“Everyone believed the mantra should be DTC or die because they wanted to eliminate the middle person and make more money,” Simeon Siegel, managing director at BMO Capital Markets, said. “What they finally realized was: No one eliminates the middle person, they simply become the middle person, and that brings its own set of costs. So for a period of time, people became so obsessed with where they sell rather than what they sell that they lost track of who they were.”
“If Allbirds had remained on its strong growth trajectory, if Peloton had maintained the growth tear it was on, the models probably wouldn't have pivoted that much. But they did change — and both companies fell into difficulties,” GlobalData Managing Director Neil Saunders said, noting those challenges pushed both brands to expand their sales channels. “Now that genie has been let out of the bottle, it's not going to be put back in.”
Even brands like Lululemon, which sells mostly DTC, have wholesale accounts, Saunders noted. “The term DTC is still used as a shorthand. I'm just not quite sure it's all that relevant now,” he said.
Asked if we’ll still be talking about DTC brands in five years, Siegel put it more bluntly.
“In a derogatory, backwards-looking fashion? Sure.”
As the direct-to-consumer model matured, a slew of factors that helped DTC brands flourish began waning. The general retail market slowed, customer acquisition costs on social media surged, venture funds dried up, the cost to fulfill online orders grew and brands started hitting their own growth ceilings.
“There's a lot of things that moved and shifted in a relatively short period of time that meant that DTC went from being almost the darling or the hero of retail, to being a channel that had a lot of challenges and problems,” Saunders said. “And had a lot to prove that it wasn't necessarily, in some cases, proving.”
The model itself was flawed from the start, according to Siegel, whose firm has done multiple reports on the impact selling direct-to-consumer has on key metrics like gross margin. Critically, Siegel found that brands pivoting to direct did not see a relative increase in revenue, gross profit, gross margin, operating profit or operating margin.
“It just didn't happen. Back then, obviously, that was controversial — and it triggered a lot of fights,” Siegel said. “But now people are looking at the results and they're acknowledging wholesale, when done right, is truly a powerful thing.”
“There was so much money sloshing around, it was very difficult to do badly.”
Neil Saunders
Managing Director at GlobalData
Some up-and-coming brands, including Vuori, may have dodged some of the growing pains in the sector by embracing wholesale from the start. Founder Joe Kudla has said before that the company saw a place for key wholesale partners from the beginning of its business and touted those relationships as part of the reason it was able to achieve profitability.
“The partners we selected at the start in the U.S., and those we work with today globally, are very intentionally picked, and our distribution is deliberately limited to only the best accounts,” Andy Lawrence, vice president of international at Vuori, said via email. “While I wouldn’t say wholesale insulates any brand from all DTC challenges, at Vuori, it does add a critical component to our success. Wholesale, if done correctly, allows brands like us to connect authentically with the local customer.”
Still, for a time many DTC brands simply didn’t invest in wholesale as a channel because selling directly to consumers was working. And investors were enthusiastic about funding DTC brands, profitability challenges or not, because capital was cheap and consumers had disposable income to spend on new brands and discretionary products.
“There was so much money sloshing around, it was very difficult to do badly,” Saunders said.
But in a more discriminating market, the value proposition of some of retail’s startups became far more important — and was often found wanting. Expensive exercise bikes and fancy sheets are harder to sell in a more risk-averse economy.
“It's very important not to confuse problems with DTC — which, there are problems — with problems with the brand,” Saunders added. “Allbirds primarily has a brand problem. It doesn't really have a distribution problem, as such. So Allbirds could push itself into more stores, do more things — it's still not going to resolve the issues of the company because the problem is with the product and the position and the brand, it isn’t with the distribution method.”
As startups and traditional brands alike recognize the limits of DTC, many are embracing a more measured model that values both DTC and wholesale. The sensibility of that approach has been touted frequently over the past few years as brands have moved away from strictly digital approaches, with one report earlier this year saying wholesale is still the most profitable investment channel for brands.
"People chase simplicity when it seems to be intuitive."
Simeon Siegel
Managing Director at BMO Capital Markets
Matt Katz, a managing partner at SSA & Company, describes what’s happening now as a “reset” driven by overinvestment in DTC and underinvestment in stores. The importance of stores and wholesale is now sending investments back in the other direction, and retailers are unlikely to lean back into DTC as hard as they did — that is, unless investors start funding it again.
“Silly as it sounds, people chase simplicity when it seems to be intuitive. This is not the first time, and it certainly will not be the last time, that everyone chased a buzzword,” Siegel said. “When companies don't need to be profitable, profit and loss statements are not scrutinized. When companies don't need to be profitable, expenses are not scrutinized. That makes it much easier to chase a hope and a belief versus being held accountable for the actual results.”
The swing to DTC — and the correction since then — has taught both brands and wholesalers some important lessons. Take Nike, for example. The rise of DTC brands spurred a huge investment from the sportswear giant in its own digital capabilities and stores, and at the same time caused Nike to cut ties with a slew of wholesale partners it deemed less important to its overall strategy.
First, that led to exceptional growth. Then came a retraction, as Nike determined it had taken things too far and, in fact, did need those wholesale partners after all. Throw in layoffs, a cost-savings plan, a lawsuit surrounding the success of the DTC strategy and an abrupt CEO swap and you have a pretty good summary of the fallout to date.
“DTC serves a lot of Nike customers, but it doesn't serve all of Nike's customers. A lot of product discovery, a lot of buying of Nike products is done by people who might go into a department store, especially some of the older age cohorts,” Saunders said. “These people are not going to go online directly to Nike. They want to buy it through the channels that they shop in. And if Nike disappears or pulls back from some of these channels, they lose the sales — it's as simple as that. And they underestimated that. They were almost a little bit arrogant as to the power of the Nike brand.”
And make no mistake, Nike is a powerful brand. A $50 billion-a-year brand.
“Consumers have taken over the leverage point and they are buying on availability and price and experience.”
Matt Katz
Managing Partner at SSA & Company
But as Nike was learning its lessons, both good and bad, about DTC, its wholesale partners were also learning theirs. Foot Locker, one of the retailers Nike spurned and is now again seeking closer ties with, has unveiled its own turnaround actions to lure brands to its shelves, including revamping two-thirds of its Foot Locker and Kids Foot Locker stores over the next few years. Macy’s, too, which received similar treatment from Nike, has been undergoing store refreshes at its go-forward locations as it looks to keep customers and brand partners coming back.
“I think that the wholesale side really had to pull its socks up as well,” Saunders said, noting that retailers like Macy’s and Foot Locker have realized they are “serving two masters” now. “‘One of our masters is the consumer, but the other master is the brands. Because the brands don't have to be in our store necessarily and what we've got to prove to them is that we're a worthwhile partner.’”
Indeed, while the pendulum has swung back toward wholesale, some brands are still moving away from certain retailers and could continue to do so if their partners don’t serve them well. Levi’s in its Q3 earnings report touted that its wholesale business now makes up less than 20% of its revenue, down from 30% in 2015. Analysts at the time pointed to Levi’s sales and profit growth as a sign that its DTC strategy is working, at least for now.
“I think we've moved from retailers having the advantage. The retail-brand wholesale relationship used to be heavy, heavy retail. That was your point of distribution and the retailer chose which brands were most important, right?” Katz said. He noted that the balance shifted when brands developed their own access to customers through DTC. Now, Katz says, the consumer is in charge. “Consumers have taken over the leverage point and they are buying on availability and price and experience.”
That means brands need to focus on being wherever the customer wants to buy, which might sometimes be wholesale and might sometimes be DTC and might sometimes be Amazon.
"It became a battle of players within the ecosystem — who could edge out their collaborator."
Simeon Siegel
Managing Director at BMO Capital Markets
During the height of DTC mania, companies like Nike and Adidas became very focused on what percentage of their revenue was DTC versus wholesale. Nike had a goal of upping DTC from 40% of its revenue to 60% by 2025, while Adidas aimed to reach a 50% DTC split by the same time period. Even with wholesale coming back in vogue, there is no universal answer for what that split should be, according to Siegel, and brands should be adjusting those percentages based on their individual needs.
Having a strong DTC business also doesn’t have to come at the expense of wholesale. For Vuori, having wholesale partners has helped it gain brand awareness in new markets like the U.K. and Japan.
“From that initial interaction, we then begin to see these newcomers start to interact and shop with us via our DTC channels too,” Lawrence said. “The omnichannel approach, including wholesale, is our best answer for how to expand in a profitable, brand accretive way.”
DTC and wholesale have different strengths, according to Siegel, with DTC theoretically offering first-party data, higher margins, greater control over the brand and greater connection to consumers, while wholesale ideally gives brands a partner with experience distributing products economically and efficiently.
“It became a battle,” Siegel said of how brands began approaching DTC and wholesale a few years ago. “It became a battle of players within the ecosystem — who could edge out their collaborator, as opposed to a holistic partnership where all sides could win.”
A case could be made that the battle is largely over now, with hybrid models being embraced across the industry and wholesale-brand relationships becoming more collaborative. But what does all this mean for future brands?
While most analysts agree that a hybrid model is the future, they also tend to agree that DTC will continue to be important for retail’s newest entrants. The channel is easy to set up and has lower initial costs, which makes it ideal for upstarts, but as the era of DTC brands fades, retail could also see more brands launching with partnerships already in place.
When Vanessa Hudgens relaunched her beauty brand Know Beauty, for example, she did so with Amazon. And beauty brand Pretty Smart entered the market through an exclusive deal with Walmart as well as its own website, even working with the mass merchant to develop its product line prior to launch.
“I think you'll see some of these brands may launch with very small strategic partnerships that give them their presence,” Katz said. “And if you can prove that the brand has staying power and pull, then you'll see continued investments in flagship real estate models.”
That could range from pop-ups to permanent stores or limited geographic partnerships with retailers, Katz said, but regardless, there is likely to be a greater emphasis on how quickly a brand can grow its points of distribution. Some up-and-coming brands already offer prime examples of this: Actor Millie Bobby Brown launched her fashion brand at Nordstrom within months of its debut online.
While they took slightly longer to branch out, intimates brands Skims and Savage X Fenty have both also pursued wholesale relationships, including internationally, in addition to their DTC channels. Pursuing wholesale partnerships isn’t without its challenges, though, particularly for young brands.
“The problem with wholesale is you will go into a company and you will say to that company, ‘Look, I want you to stock our product’ and the first thing they will say is, ‘Our shelves are full,’” Saunders said. “So it's very difficult to break through. And then when you do break through, for a younger company, there are a lot of issues that you have to resolve. You have massive working capital requirements because if you're a brand-new brand and you're trying to get into a Walmart — even if Walmart agrees to take you into a fraction of the stores that they have — guess what? Your volume is terrific and most companies don't have the manufacturing capacity.”
The model of the future may look a lot more like that of running brands Hoka and On, which have both surged in popularity recently and have benefited from strong DTC sales and also a healthy presence in wholesale.
“You will get businesses that start off in both ways, but I think what is fortunate is … we've moved on from simply condemning a channel,” Siegel said. “There's no such thing as a bad channel. There are bad partnerships and there's bad execution.”
Another challenge for new brands, according to Saunders, is the simple fact that “there’s a lot of stuff out there” already. Any startups in retail now have to make it through a noisy landscape and offer a valuable enough proposition to gain shopper interest. Identifying as a “DTC brand” just doesn’t much matter anymore.
“We went through an era where companies identified themselves, and were known by others, by the outside world, based on where they sell, not what they sell. That's silly, right?” Siegel said. “Are you an apparel retailer? Are you a mattress retailer? Are you a connected fitness bike brand? Or are you a channel? … The idea of where you sell should always be a very important part of your business decision making. But it should not be who you are. You should not aspire to be a DTC brand. You should aspire to sell something special and figure out how to reach your consumer in the most economic, healthy, brand-appropriate way. I think, fortunately, we've moved a lot closer to that.”
