Is direct consumer less profitable for brands than wholesale? – RetailWire
05 October 2021
BMO Capital Markets study, “DTC’s Not All It’s Cracked Up to Be,” found that while many clothing brands are aggressively turning to direct-to-consumer (DTC) sales, underlying profitability may be better. sold through wholesale channels.
âOver a decade ago, when e-commerce began its significant rise, the world expected the channel to be a boon to retail margins,â wrote Simeon Siegel, senior author and analyst at retail, in the report. âAfter all, there was no rent. That was until it became clear that the costs of e-commerce were variable and ended up putting a big drag on company-level profits.
“We are concerned that a similar problem could reoccur with a widespread push from the largest wholesale-dependent brands to DTC (both through company-owned stores and e-commerce), away from sales channels. wholesale on which they have healthily built their retail empires, âadded Mr. Siegel.
Based on the available data, BMO’s analysis found that DTC did not increase revenues, gross margins, commodity margins, EBIT margins, and EBIT dollars at the enterprise level. The study explored a wide range of clothing and footwear vendors and retailers.
The analysis determined that DTC’s gross margins are on average 2,350 basis points above wholesale, but the operating costs of DTC operations in most cases result in margins before interest and taxes (EBIT) lower than wholesale.
E-commerce, which is behind the DTC surge, “also comes with its own set of expenses that are absent from wholesale,” including fulfillment, logistics, heavier marketing. , technology and increased returns. These expenses can “quickly erode” any benefits of not operating brick-and-mortar stores.
âIn addition, it now appears to be common knowledge that e-commerce has put pressure on industry margins, not a boost. A fact well demonstrated by the recent repositories of digital native disruptors, âwrote Siegel.
BMO’s report was designed to spark further debate on the general belief that DTC is more profitable than wholesale for brands. BMO plans to explore other potential factors driving the spreads, including higher margins from international companies and outlets, as well as advantages of scale for biased wholesale brands.
Nonetheless, the report notes that being able to better control and elevate a brand at DTC âmay be reason enough to pivotâ despite margin risks.
DISCUSSION QUESTIONS: How convinced are you that DTC is a more profitable route for brands than wholesale? What factors may explain the lower profitability of DTC than wholesale trade, and are they short-term or long-term in nature?
âThe benefits can far outweigh the costly learning curve and infrastructure costs if a brand is to develop a long-term path to success. “