as well as stock appreciation than the traditional retailers by expanding vertically, opening their own stores, including international, and accelerating their online business.

While the study verified the fact that the DTC brands are growing faster and more profitably under their own vertical control than the traditional retailers, it did not provide the more important strategic insight as to why.

In our book, we provide the reasons for the superiority of this vertically integrated model, that we labeled “The Master Model: Omni-Brand to Consumer” (Chapter 10). Following are the key points in that chapter outlining the integrated advantages:

1. Better Potential for Creating a Neurologically Connecting Experience
2. Easier, More Intimate and Personalized Shopping Experience
3. Single Dedicated Space for Cohesive and Total Lifestyle Presentation
4. More Focused, Knowledgeable and Effective Associates
5. Real-Time Research, “Big Data” Collection and Relationship Building
6. Smaller, Flexible Footprints for More Accessible Locations
7. Neurologically Defined Experience as Preemptive Destination
8. Control of One Simpler, Branded Value Chain

The Model to Beat or Imitate

Conversely, we postulate that the traditional major department stores have the strategic potential to gain competitive advantage over the branded specialty chain model. Here’s an excerpt:

Based on the strength of this omni-brand model and its rapid growth and share dominance in some categories (particularly apparel, primarily taken from the department-store sector), one could argue that some of the major department stores are fighting back with the same weaponry used against them.

For example, there is no question that Macy’s, Bloomingdale’s, Belk, Nordstrom, Lord & Taylor, Neiman Marcus and others are all focused on elevating their respective shopping experiences (friendlier, more attentive associates, better lighting, less clutter for quick and easy scanning of the entire store, greater use of mannequin displays for outfit suggestions, smaller vignettes, music, videos and colorful graphics, cooking and other classes, restaurants, celebrity and designer fashion shows, etc.). They are also increasing their use of augmented-reality technologies (digital enhancement of the real-world environment) to heighten the in-store experience and of Big Data to personalize service and assortments based on local consumer preferences. Again, the neuro-experience achieved in each case will be different, consistent with its brand image and customer expectations.

If the experience is strong enough, those stores will preemptively compel and steal customers before they go to a competitor. In addition to the experience, the stores participate on all distribution platforms, including staking out a presence in the social networks such as Facebook, Twitter, etc.

As we predicted, and as some retailers are already doing, they will roll out smaller neighborhood store formats such as Bloomingdale’s has done, for both preemptive distribution and localizing the product mix and experience. We also predicted a direct attack on the specialists by the department stores that are rolling out their own private brands into the Omni-Brand to Consumer sector (e.g., Alfani or INC from Macy’s or Stafford or Arizona from JCPenney).

Finally, the pursuit of more private and exclusive brands will eventually give department stores even greater control over their entire value chains.

We believe that this is the transformation traditional department stores must make to survive. More optimistically, if they do it right, they have the potential to claw back much of their lost apparel share. Furthermore, the Omni-Brand to Consumer model will provide these bigger stores an advantage, thanks to the greater breadth of their product and experiential offerings. JCPenney, under CEO Ron Johnson in 2012, had a vision that essentially would have transformed the national chain department store into an enclosed mini-mall as an entertainment destination, with streets of shops, all as omni-brands to consumers. Although it was a great strategy, we know that the implementation of the vision was a catastrophic failure.

However, we have also speculated that that perhaps Macy’s is methodically and brilliantly evolving into such a visionary model. Indeed, it would be a great irony if the department stores pulled a “back to the future” move, and once again, became the palaces of consumption they were known as in their earliest days during the latter part of the 19th Century.

As this biggest and most profound transformation in the history of retailing plays out, and regardless of what the structure of the marketplace will look like, the terms “retail” and “wholesale” will be ideas of the distant past, about as useful as the buggy whip.

The value chain of the future is one seamlessly integrated chain that is controlled and operated by the creator of such value (product, service, information, entertainment, knowledge and all other types of value) who will distribute the value directly to consumers.