Brands are turning to their direct-to-consumer sales activities. But a new report suggests it could limit long-term profitability.
DTC channels may offer retailers lower profit margins than wholesale channels before taxes and interest, according to a new report from analysts at BMO Capital Markets. The report highlights a possible downside to the current trend in the retail industry of brands like Nike, Adidas and Crocs to refuse partnerships with different wholesalers to focus on key accounts and direct-to-consumer channels.
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Analysts observed an inverse relationship between DTC penetration and reported revenues at the retail companies surveyed in the report over the past five years. In other words, companies that experienced a decline in DTC penetration also experienced significant sales growth. The reverse was also true.
“This seems to suggest that while revenue per item is increasing at DTC, units lost by dropping out of wholesaling generally exceed unit price increases at DTC,” analysts said in the report.
Overall, market experts have estimated that DTC’s gross margins are on average about 1,000 basis points lower than wholesale margins.
For many large shoe companies, DTC has been the North Star guiding their branding and merchandising strategies. Over the past year, Nike has terminated wholesale accounts with major retailers including Dillard’s, DSW, Urban Outfitters and Shoe Show, along with many others, as it moves forward with a plan to rely on its direct-to-consumer sales capabilities. Adidas, Under Armor and Crocs have taken similar steps.
As for the reason for their startling findings, BMO analysts have suggested that direct-to-consumer sales, which often take place online, can lead to various additional expenses related to fulfillment, logistics, intensive marketing and sales. technology, which represent lower overall profit margins. .
Nonetheless, the report highlighted other reasons why DTC channels are still important. For example, they offer companies a higher level of control over branding, distribution and pricing. And according to analysts in the report, those benefits are “perhaps reason enough to switch from wholesale to DTC”, margins aside.
“Brand perception remains the key to brand equity; where and how a product is sold can be as important as the quality of the product itself, ”the analysts wrote in the report.
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