4 Reasons to Sell Direct-to-Consumer Over Wholesale

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By Tricia McKinnon

There was a time when selling your products through a large multi brand retailer like a department store was the only game in town. But over the years there has been a shift away from selling goods via wholesale towards selling through direct-to-consumer channels. Even large brands such as Nike are increasingly focusing on their direct-to-consumer businesses which includes not only eCommerce but its bricks and mortar stores. In 2015 Nike declared a goal of reaching $50 billion in sales by 2020 (its sales were $37 billion in its 2020 fiscal year) and its direct-to-consumer business was heralded as one of the key ways of getting there.  

Even luxury brands which have relied on wholesale channels are also moving in this direction. Luxury brands such as Louis Vuitton, Celine, Gucci, Saint Laurent, Cartier and Chloé have significantly increased the amount of sales generated from their own stores and eCommerce sites. This trend is going to continue and these are the reasons why. 

1. More control over the customer experience. According to a study by eMarketer only 18% of consumers believe that brands offer an excellent customer experience. With this in mind direct to consumer channels give brands an opportunity to improve customer satisfaction.  Take Nike’s House of Innovation store in New York City. Shoppers can scan the barcode on any product in the store using their phones to access product information including whether or not a sneaker is in-stock as well as available colours. They can also self-checkout using the Nike app. There is also a basketball court in the store where customers can test products. With features such as these customers are treated to a fun and modern shopping experience that is aligned with a brand that is known for high performance and innovation. It would be nearly impossible to provide a similar experience within a multi brand retailer that has a number of competing interests.  

2. More control over margins. Margins are typically higher in direct channels than in wholesale. However, by selling direct companies have to take on other functions and costs related to fulfillment, stores operations, returns and website development.  

With the lure of better margins and an enhanced customer experience in its sights a few years ago Nike decided to double down on its direct channel. In 2017 Nike sold its product through an estimated 30,000 retailers but by 2019 it only had 40 strategic retail partners. To make this shift Nike exited several wholesale relationships including the ones it had with Zappos, Belk, and Fred Meyers. “As part of our recently announced Consumer Direct Acceleration strategy, we are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected, and modern shopping experience,” Nike said in a statement.

Typically Nike earns 10 points higher on its gross margin rate on revenue from digital channels than wholesale. Speaking about this on Nike’s first quarter 2021 earnings call Matthew Friend, Nike’s CFO, said: “I …also want to highlight that the strategy and the focus on shifting the marketplace, exiting…wholesale distribution and focusing on our direct business and our strategic partners drove higher full price realization…which also fueled our gross margin. And so, those two factors in particular were large drivers of gross margin performance in the quarter.”

Under Armour, similar to Nike is also rationalizing the number of its wholesale partners. It plans to cut 2,000 to 3,000 wholesale partners over the next several years. Speaking about the shift in strategy Under Armour’s CEO Patrik Frisk said: "and what we'll be left with, when we're through that journey, is really what we believe are more appropriate doors for us — doors that we feel are going to win." Commenting on this, BMO Capital Markets analyst Simeon Siegel said: "the reality is, the company is showing restraint and conservatism because they recognize the need to grow healthy and not rapidly." "The idea that a brand will grow to the moon and sell anywhere is a thing of the past. And the retailers that relied on them ... will have to look inward."

Frisk also said: “As we turn into 2021, we're also focused on prudent marketplace management and working proactively to ensure that we show up in distribution that is brand right, profitable, and capable of elevating the Under Armour brand.”  “Accordingly, we have begun identifying certain undifferentiated retail partners, primarily in North America, to more meaningfully reduce our wholesale footprint starting next year and into 2022 and beyond. To be clear, wholesale remains a crucial part of Under Armour's future, but as the broader retail landscape continues to evolve, so must we.”

Tamara Mellon, who co-founded Jimmy Choo now sells her own line of shoes using a direct-to-consumer model. Speaking about this model she said: “I still work with the Italian factories, so I still pay the same price as all my competitors. The quality is incredible, but I don’t mark my shoes up six times anymore, because I don’t have to have wholesale margin in there. So my shoes are 50% less than what I used to charge.”  “The future of retail is the end of wholesale. I built my business in a way so that I could give the customer what she wants, when she wants it,” said Mellon. “There’s a new way: the way some brands are doing in-store pop-ups, or shop-in-shops, which means you manage your own inventory, you stock it, and you give the department store commission. That way, the brand is still in control. Retail is still really important, but what that looks like is going to be very different.” 

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3. Better customer data. Another benefit for brands using direct-to-consumer channels is the ability to collect better customer data, data brands wouldn’t normally have access to if they were selling through a traditional wholesale model. Rich customer data can be used, for example, to provide customers with more personalized products and services. When digital device users in the United States were asked what action they were likely to take as a result of personalized brand content the top answer was: make a purchase (51%), followed by become loyal to the brand (49%) and recommend the brand to others (46%) came in third place. Rich customer data that brands can turn into actionable insights can be a game changer.  

Beauty brand Glossier is an example of a brand that essentially crowdsourced data about what type of beauty products readers of its popular blog Into the Gloss wanted and turned that data into the launch of a successful beauty brand. Now Glossier which was launched back in 2014 on the back of wealth of direct-to-consumer data is valued at over a $1 billion. 

4. More control over storytelling and merchandising. Having owned channels also provides brands with the opportunity to tell its story more effectively. There is only so much merchandising direction a brand can give to a retail store and only so much guidance a retailer can be reasonably expected to implement for each brand. 

Speaking about the evolution of retail Alice + Olivia CEO and creative director Stacey Bendet said: “brands today are like media companies.” “Ten or 15 years ago it was really just about making great clothes. Today it is about telling a story, reaching your customer and engaging that customer in more dynamic ways.” 

It’s not just story telling that is important but owning the touch points across the buyer’s journey from return policies, to the pace of product drops to delivery fees to product presentation.  All of these factors affect a customer’s affinity to a brand and the brand’s value proposition. Having greater control of these areas provides brands with a greater ability to influence each purchase.  

Tricia McKinnonTrendsComment