The Direct-to-Consumer Model Is no Retail Panacea

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The academician in me needs to clear up some persisting confusion about direct to consumer (DTC) — even for those working in retail. DTC was originally a label to describe the business model of digital native brands that sold products directly to consumers through ecommerce sites. Warby Parker, Dollar Shave Club, Bonobos, Allbirds, and Glossier immediately come to mind. And of course, we all know Zappos, which in 1999 became one of the first DTC brands still supported by fierce loyalists. Its DTC value is self-evident: Amazon purchased Zappos in 2009 for $1.2 billion.

DTC for multi-branded retailers, on the other hand, is more complex and may include selling merchandise that is directly shipped from vendors or selling products through a marketplace or concession models.

Wholesaler D2C

First, let’s first consider wholesalers who were practicing forward integration of the supply chain by opening retail stores and selling directly to the consumer long before the digital natives showed up. Ralph Lauren, Hugo Boss, Louis Vuitton, Estée Lauder and Timberland are great examples. In 2017, Nike, which was a wholesaler before becoming a retailer, launched a way-forward strategy for the DTC business by reducing the number of wholesale distributors for its product from 30,000 to 40 (yes, you read those numbers right). Nike plans to invest more in DTC and digital markets and continue to reduce their number of strategic partners.

[callout]The formula for long-term success in DTC is complex for multi-brand retailers. Time, resources, and capital is needed to build out a proper and sustainable model which includes technology infrastructure and integration, transportation and fulfillment, inventory visibility and customer service-related technologies[/callout]

Getting closer to the consumer is a great strategy for any brand. It unlocks higher profit margins and increases the timeliness of customer feedback, which in turn, enables more nimble product changes. It also builds loyalty through inclusive product branding and services. Levi’s CEO Chip Bergh stated in a recent interview, “When I joined the company 10 years ago, our total direct to consumer business was 21 percent. Last year, we finished the year at almost 40 percent, and our ambition is to get above 50 percent in the coming few years. DTC is important to us because we’re able to have that direct connection with the consumer — there’s no middleman.”

DTC Sparks a Shakeout

 Small digital brands triggered a remarkable shakeout in the industry powered by expansive internet access and a boom in the number of younger consumers. Digital native brands did the unthinkable, something that was thought by many to be impossible: they stole market share away from major legacy wholesalers and retailers in some of the world’s largest industries. Case in point, digital native Warby Parker upended and disrupted the eyewear industry as we discussed in a recent Robin Report podcast.  In ten short years Warby Parker took almost half a billion dollars from the major players in the eyewear industry including Vision Source, Luxottica, and Walmart by selling affordable eyewear directly to consumers. Another native darling, Dollar Shave Club is the quintessential DTC brand doing about $200 million when Unilever bought it out for $1 billion. If you can’t build DTC, buy it!

DTC and Multi-Brand Retail

The DTC model has worked well for wholesalers and digital natives, but this model may not be a panacea for multi-brand large format retailers.  It’s not as simple as sending out an edict to become a DTC focused brand. Multi-brand retailers like Macy’s, Target, Walmart, Best Buy, Nordstrom, Footlocker, Dicks have complex business models operating with a significant number of vendors across multiple product categories. DTC looked like a salvation for many retailers in this segment impacted by the pandemic. These brands were faced by massive inventory holdings of multiple brands that put tremendous financial burdens on their businesses. Supply chain disruption also challenged larger retailers to deliver the right products in the right locations at the right time to meet consumer demand. DTC looked even more attractive with the closure of retail locations. The reality is that DTC for legacy multi-brand retailers is a layered challenge presenting logistics challenges that require a suite of technologies and partnerships to pull off.

DTC Playbook

The formula for long-term success in DTC is complex for multi-brand retailers. Time, resources, and capital is needed to build out a proper, sustainable model which includes technology infrastructure and integration, transportation and fulfillment, inventory visibility and customer service-related technologies.

According to Daniel Binder of Columbus Consulting, DTC offers new opportunities to own the customer. “You have this massive customer shift to digital that throws off so much data and insights that give the brand opportunity to make product enhancements expeditiously. This nurtures long-term loyalty.” Binder also believes that customers want the full brand visibility that DTC delivers as opposed to marketplaces that typically are limited by a curated assortment.

Implementing DTC requires a holistic approach that is tech driven.  Retailers must invest in solutions to support direct-to-consumer or dropship models including customer data platforms, AI enhancements (chatbots, virtual assistants and other customer service-related features), personalization, and alternative payments. Today’s younger customers have been weaned on digital native DTC brands, which have created sophisticated operating models specializing in customer fulfillment, fundamentally different from distribution center fulfillment models. In plain speak, a warehouse cannot be simply repurposed as a customer fulfillment center. Multi-brand retailers with DTC aspirations need to strategize in a few key areas.

  1. Customer engagement and experience have to be seamless.
  2. Tech solutions are required to manage DTC logistics: order follow-up, AI chatbots, personalized customer communications, and coordination among customers, retailers and brands.
  3. Managing the risk of losing customers to vendors and proactively putting measures in place to ensure the retailer retains loyalty.
  4. Implementing complex infrastructure and integration of systems including inventory management, supply chain and logistics, real-time inventory visibility, vendor collaborated supply chains and systems integration across vendors.
  5. Execution of transportation and customer fulfillment from every vendor aligning with the expectations of targeted customers.

What It Takes to Play in the DTC Sandbox

Retailers that want to play in the DTC market really have four choices: build their own DTC market with private label goods; acquire existing DTC brands as part of a retailer portfolio; partner with vendors to direct ship to consumers; and/or wait and see where the DTC model goes. BTW, retailers opting to wait will be left behind. Bottom line?  If you’re going to venture in the DTC arena, invest in the time and resources to do it right, or honestly, don’t bother. Consumers are savvy and unrelenting in their expectations.  One misstep and you’re out of the sandbox.



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