Brands Accelerate Shift From Wholesale to D-to-c
Manufacturers opening their own stores and bolstering their e-commerce presence is certainly nothing new. But with the pandemic forcing thousands of stores to temporarily shutter and other retailers closing up shop permanently, the process has been kicked into overdrive.
Companies as diverse as Nike, Under Armour, Ralph Lauren, Tommy Bahama, Prada, Psycho Bunny and Levi’s have all pivoted to put more focus on their own direct-to-consumer efforts, and the move is only going to accelerate in the future, brands and observers say.
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Prevailing wisdom is that most manufacturers should not derive more than 30 percent of their sales from the wholesale channel. Focusing more on selling directly to their customers allows brands to achieve higher volumes and more control over their cadence of introductions, pricing and messaging.
Polly Wong, president of Belardi Wong, a New York-based direct marketing firm, said when the pandemic was at its worst last year, it impacted between 50 and 65 percent of all wholesalers as “department stores cut their orders” dramatically, leaving apparel and footwear brands with a glut of inventory. “So it accelerated the shift to d-to-c as a defense mechanism.”
But Wong said that for traditional wholesale brands, this shift to d-to-c requires a new skill set. “Wholesale brands are not traditional marketers,” she said, adding that only a small percentage of their budgets are currently earmarked to marketing. “So they’re learning to build customer relationships through print and digital marketing, which is a big transformation.”
It’s a transformation embraced by Oxford Industries, parent of Tommy Bahama, Lilly Pulitzer, Southern Tide and other brands. “When we look back at 2019,” said chief executive officer Tom Chubb, “wholesale was 30 percent of our total business.”
At both Tommy Bahama — which operates restaurants as well as retail stores — and Lilly Pulitzer, wholesale represented only around 20 percent of the total, he said, while the soon-to-be-discontinued Lanier Clothes division accounted for 8 to 9 percent of the company’s total wholesale exposure.
“For the last six or seven years,” Chubb said, “we haven’t really seen wholesale as a growth channel.” Although Oxford is not turning its back completely on the wholesale channel, the retailers it does business with have to be “the right kind” of retailers.
“There are two main criteria,” he explained. First, the product has to be able to sell at the right time at full price. And second, it has to be presented properly in the stores, with the right adjacencies, good housekeeping and a strong sales staff.
“If it’s selling through and the presentation and service is excellent, then it’s a good combination,” Chubb said.
Wholesale customers can help the brands reach consumers that they might not otherwise find on their own, but “as markets evolve, those situations have been harder to find,” Chubb said.
Retailers — particularly department stores —have been criticized for years for sales floors that look like a hurricane came though, Chubb said, “and no one wants to go there.” But if floors are kept neat, dressing rooms are well-lit and well-mirrored and the sales staff is courteous and helpful, it gives consumers a reason to visit. “You can’t replicate that experience online, but all too often, those things are missing,” Chubb said. “There’s a big opportunity for retailers to really focus on being great merchants, and the people who are doing it are winning.”
But the state of the industry today has forced a sea change within Oxford. “There’s definitely been a change in our mind-set to be a retail-led business,” Chubb said. “We start with what’s going to work from a product and marketing perspective and then figure out how to serve the wholesale channel. They have to be in sync because to the consumer, it’s just one brand.”
Going forward, Chubb said while Oxford may close a few underperforming doors, it will continue to add stores in locations where its customers live and play. “We can coexist with better wholesale and we will continue to follow that model. The pandemic hasn’t changed our view,” he said.
Psycho Bunny, a casual apparel brand, started to focus more on its d-to-c business prior to the health crisis and plans to significantly increase its retail presence this year.
The company recently opened its first Northeastern unit, a 1,500-square-foot store at the Garden State Plaza in Paramus, N.J., that will be followed by Century City, Valley Fair and South Coast Plaza in California as it works to more than double its count by adding 15 stores in 2021. Last fall the brand opened units in Atlanta, Las Vegas and Hollywood, Fla., bringing its total in the U.S. to 10. It also has licensed stores in South and Central America as well as Japan.
Kenny Minzberg, chief operating officer, said that while Psycho Bunny has not abandoned wholesale completely, its expansion beyond polos and T-shirts to other categories such as fleece, outerwear and swimwear is what drove its focus on d-to-c. “With department stores, we’re focusing on our legacy categories, but since our goal is to expand into other categories, we knew we had to enhance our d-to-c business. With traditional retailers closing stores or downsizing their footprint, we’ve jumped on the [opportunity to open our own stores].”
He stressed that operating its own stores is not intended to replace wholesale, and in fact, that channel has grown even as more Psycho Bunny stores open. “The channels amplify each other,” he said. “And having our own stores has actually encouraged some of our department store customers to give us opportunities in other markets.”
Psycho Bunny views wholesale — whether it’s a department store such as Nordstrom or Bloomingdale’s or an independent specialty store — as an accretive channel. “We come from a wholesale background and we believe we have a greater obligation to our wholesale customers than our own stores,” Minzberg said. “We look at it almost like a fiduciary responsibility to support them properly.”
But focusing more on d-to-c requires operational changes within the company as it has had to invest in different systems and processes and learn to deal with calendar shifts. “It’s easier to go to retail from wholesale than vice versa,” he said.
Indeed, going d-to-c requires increased investment in web design and logistics, shipping, marketing and other back-office requirements. And while that could be a sticking point for smaller brands, larger companies have the financial wherewithal to invest more in their d-to-c operations.
In its third-quarter investors call, Ralph Lauren chief executive officer Patrice Louvet, said the company eliminated 230 wholesale doors to concentrate more on its own e-commerce operations. Jane Hamilton Nielsen, chief operating and chief financial officer, said this “significant clean-up” in North America will also impact its Chaps brand, whose wholesale base will also shrink.
At Capri Holdings, parent of Michael Kors, Versace and Jimmy Choo, CEO John Idol said during an earnings call in November that the company plans to reduce its exposure to wholesale from what was around 30 percent in 2019 to about 20 percent over the next few years as it opens more Versace and Jimmy Choo stores around the world and grows e-commerce. And that figure will be even higher in North America.
“Our feeling is that in North America, digital will represent over the next couple of years between 40 percent and 50 percent of the overall revenues for the brands in North America,” Idol said. “[In] Europe, we don’t see that type of trajectory. We see something that will probably get us to a 30 percent level over the next few years. And in Asia, as you know, it’s a much smaller piece of the business today, low single digits. But we do think that that will kind of be in that 10 percent-to-15 percent range again, over the next few years.”
Capri is hardly alone. Prada is also heavily reliant on its own channels for sales. D-to-c represented more than 90 percent of its volume last year, a deliberate move that Luca Solca, Bernstein’s senior research analyst for luxury goods, said “is a prerequisite to better safeguard brand equity and online development.”
And a recent deal it made with Net-a-porter will employ a drop-ship model, which allows brands to ship directly to consumers and stores receiving some sort of prearranged commission. That’s similar to the concession-style model used by Farfetch and others that also allow brands more control over the sale of their products.
But it’s not only luxury brands that are employing this strategy. Nike has used a drop-ship model with its retail partners including Foot Locker and at its investors day presentation in February, the sporting goods giant said drop-ship and concessions will become more prevalent as it moves to reduce its dependence on traditional wholesale to about 50 percent.
Over the past three years, Nike has moved aggressively to reduce the number of what it calls “undifferentiated accounts” in North America by roughly 30 percent. In the second-quarter earnings call in December, CEO John Donahoe, said that “over the next two years, we will aggressively accelerate change with larger undifferentiated accounts, as we and our strategic partners together reprofile the shape of the marketplace and recapture short-term demand dislocation.” Instead, the focus is on larger stores as well as on its Nike Direct initiatives.
The retailers Nike is dropping include some big names, such as DSW, Urban Outfitters, Dillard’s, Belk and Zappos, according to published reports.
Under Armour, too, is in the midst of a “proactive wholesale door reduction effort in North America,” its CEO Patrik Frisk said on the company’s fourth-quarter earnings call in February. The plan is to eliminate 2,000 to 3,000 wholesale doors in the back half of this year to end with around 10,000 doors by the end of 2022.
The goal, he said, is to focus on “more appropriate doors” that will allow the brand to achieve a “more premium position” as it achieves more full-price sellthroughs.
But it’s not just sporting goods brands that are moving away from traditional wholesale. Levi’s is also de-emphasizing wholesale.
In the fourth quarter, the jeansmaker said wholesale accounted for 23 percent of total revenues, up from 15 percent a year ago. D-to-c is currently around 40 percent of its total and the company is moving to increase that figure to 60 percent. A decade ago, according to CEO Chip Bergh, U.S. wholesale alone accounted for 48 percent of total sales, but today, traditional department stores account for less than 10 percent of overall global revenues.
And while the brand is still adding some key accounts such as Dick’s and Target, at the same time it works to expand premium distribution. Bergh said that while wholesale remains “really, really important” to Levi’s, the pandemic “accelerated what we probably would have taken another five or 10 years to play out and compress it all into the last year or so.”
“We remapped our business. We’ve built a new footprint of high-caliber, high-quality wholesale partners. We are premiumizing the brand in the marketplace with these customers. I think the big takeaway though should be that as we emerge from the pandemic, wholesale will still be important to us, but it will look different, and we will be healthier customers with a stronger proposition and winning with winning customers at the end of the day, and that’s really what we’re trying to do.”
With manufacturers shifting away from traditional wholesale and employing more nontraditional strategies, it means retailers need to pivot as well. For larger stores such as Nordstrom, which has said it plans to reduce its dependence on traditional wholesale to 50 percent from 85 percent, that means more drop-ships, concessions and revenue-sharing deals.
Other retailers will undoubtedly follow suit as they seek to cut inventories and reduce their cash outlays.
“It’s a learning experience for everyone,” said Wong. Although 81 percent of sales still came from physical stores last spring, she said, e-commerce continues to gain in importance. “But it depends on the target consumer,” she said, with affluent customers more likely to shop online.
Antony Karabus, CEO of HRC Retail Advisory firm, also believes brands will continue to shave their wholesale operations even as the pandemic wanes.
“Without a doubt it will continue,” he said. “Many brands believe they can do the best job of representing themselves to consumers rather than in a department store.”
Although there are exceptions — Nordstrom, Neiman Marcus and Saks Fifth Avenue — mainstream department stores have a number of hurdles to overcome in order to convince brands they’re worthy of working with. “It’s a sea of brands, there are discount signs all over and there’s no service,” he said. “The message is price and better brands don’t want to be associated with that.”
But even on the high end where the stores are well maintained and there’s great service, brands are still moving toward a concession model, he said, as they seek more control over their own sales and messaging.
“In regular department stores, it’s very challenging,” he said, “and the number of stores is declining rapidly. Macy’s went from 850 stores to just over 500. So if you’re a wholesaler and you see retail doors declining significantly, you see your top line dropping at the same rate. But if you go direct, you can mitigate that.”
In addition, cash flow at department stores is tight and orders are shrinking so brands are getting stuck with inventory they need to move. “It’s a transformational stage,” he said.
Brands which had formerly only derived 15 to 20 percent of their business from e-commerce have seen that number inch up to 25 to 35 percent of the total — a number that can be over 40 percent for some luxury players. He pointed to Nike as a good case study because as the brand moved more toward d-to-c it carefully selected the right wholesale partners to retain such as Nordstrom, Foot Locker and Dick’s Sporting Goods, Karabus said. “They said, ‘We don’t want wholesale accounts, we want retail partners.’”
But going it alone necessitates change. “It requires new muscles for a lot of brands — they have to think like a retailer. But the margins are much greater. It’s a fundamental shift, but it’s inevitable.”
Rod Sides, U.S. retail sector leader for Deloitte Services, said that any type of economic downturn — like a pandemic — tends to accelerate trends that have already started. “D-to-c for brands was well on its way and we’ll continue to see it,” he said.
He said the propensity for brands to sell special pieces through their own channels and mainstream product through traditional retail will also continue as the balance of power shifts.
Ultimately, Sides believe, the winners will operate under a “mixed mode.” While brands will continue to embrace a growing online business as their “primary growth vehicle, they’re also going to need a physical presence of some sort. This blended mode is what will fuel them going forward.”
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