You might not believe me when I say this, but selling wholesale is actually more profitable than selling direct to consumer (DTC). How can this be? All the biggest brands in the world are aggressively pursuing direct to consumer strategies like Nike, Apple, Adidas, Canada Goose and others. It’s to the point where these brands are prioritizing their direct selling channels often to the detriment of retailers that rely on some of these national brands to drive their sales.
At first glance, direct to consumer margins are much larger, there is no middle man that requires compensation. The strategy is based on the straightforward principle that brands can capture more of the sale price of a product and thus keep the lions share of the profits. But DTC sales unfortunately do not always equal higher profits. A new study from BMO Capital Markets found that although many brands are aggressively shifting towards direct-to-consumer (DTC), underlying profitability may be better selling through wholesale channels.
Need proof? There is a new breed of DTC brands we are learning about their business model that they are publicly traded companies. Take AllBirds, Casper, Honest Co. and a whole host of other DTC brands who have filed IPOs, even Wayfair took a pandemic for them to claim a profitable quarter and admitted it wasn’t sustainable. All of these companies and most DTC brands are not profitable but are hyped up on investor money. Question is, what happens when that dries up?
As brands shift to DTC channels, wholesale customers become less reluctant to want to work with these brands and could translate into fewer overall sales even though brands capture more for themselves. This phenomenon is called channel conflict. “Although revenue per item grows at DTC, the units lost by abandoning wholesale generally overwhelm the unit price lifts at DTC.” Think of the scale wholesale represents that is reflected in lower manufacturing costs reducing the cost of goods. Or how much less a brand needs to spend on marketing and customer acquisition costs when their products are widely distributed and visible to consumers in real-life and on retailer websites or promotions. Having products located closer to consumers on wholesale customer shelves also leads to same day gratification something many of us have felt and crave.
For any brand, making DTC sales online a priority is a costly venture when compared to working with wholesale. When all other expenses are factored in like fulfillment, logistics, heavy marketing costs, technology, increased returns (4X higher when selling DTC), etc. can quickly erode the aforementioned gross margin gains that eCommerce enjoys over wholesale. Among the findings around profitability was that almost every company that reports (or has previously reported) EBIT margins by channel showed meaningfully higher EBIT rates at wholesale versus DTC. BMO’s analysis shows that the costs to run DTC operations, in most cases, offset the gross margin gains that come from DTC, “a fact which we believe is commonly ignored,” wrote Siegel.
Often online specialists find that the costs of fulfillment and online marketing are eating up massive sales gains. Each subsequent new customer being acquired is increasingly more expensive and fulfillment costs that outstrip inflation are all cause for concern about the viability of the model.
So if DTC isn’t sustainable and wholesale is difficult to tell if marketing is working or not becoming over reliant on B2B customers with your brand, well what should a brand do? Our recommendation is to partner closer online with your best customers, which just so happen to be wholesale customers who can give consumers the best of online & offline shopping with Online to Offline Commerce.
Download our guide that walks through real-life examples of the DTC conundrum and how the model can be corrected to improve visibility, wholesale customer loyalty, and sales operations humming. Online to Offline Commerce is the only way you can scale your online and wholesale business simultaneously.
