Is consumer direct less profitable for brands than wholesale? – RetailWire

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October 05, 2021

A study by BMO Capital Markets, “DTC’s Not All It’s Cracked Up to Be,” found that while many apparel brands are aggressively moving towards direct-to-consumer (DTC), the underlying profitability may be better sold through wholesale channels.

“Over a decade ago, when e-commerce began its significant rise, the world expected the channel to be a boon to retail margins,” wrote Simeon Siegel, lead author and retail analyst, in the report. “After all, there was no rent. That was until it became clear that e-commerce costs were variable and ultimately led to a significant profit brake at the company level. “

“We fear a similar problem will re-emerge with a broad-based foray by the largest wholesale brands into DTC (both through proprietary stores and e-commerce) away from the wholesale channels on which they have built their retail empires soundly “Added Mr. Siegel.

Based on the available data, BMO’s analysis has shown that DTC has not increased company-level sales, gross margins, merchandise margins, EBIT margins and EBIT dollars. The study looked at a wide range of apparel and shoe manufacturers and retailers.

The analysis found that DTC gross margins averaged 2,350 basis points above wholesale, but the cost of DTC operations results in lower DTC earnings before interest and taxes (EBIT) than wholesale in most cases.

The e-commerce that is driving the DTC push also brings “its own expenses that are missing in wholesale,” including fulfillment, logistics, stronger marketing, technology and higher returns. These expenses can “quickly consume” any benefits from not operating physical stores.

“In addition, it now seems to be publicly known that e-commerce has put pressure on margins, not a boost, for the industry. A fact that has been shown well by recent filings from Digital Native Disruptors, ”wrote Siegel.

BMO’s report was designed to fuel further debate on the common belief that DTC is more profitable to brands than wholesale. BMO plans to investigate other potential factors causing the discrepancies, including higher margins from international and factory outlet deals, and economies of scale for wholesale brands.

Nonetheless, the report found that the ability to better control and improve a brand at DTC, despite all the margin risks, “can be reason enough to turn around”.

DISCUSSION QUESTIONS: How confident are you that DTC is a more profitable route for brands than wholesale? What factors may be responsible for lower DTC profitability than wholesale, and are they short or long term in nature?

Brain trust

“The benefits can far outweigh the expensive learning curve and infrastructure costs if a brand is looking to develop a long-term path to success.”

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