This is an excerpt from Monday’s (3/15) Point of Sale retail supply chain newsletter sponsored by ArcBest.
The wholesale model that has driven retail for decades is under increasing pressure. There is a shift occurring, driven by some of the most powerful consumer brands, away from wholesale distribution and toward direct-to-consumer models.
The first major splash came in November 2019, when Nike (NYSE: NKE) announced it was pulling the brand from Amazon (NASDAQ: AMZN). Nike was the tip of the iceberg, and since then many other prominent brands such as Vans (NYSE: VCF), Birkenstock and Ralph Lauren (NYSE: RL) have all ended relationships with Amazon. These are just a few examples of retail giants that have ditched Amazon, but there are a million more small retailers bypassing Amazon and selling their products online independently.
For a long time, brands depended on Amazon to sell their products online. And until very recently, the idea of smaller retailers competing with Amazon online was laughable. But e-commerce technology providers and logistics companies have flipped the script. It may be a surprise, but mom-and-pop shops can now run online stores that compare very well to Amazon’s offerings. Here’s a breakdown:
Build an online store with Shopify (NYSE: SHOP), BigCommerce (NASDAQ: BIGC) or WooCommerce.
Run guided advertising campaigns with Facebook (NASDAQ: FB) or Instagram.
Handle payments with Stripe.
Give credit with Affirm (NASDAQ: AFRM).
Store inventory and fulfill orders with ShipBob.
Handle returns with Returnly.
With that tech stack, small retailers can offer almost everything Amazon does: two-day shipping, simple returns (to UPS/FedEx), interest-free credit and secure payments. All of these firms charge either a small monthly fee or a small commission off sales. That means anyone with a couple hundred bucks can sell stuff online nearly as effectively as Amazon.
Why are brands moving toward DTC? In short, because they can. The decision to cut off Amazon was a big step, but brands have gone even further to cut out physical middlemen as well. Late last year, Nike announced that it would withdraw from a handful of middle-market regional players like Belk and Dillard’s. Last month, Under Armour (NYSE: UA) announced it would be closing 2,000-3,000 wholesale accounts.
Brands are seeking to take back control over more of the consumer experience to build better relationships, gain more data and unlock higher margins. For some brands including Nike, the move is about maintaining brand consistency. Amazon is notorious for its inability to control counterfeits. Also, exiting brands have cited concerns over the difficulty they have handling customer service requests independently from Amazon.
This is a power play. In today’s e-commerce landscape, the platform is power. Owning the platform gives brands the ability to fully customize the user experience and maintain control over customer service (and data). Especially for higher-end fashion and apparel brands, the experiential opportunities available for DTC brands are remarkable. (Here are a few of my faves: wonhundred.com, patta.nl and nike.com.)
There’s another angle here: Brands are fighting back against retailers’ private-label successes.
What is happening is the inverse of retailer private labels. Over the past decade, retail behemoths like Walmart (NYSE: WMT) and Target (NYSE: TGT) have VERY effectively launched in-house brands to compete with namesakes in nearly every segment. Walmart and Target each have no fewer than eight white-label brands worth $1 billion EACH. Retailers believe the same things as brands: We know our customers better than you. For retailers, it’s analyzing the mountains of consumer data to spin out new brands and products at higher margins and sell directly to consumers. For brands, it’s about creating a more robust consumer experience to sell products at higher margins directly to consumers. Just as private label has become a significant part of retailers’ selling mix, we’ll see the reverse from brands.
There have been a couple of developments in the past few years that have brought us to this tipping point. In part thanks to COVID, shoppers are much more comfortable shopping online these days. And recent advancements in third-party logistics operations and e-commerce technology providers have given brands the ability to effectively take more control over sales channels and fulfillment. There is very little standing in brands’ way of taking back control of their own brand experience by cutting out the middleman.
Where DTC makes sense. The feasibility of leveraging DTC models depends on the product. Brands must ask themselves two questions: 1) Am I capable of pinpointing customers to whom I can sell and ship? 2) Do customers want to shop directly from a single brand source, or do they prefer to shop where there is a variety of brands in a rich assortment?
Because customer acquisition costs in DTC models are so high, it is typically high-value discretionary items that are best suited. This hasn’t stopped brands with low-value, historically wholesale products from opening up proprietary online sales channels. Mattel (NASDAQ: MAT) and Kraft Heinz (NASDAQ: KHC) are both Shopify Enterprise customers, but their websites are purposefully in addition to, not in place of wholesale operations. The fact of the matter is Kraft Heinz will sell more mac and cheese and ketchup at Walmart, Target and Kroger (NYSE: KR) than it ever will DTC. But if Kraft Heinz has the inventory and logistics partners to fulfill its enterprise accounts at schools, hotels and stadiums, why should it allow Sysco (NYSE: SYY) or US Foods (NYSE: USFD) to complete a job it’s capable of?
The shift away from retailers must be made strategically to avoid lost sales from product availability. Before pulling out of retailers, brands must ensure they have a core base of stores carrying products in all geographies. Until brands have sufficient coverage and penetration with their branded stores, they ought to continue to operate with a hybrid model of DTC and wholesale.
Having a strong DTC online channel does not ensure long-term success. Only brands with access to brick-and-mortar touchpoints will do well in DTC. Just ask any of the most successful DTC brands — AllBirds, Casper, Bonobos, Warby Parker — they’ve all realized sooner or later that physical storefronts, even in a Bonobos-style showroom setting, are powerful brand builders and customer acquisition tools.
So for powerhouse brands like Nike and Under Armour with established physical footprints, it is feasible to cut off retailers. But this movement puts smaller brands without a store network at a distinct disadvantage. DeAnn Cambell, VP of Strategy and Insights at Harbor Retail, wrote, “As more brands withdraw from the wholesale model, there will be a surge of shop-within-shop partnerships developing across retailers with large physical store networks to establish that important physical presence to support direct e-commerce — not unlike what Target is doing right now with Levi’s, Ulta and Apple.”
Can brands kill the retailer? In short, no. Wholesale and DTC models are definitely at odds, but the market is enormous and there’s plenty of room for both. Although COVID has made us much more comfortable with online shopping, there will always be a place for the immediate gratification of walking away with a new product. And there will always be a place for well-curated, thoughtful storefronts that offer unique experiences. But with marketplaces like Amazon dominating online shopping, it’s just that there doesn’t need to be quite as many retailers as there used to be.
E-commerce has made it too easy and too convenient for retailers to survive on just selling stuff. Retailers that just sell brands no longer have a compelling platform, and platform is power.
Nike’s been building out its platform for a while, and now it’s a multi-format retailer that runs a physically and digitally connected brand empire that powers its direct-to-consumer sales and brand loyalty. As its platform amps up, wholesale relationships can be seen as a liability that compromises the Nike brand, price control and profitability.
Every day it’s becoming easier and cheaper for brands to build and operate their own platforms. There is nothing new about the tension between brands and retailers, but the brand versus retailer battle is as acute as it’s ever been, thanks to e-commerce technology companies and logistics providers.
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