November 29, 2021

Golden Age Golds

Take Advantages of Your GOLDEN AGE

These traditional brands are shifting to a DTC model. Here’s how.

Department stores used to be the “it” place to buy apparel. But a lot has changed in the past 10 years, and some brands have recognized they can sell clothes just fine on their own. Take Nike for example. 

In 2010, DTC made up just 15% of Nike’s total revenue. By 2020, the athletics retailer had grown that number to 35%, as it stepped back from wholesale partners and focused on sales through its own stores and digital channels. At the end of its most recent fiscal year, Nike raked in $44.5 billion on the back of a 40% DTC business, with plans to make $50 billion in 2022.

It’s far from the only brand doing so. Retailers across the spectrum have taken a liking to the higher margins promised by selling directly to the consumer, and the pandemic’s spike to e-commerce last year only accelerated that trend. Those already committed to DTC saw their efforts accelerated by an eager consumer, and for some wholesale-heavy brands, order cancellations from big retailers served as an eye-opener, and an opportunity.

“With those golden handcuffs of the wholesale order coming off of the brand, they then turn to their digital arm to say, ‘OK, guys, we can now start to focus more energy on digital,'” said Noah Gellman, CEO and co-founder of media and research company The Lead. “And they looked at those teams, and those teams were underinvested and they were small, but they did have the seeds of building the direct-to-consumer business model.”

Although shifting more sales to DTC has widely been touted as a positive strategy, it has its drawbacks. A September report from BMO Capital Markets found that wholesale sales come with higher margins before taxes and interest than DTC sales. Companies shifting to DTC could bring in lower sales dollars overall, the analysts found, despite the fact that brands capture more of the sales price for themselves selling DTC.

For most, it’s not an either or situation, according to Cristina Fernández, a senior equity analyst at Telsey Advisory Group.

“Ideally, they want all the channels to grow, but DTC growing faster than wholesale,” Fernández said. “They’ll cut back partners that are not working, but for the most part, I think they just want to have strong partners that believe in their vision. So it’s a combination of the two.”

Below are some of the players making a dedicated shift to DTC, and why the strategy doesn’t work for everyone.

Fast movers

DTC as a term has become a bit complicated over the years. At its core, it just means selling your own products to the customer yourself, rather than selling through a platform like Amazon or a retailer like Macy’s. But it’s also been loosely applied to startups that grew their businesses through an online-only model (think Warby Parker, Bonobos and Allbirds).

Of course, many of those startups have moved far beyond those early days and now have a wholesale business in addition to their DTC stores and digital channels.

“It’s such a buzzword. I think that could be the Achilles’ heel of the industry going into 2022, is that everyone says ‘I’m going to become a direct-to-consumer brand’ and I say ‘apples’ and you hear ‘oranges,'” Gellman said. “And if we’re not on the same page, we can’t collectively come together as an industry, and we can’t make the changes that need to be made.”

Some of the traditional brands that are moving the fastest to take advantage of DTC have one big thing in common: They’re all athletic brands. While there are certainly DTC startups in the athletics space — Vuori, Sweaty Betty and others — traditional athletics brands like Nike and Adidas are also moving hard into the model to try and take back some of their sales from wholesalers. (For a traditional athletics brand, selling DTC refers to making sales through its own stores and digital channels, rather than through wholesalers.)

Sonal Gandhi, chief product officer at The Lead, said sneaker brands as a whole have been pushing toward a DTC model, including all of VF Corp’s brands (Timberland, Vans and The North Face, among others). For a company that has historically sold a lot of wholesale, making that switch involves “rewiring the internal structure to sort of cater to that business model,” Gandhi said.

Although athletic brands have sold wholesale a lot in the past, they don’t have the same reliance on the channel that other sectors do, according to Fernández. Retailers like Foot Locker and Dick’s are important for athletics brands, but department stores and others less so. That’s allowed them to push more into DTC over the past few years now that they’ve been able to build connections with customers through social media or their own e-commerce sites.

“It’s really all the athletic brands in my space,” Fernández said of who’s moving to sell more DTC. “Nike and Adidas and Under Armour are the big three, and they’re all kind of following similar strategies. I’d say Nike and Adidas are probably a little bit more aggressive, but they’re all moving in the same direction.”

Broadly, those who are doing it well, according to Gandhi, are data-driven, moving away from the seasonal wholesale calendar of product releases and digitizing their supply chains — including optimizing logistics and manufacturing, and speeding up product creation timelines.

Nike

DTC at Nike is expected to be 60% of the business by 2025.

Courtesy of Nike

 

Nike is probably one of the brands most cited for shifting to a more DTC-reliant model. As of its most recent fiscal year, DTC is nearly 40% of the business and is projected to reach 60% by 2025. Side by side with its pursuit of DTC sales is an emphasis on digital. The company expects to be a 50% digital business, through both its own channels and its wholesale partners, by 2025. That’s up from nearly 35% at the end of its most recent fiscal year.

To do so, Nike has pursued a strategy to cut down on wholesale partners that don’t offer a differentiated experience or present its brand the way it wants. That’s reportedly included Urban Outfitters, DSW, Macy’s, Zappos and Dillard’s, among others.

“Nike’s definitely changing things more in the sense that they’re taking more aggressive steps to overhaul their wholesale distribution,” Fernández said. “So you’ve seen them, and we’ll see them over this next 12 months, eliminate a lot of wholesale partners … that they felt like weren’t as closely aligned with their long-term model.”

Adidas

Adidas plans to reach a 50% DTC business by 2025.

Courtesy of Adidas

 

In March this year, Adidas announced plans to reach a 50% DTC business by 2025, about 10 percentage points behind where Nike aims to be by that time. In 2019, Adidas had a 30% DTC business and grew that to 40% in 2020 (on par with Nike). Like Nike, the retailer is betting big on e-commerce, hoping to double its digital sales during the same time frame to between 8 billion euros ($9.6 billion at the time of the announcement) and 9 billion euros.

In discussing the strategy in March, CEO Kasper Rorsted said DTC would drive more than 80% of the company’s net sales growth over the next four years as it shifts away from some wholesale partners and holds onto strategic ones. According to Gandhi, reaching that 50% mark of wholesale to DTC is ideal, provided it makes sense for the category a retailer is in.