- For most new DTC brands, wholesale is a matter of “if”, not “when”.
- Digital native brands secure retail partnerships in no time.
- Analysts say brands shouldn’t overlook retail partners, they need to choose the right ones.
A decade ago, emerging digitally native brands like Dollar Shave Club would not have dreamed of selling wholesale.
The novel idea of brands selling their products online directly to consumers, “cutting out the middleman” seemed to make financial sense. Without a retail partner to constrain profit margins, brands could make more money and pass savings on to consumers.
Now that strategy is being turned on its head.
For the majority of digital native brands, the question of when to start wholesale is not a “if” but a “when”. Most recognize that retail partnerships are an inevitable part of the journey to developing a large and profitable business, especially when the cost of acquiring customers increases.
“Digital natives initially limited themselves to their own websites. Then select storefronts that are still owned and operated by the brand evolved, which have now evolved to allow others to sell products,” Simeon Siegel, managing director of equity research at BMO Capital Markets said. “It’s the de-DTC era.”
Digital native brands entering into retail partnerships are not a new phenomenon. Harry’s joined Target in 2016, paving the way for many DTC-first brands like Native and Quip that would follow the razor startup into major retailers. Dollar Shave Club only started wholesale in late 2020.
But a convergence of circumstances makes 2022 a stellar year for direct-to-consumer brands rushing into wholesale expansion.
Two years after the COVID-19 pandemic, supply chain disruptions are still common and consumers are increasingly valuing convenience. Sales have increased at bulk retailers like Target and Walmart. Meanwhile, DTC darlings like Warby Parker, Allbirds and Casper have gone public to reveal their lack of winnings. And nearly a year ago, Apple announced updates to its iOS 14 operating system that allowed users to opt out of the data tracking that DTC brands rely on to keep customer acquisition costs down.
This month, SoftBank-backed activewear brand Vuori launched e-commerce in seven countries, accompanied by multiple wholesale partnerships in local markets, including Selfridges and Barry’s Bootcamp. In March, childrenswear brand Primary launched shop-in-shop spaces in 100 Buy Buy Baby stores and on the retailer’s website. Men’s skincare brand Hawthorne launched a line of 14 products in 1,200 Target stores.
DTC is also proving to be a challenging business model for established brands. In a note written last month after Nike announced its third-quarter results, Siegel noted that while the brand’s DTC business is attracting more customers, profits from direct channels have declined.
“We believe this outcome is increasingly the norm, not the exception,” he wrote.
Running a direct-to-consumer e-commerce business “comes with its own expenses” that wholesale players don’t have to deal with, including shipping, fulfillment, technology and marketing, Siegel said in a January research note titled ” DTC isn’t everything it’s supposed to be.”
“Companies are finally starting to acknowledge and realize that wholesale is not a bad channel,” Siegel said.
“You have to be omnipresent”
Primary planned to begin retailing by opening its own brick-and-mortar store in fall 2020, but the children’s clothing brand scrapped the idea when COVID-19 hit. Instead, Primary made its retail debut this year in Buy Buy Baby stores.
“To be honest, it was a really big effort to get a physical store up and running at a time when we had less than 50 employees,” said Christina Carbonell, a co-founder of Primary, adding that the brand intended , one day to open their own retail stores. “Being able to tap into a partner who already has the infrastructure in place has made it so much easier to scale quickly because they’re already doing it.”
Primary’s shop-in-shop sections of Buy Buy Baby stores made us “really excited” about the prospect of working with a wholesale partner, Carbonell said. The Buy Buy Baby registration business also serves as a free advertisement for Primary.
The first wave of DTC brands launched in retail stores, like Harry’s and Native, positioned the moves as customer acquisition games. Now, founders of digitally native brands say they are increasingly focusing on wholesale partnerships, which are essential to profitability.
“The new way of thinking is very different. You have to be omnipresent. You have to be everywhere. You can’t think of it as a single channel,” said Brian Jeong, CEO and co-founder of Hawthorne.
Hawthorne co-created an exclusive line of skin and hair products for Target after customer feedback indicated that despite availability at Nordstrom and Ssense, there was demand for the brand at low-cost wholesalers.
“We see the strategy as a forward-looking multichannel business,” said Jeong. “The Target buyer can buy eye cream on our website, or the DTC customer can go to the local Target and buy facial toner in a pinch. We’re not worried about that.”
“Proceed with caution”
Some DTC brands may avoid entering into wholesale partnerships until much later stages of growth.
Coterie, a premium diaper subscription startup, has no plans for a major retail launch until it has achieved significant brand awareness through its e-commerce business, said Frank Yu, its co-founder and CEO.
For now, the brand relies on its first-party data to learn as much as possible about its customers, which Yu Coterie says would allow it to make more informed decisions about when and where to start wholesale at a larger scale .
In February, Coterie began selling in 450 Whole Foods stores across the country, but is “proceeding with caution” for a larger launch at major retailers, Yu said.
“For a subscription-based online business, mainly DTC, I think the runway is still very long,” Yu added.
Siegel agreed that digitally native brands should be selective when choosing retail partners, but said that for most it would be a mistake to rule out wholesale altogether.
“Be careful who your partners are. Don’t sign up without doing the due diligence, but understand there will always be good partners,” he said.
At the time, baby and toddler brand Lalo opened its first retail store in New York in November, but plans to launch with a wholesale partner later this year.
“There are limited opportunities to increase margins and continue to grow – only online and through our own channels,” said Michael Wieder, co-founder, president and CEO of Lalo. “It’s not much different than working with an influencer. They bring their own perspective and perspective and it gives us the opportunity to align with their network.”
Still, some DTC brands still stick to wholesale. DTC bedding brand Brooklinen is focused on expanding its own fleet of retail stores by tripling the number of locations this year and doubling in 2023. CEO and co-founder Rich Fulop said the goal is to operate 25 to 30 stores by 2024.
“By not entering into these wholesale relationships, we are able to achieve more margin, which is important to the business from a business perspective and in terms of customer experience,” said Fulop.
Fulop stressed that Brooklinen has no plans to enter wholesale anytime soon, but he also understands that it could inevitably happen. “We’re not closing the door 100 percent,” he said. “But we want to avoid it for as long as possible.”