image courtesy of Daphne Howland/Retail Dive
Dive Brief:
- As brands large and small try to capture more margin by selling directly to consumers, analysts with BMO Capital Markets question whether the strategy is truly more profitable.
- In a recent report, the analysts found that wholesale sales come with higher margins before taxes and interest than DTC sales.
- Moreover, shifts to DTC channels could translate into lower sales dollars overall even though brands capture more of the sales price for themselves. The BMO analysts wrote that “although revenue per item grows at DTC, the units lost by abandoning wholesale generally overwhelm the unit price lifts at DTC.”
Dive Insight:
Nike is doing it. Adidas is doing it. Crocs is doing it. Canada Goose, Vera Bradley and Michael Kors are doing it. Brands across the board have been expanding and prioritizing their direct channels, often to the detriment of retailers that rely on national brands to drive their own sales.
The strategy is based on the straightforward promise that brands can capture more of the sale price of a product and thus keep more of the profits. But the BMO report calls into question the formula that more DTC sales equal higher profits.
The analysts estimate that wholesale margins are about 1,000 basis points higher on average than those of DTC, prior to taxes and interest payments. The reasons for that are not really known with any certainty. The BMO analysts suggest a few theories, including that the scale of wholesale sales reduces the cost of goods sold and that wholesale sales boost the visibility of a brand.
For a brand, making DTC sales online is a costly venture compared to wholesale. The BMO analysts point to numerous expenses, including “fulfillment, logistics, heavy marketing, technology, heightened returns, etc., which can quickly erode the aforementioned [gross margin] gains that ecomm enjoys over wholesale.”
The costs of selling goods online are laid bare in numerous initial public offer filings and the quarterly reports of DTC brands and other digital natives. Casper, for example, has never made a profit off its operations. Honest Co., Allbirds and others who recently filed for IPO have histories of operating losses.
Often online specialists find that the costs of fulfillment and online marketing eat up massive sales gains. Scale is therefore crucial for DTC profitability, but reaching it is very often a money-burning endeavor.
If the promise of DTC sales is more sales price in the pockets of brands, for wholesale it is having partners to share in the expenses of reaching a broad consumer audience.
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