The Battle Between Retailers and Brands
Over the past few decades, the surge in e-commerce has shifted many consumer brands from relying on wholesale retailers to direct-to-consumer (DTC) operations. Although some global brands have seen great success with DTC, research has shown that the business model may not be the “end-all, be-all” to business success. Operating costs of a DTC business are much higher compared to wholesale retail and are only going up as inflation rises. As consumers crave in-person experiences in a post-COVID-19 world, traditional retail has made a comeback (up 22 percent in 2022, according to Mastercard). This shift has helped retailers rebound and revitalize their sales.
Both operations have noteworthy financial and marketing arguments, so how does a brand decide which is best?
The Cost of Business
Direct-to-consumer sales refer to selling products directly to customers, bypassing any third-party business. Wholesaling refers to producers selling products in bulk to a retailer. The retailer essentially serves as the “middleman” in marketing and selling products for the manufacturer or brand. Although it may seem obvious that erasing the middleman from an operation would positively impact revenue, that is not always the case. Direct-to-consumer functions let brands connect and deliver directly to their customer base, allowing them to capture a larger margin of profit at the point of sale.
On the surface, the higher percentage of profit looks great to companies, but when broken down and evaluated at the bottom line, it isn’t as promising as it appears. The cost of operating a DTC business is significantly higher than selling products to a retailer. Marketing, advertising, and SEO are all backend costs that come out of pocket for a DTC brand. However, when selling to retailers, the cost of doing business is much less. For example, a brand sells a collection in bulk to Walmart. The brand doesn’t have to market that collection to consumers extensively, Walmart takes on that responsibility, along with the cost. In addition, physical stores serve as a hybrid solution for retailers, providing storage, and sale space.
“Often, online specialists find that the costs of fulfillment and online marketing are eating up massive sales gains in DTC. Every new customer acquired is increasingly more expensive, and fulfillment costs that outstrip inflation are all cause for concern about the viability of the model.”- shipearly.com
Retailers also need to decide if they want to sell through third-party distributors, such as Amazon. The e-commerce giant has a massive audience, with 82 percent of U.S. households subscribed to Amazon Prime, but long-term results show third-party may not be worthwhile. DTC emphasizes getting to know customers on a personal level, with Amazon, that goal is unattainable since all purchase data is owned by Amazon, not the brand. According to Parkfield Commerce, it costs about 15 percent of an item’s sale price to sell through the e-commerce retailer, a significant percentage of cash flow that could be put into marketing campaigns or bettering employee benefits. Lastly, brands run the risk of a higher return rate when selling through a third party. On average, 12 percent of goods bought through Amazon. High fashion returns average 35 percent. Higher return rates translate to higher costs.
There is also an effect called channel conflict, a phenomenon that occurs when one business partner’s activities affect the sales, profitability, or market share of another. Global companies are prioritizing DTC, causing a strain on wholesalers that rely on the sale of their products. As the brand lessens its interaction with the retailer, profitability for the retailer lessens. This can cause wholesale customers to be reluctant to work with certain brands, translating to fewer sales overall, even if the profit margin per good is higher at the transaction point.
Pros and Cons
Despite the two business models battling for the top spot, both have pros and cons to their methods. There are also certain brands that tend to perform better in wholesale than DTC and vice versa. Oftentimes, moderately priced and contemporary producers are successful with DTC operations, such as H&M, Dollar Shave Club, and Wayfair. The key to success is providing customer-centric, hyper-focused products paired with savvy social media and a loyal customer base.
Retailers such as Costco, Home Depot, and Walmart are all successful retailers, proving wholesale can perform well in an e-commerce-fueled industry. Home Depot reported annual revenue for 2022 was $151.157 billion, a 14.42 percent increase from 2021, according to Macrotrends. Popular wholesaler, Costco, reported net sales of $58.36 billion, an increase of 7.9 percent from $54.10 billion last year.
These department stores and retailers are creating a personalized shopping experience using their attentive employees and customer service to keep consumers coming back. When choosing between DTC and wholesale retail, it’s important to analyze a business’s strengths, weaknesses, and target audience to see which fits best.
Finding the Right Balance
Often each business model is undervaluing the other while overvaluing its own value. It’s important for manufacturers and businesses to determine their customer base and strengths as a brand to implement sales operations. Customers are no longer avoiding brick-and-mortar shops; they are eager to be involved in the shopping experience on a more personal level than online shopping allows. In-store sales have ramped up, and retailers are reporting stronger numbers than pre-pandemic. Although the pace of e-commerce adoption is not slowing down, it is not expected to fully take over retail any time soon.
“Consumers are no longer buying primarily out of necessity and limited to online shopping, which fell short of some expectations — choice has reentered the equation, and they are hungrier than ever for the experience of in-person shopping.” — NPD Group
On the other hand, DTC businesses are reporting losses as inflation, shipping, and digital advertising prices have skyrocketed over the past few quarters, making it difficult for higher margins to make up for fulfillment and shipping costs. These challenges, combined with consumers’ renewed interest in traditional retail shops, are making it difficult to sustain the growth DTC companies experienced during the pandemic, causing a loss in sales numbers and fewer customers.
Finding the right balance between DTC and wholesale can be tricky, but when done right, businesses reap the rewards. Producers and brands should attempt to partner with retailers, as opposed to competing, by offering exclusive items on the brand. The goal is to play different roles as a DTC business and retail partner. Another way to integrate the two models is by creating co-marketing public relations or marketing campaigns. Partnered initiatives reduce the workload and cost by half but can double the exposure because the campaign is reaching both audiences, digitally and in-person.
Overall, consumer wants and needs are fluid, meaning retail is ever-evolving. Whether a brand is strictly direct-to-consumer or wholesale, the business can find ways to combat the challenges they produce. As DTC became popular during the pandemic, wholesale struggled, but as the world emerged from COVID-19, DTC has wrestled with sustaining growth, and wholesale rebounded. Collaboration between top brands and retailers looks to be the answer, but it’s important to consult with an expert to determine what’s best for business.