These traditional brands are shifting to a DTC model. Here's how. - Retail Dive

Department stores used to be the "it" place to buy apparel. But a lot has changed in the past 10 years, and some brands have recognized they can sell clothes just fine on their own. Take Nike for example.

In 2010, DTC made up just 15% of Nike's total revenue. By 2020, the athletics retailer had grown that number to 35%, as it stepped back from wholesale partners and focused on sales through its own stores and digital channels. At the end of its most recent fiscal year, Nike raked in $44.5 billion on the back of a 40% DTC business, with plans to make $50 billion in 2022.

It's far from the only brand doing so. Retailers across the spectrum have taken a liking to the higher margins promised by selling directly to the consumer, and the pandemic's spike to e-commerce last year only accelerated that trend. Those already committed to DTC saw their efforts accelerated by an eager consumer, and for some wholesale-heavy brands, order cancellations from big retailers served as an eye-opener, and an opportunity.

"With those golden handcuffs of the wholesale order coming off of the brand, they then turn to their digital arm to say, 'OK, guys, we can now start to focus more energy on digital,'" said Noah Gellman, CEO and co-founder of media and research company The Lead. "And they looked at those teams, and those teams were underinvested and they were small, but they did have the seeds of building the direct-to-consumer business model."

Although shifting more sales to DTC has widely been touted as a positive strategy, it has its drawbacks. A September report from BMO Capital Markets found that wholesale sales come with higher margins before taxes and interest than DTC sales. Companies shifting to DTC could bring in lower sales dollars overall, the analysts found, despite the fact that brands capture more of the sales price for themselves selling DTC.

For most, it's not an either or situation, according to Cristina Fernández, a senior equity analyst at Telsey Advisory Group.

"Ideally, they want all the channels to grow, but DTC growing faster than wholesale," Fernández said. "They'll cut back partners that are not working, but for the most part, I think they just want to have strong partners that believe in their vision. So it's a combination of the two."

Below are some of the players making a dedicated shift to DTC, and why the strategy doesn't work for everyone.

Fast movers

DTC as a term has become a bit complicated over the years. At its core, it just means selling your own products to the customer yourself, rather than selling through a platform like Amazon or a retailer like Macy's. But it's also been loosely applied to startups that grew their businesses through an online-only model (think Warby Parker, Bonobos and Allbirds).

Of course, many of those startups have moved far beyond those early days and now have a wholesale business in addition to their DTC stores and digital channels.

"It's such a buzzword. I think that could be the Achilles' heel of the industry going into 2022, is that everyone says 'I'm going to become a direct-to-consumer brand' and I say 'apples' and you hear 'oranges,'" Gellman said. "And if we're not on the same page, we can't collectively come together as an industry, and we can't make the changes that need to be made."

Some of the traditional brands that are moving the fastest to take advantage of DTC have one big thing in common: They're all athletic brands. While there are certainly DTC startups in the athletics space — Vuori, Sweaty Betty and others — traditional athletics brands like Nike and Adidas are also moving hard into the model to try and take back some of their sales from wholesalers. (For a traditional athletics brand, selling DTC refers to making sales through its own stores and digital channels, rather than through wholesalers.)

Sonal Gandhi, chief product officer at The Lead, said sneaker brands as a whole have been pushing toward a DTC model, including all of VF Corp's brands (Timberland, Vans and The North Face, among others). For a company that has historically sold a lot of wholesale, making that switch involves "rewiring the internal structure to sort of cater to that business model," Gandhi said.

Although athletic brands have sold wholesale a lot in the past, they don't have the same reliance on the channel that other sectors do, according to Fernández. Retailers like Foot Locker and Dick's are important for athletics brands, but department stores and others less so. That's allowed them to push more into DTC over the past few years now that they've been able to build connections with customers through social media or their own e-commerce sites.

"It's really all the athletic brands in my space," Fernández said of who's moving to sell more DTC. "Nike and Adidas and Under Armour are the big three, and they're all kind of following similar strategies. I'd say Nike and Adidas are probably a little bit more aggressive, but they're all moving in the same direction."

Broadly, those who are doing it well, according to Gandhi, are data-driven, moving away from the seasonal wholesale calendar of product releases and digitizing their supply chains — including optimizing logistics and manufacturing, and speeding up product creation timelines.

Nike

Nike is probably one of the brands most cited for shifting to a more DTC-reliant model. As of its most recent fiscal year, DTC is nearly 40% of the business and is projected to reach 60% by 2025. Side by side with its pursuit of DTC sales is an emphasis on digital. The company expects to be a 50% digital business, through both its own channels and its wholesale partners, by 2025. That's up from nearly 35% at the end of its most recent fiscal year.

To do so, Nike has pursued a strategy to cut down on wholesale partners that don't offer a differentiated experience or present its brand the way it wants. That's reportedly included Urban Outfitters, DSW, Macy's, Zappos and Dillard's, among others.

"Nike's definitely changing things more in the sense that they're taking more aggressive steps to overhaul their wholesale distribution," Fernández said. "So you've seen them, and we'll see them over this next 12 months, eliminate a lot of wholesale partners ... that they felt like weren't as closely aligned with their long-term model."

Adidas

In March this year, Adidas announced plans to reach a 50% DTC business by 2025, about 10 percentage points behind where Nike aims to be by that time. In 2019, Adidas had a 30% DTC business and grew that to 40% in 2020 (on par with Nike). Like Nike, the retailer is betting big on e-commerce, hoping to double its digital sales during the same time frame to between 8 billion euros ($9.6 billion at the time of the announcement) and 9 billion euros.

In discussing the strategy in March, CEO Kasper Rorsted said DTC would drive more than 80% of the company's net sales growth over the next four years as it shifts away from some wholesale partners and holds onto strategic ones. According to Gandhi, reaching that 50% mark of wholesale to DTC is ideal, provided it makes sense for the category a retailer is in.

"But even then, just having to maintain two sets of operational models — one that supports wholesale and one that supports direct to consumer — is a lot of work and challenging," Gandhi said. "I think over the long term, they might even want to make it a greater portion of their business and just have the wholesale model as a way of acquiring customers that they wouldn't acquire on their own."

Adidas itself is also aware of the complexity that comes with the shift. Harm Ohlmeyer, chief financial officer of Adidas, touched on both the opportunity and the challenges when announcing the company's goals.

"Moving from a largely wholesale-driven to a DTC-led business model is a tremendous opportunity from a strategic and from a financial perspective," Ohlmeyer said. "But it also means that an increasing share of sales is realized by shipping individual parcels to consumers instead of large bulks of products to wholesale partners. Individual product returns need to be handled, omnichannel offerings are becoming more important. All of this increases the complexity in our supply chain and we hold onto inventory longer. That said, we have a clear understanding of all of those moving parts and have a proven ability to mitigate them."

Under Armour

The last of the big three in the athletics space, Under Armour, in October last year, announced it would exit between 2,000 and 3,000 wholesale doors, a two- to three-year journey that was set to start in the back half of this year. In Q4 of 2020, DTC grew 11% thanks to a 25% rise in e-commerce, and the momentum has continued since then.

In August this year, CEO Patrik Frisk noted the company has seen a "significant increase in DTC" and "considerably lower" wholesale sales, as part of its strategy to adopt a more DTC-focused model. Both channels were up greatly over 2020, with wholesale growing 157% and DTC increasing 52%.

As Under Armour and its peers make that shift — trimming down wholesale partners and building up digital along the way — they have a benefit that not all apparel brands do: recognition.

"Athletic brands are stronger and they're more recognized," Fernández said. As a result, moving to DTC is "a little bit easier for them."

Pivoters

Outside of the highly publicized strategy shifts from Nike, Adidas and others, plenty of additional brands are moving to sell more directly to the consumer. The Lead's recent Direct 60 List, which highlighted executives for developing and improving DTC models at traditionally wholesale companies or at DTC brands not born online, includes the likes of Express, J. Crew, Marquee Brands, Estée Lauder, L'Oréal and PVH.

"There's ... brands that are highly, highly wholesale that are now making major shifts into DTC. So they're going from 90%, 95% wholesale into a much higher percentage of that business coming from DTC," Gandhi said. "Brands you wouldn't even think of, like Movado."

Columbia Sportswear is pursuing a similar strategy. The company has committed to investing more in digital and DTC, including building out its team on that side of the business, with CEO Tim Boyle saying it is "critical" to long-term growth.

Some electronics brands have made the shift by opening their own stores, including Samsung, Fernández said. Joe Feldman, a senior equity analyst at Telsey Advisory Group, also mentioned Ralph Lauren and Tommy Bahama, which aren't necessarily aggressively cutting down on wholesale but have moved further into DTC.

"I think some of that happens by default, just given that a lot of the department stores have gone away over the past five to 10 years, whether it's fewer stores or they literally don't exist anymore as an entity," Feldman said. "By default, some of these companies had to adjust how they've come to market, which obviously includes leaning into the DTC model a lot more."

The shift to e-commerce caused by the pandemic only compounded that as shoppers stopped going to the department stores or other wholesalers they used to buy from. Instead, they bought directly from brands, leading some companies to get "a whole deluge of new customers," according to Gandhi. That influx of shoppers justified investments for some companies in digital and omnichannel technology they previously hadn't prioritized.

Wilson

Well known as a sporting goods manufacturer sold through specialists like Dick's, Wilson in spring this year decided to capitalize on its brand and try to form a more direct connection with customers. The company launched an apparel line to complement its assortment of sports equipment and in July opened its first physical store.

Wilson has experimented with pop-ups for "decades," according to the company, but a store in its hometown of Chicago was the first permanent brick-and-mortar space dedicated to Wilson products. At the time, the company also outlined plans for stores in New York, Beijing and Shanghai, and called it the beginning of a "direct-to-consumer expansion." Since then, Wilson has also opened a pop-up tied to the U.S. Open to highlight its tennis-related products and long history in the sport.

Crocs

Crocs in 2014 made nearly 56% of its revenue through wholesale. Over the past few years, the tide has been turning toward DTC, with wholesale mostly declining. In 2020, wholesale made up 50% of revenue on the nose, while its own website and stores made up the other half. Crocs is digging in even further on that strategy, aiming for digital to make up half of its revenue by 2026.

The company has said it's seeking a "digital-led route to market," with continued double-digit growth in its DTC channel. In Q2, DTC made up over half of its revenue, at 52%.

Levi's

A brand that's been experiencing a renaissance of sorts lately, Levi's has also been steadily shifting its business away from wholesale and toward DTC. CEO Chip Bergh in 2019 said wholesale had declined to 30% of the business, down from around 50% eight years earlier. By the end of fiscal year 2020, DTC had grown from 20% of the business in 2011 to nearly 40%, according to a filing with the SEC.

Over the next decade, the jeans brand is hoping to grow that number even further, working toward an eventual 60% DTC business. In so doing, the company has shuffled its executive leadership to emphasize DTC and digital and planned a larger store footprint for itself.

"As store productivity levels continue to recover, we are confident in the outlook of our DTC business and we will continue to invest in growing all segments of this channel," Bergh said in July, according to a Seeking Alpha transcript. "We also remain focused on diversifying our business."

Hoka One One

Acquired by footwear conglomerate Decker's in 2013, running brand Hoka One One is available in specialty running stores as well as its own site. Decker's CEO Dave Powers said in July that Hoka drove the majority of its DTC growth in Q1 and the running brand's revenue outpaced the company's Ugg brand for the first time in company history.

In early September, the running brand announced it would open its first brick-and-mortar locations through two pop-ups in New York and Los Angeles. Hoka said the store openings are "an important next step for both sales and branding purposes," noting that net sales at the brand grew 95% to $213.1 million in Q1.

Committing to a higher mix of DTC allows brands to get to know their customer better and, in the case of Hoka, opening stores can aid that further by getting more granular information, Fernández said. "Anything footwear, apparel, athletic — it's been trending in that direction."

And indeed — Decker's is also pushing a DTC model with its other brands, hoping for 50% of total revenue to be DTC over time.

"This quarter represents further progress toward our long-term strategies, which include accelerating consumer adoption of the Hoka brand globally, to build the brand's revenue to $1 billion and beyond, building Ugg as a year-round global lifestyle brand through a diverse product offering and executing a digital-first approach by prioritizing direct-to-consumer acquisition online and working towards a direct business that will represent 50% of total revenue for the company over time," Powers said, according to a Seeking Alpha transcript.

Stay put-ers

The DTC dream isn't for everyone.

Despite the hype around DTC, wholesale is still an integral part of doing business for many brands. Coresight Research predicted earlier this year that brands would continue to rely on a hybrid DTC and wholesale model for the next three years while growing DTC.

The importance of both channels is displayed practically every day in retail. Digital-first brands are increasingly forming wholesale partnerships to expand their reach, and likewise, traditionally wholesale brands are experimenting with selling directly to consumers.

"I think they go after wherever they can get the dollars, quite honestly," Feldman said. "They're not trying to push DTC if it means impacting the growth in their wholesale channel … They just don't think like that. They'll take sales where they can get it and they would like the direct-to-consumer foundation to be higher, but if it's not, they can live with that because they're just selling it through other outlets."

And the reality for some brands is that selling direct-to-consumer just doesn't really make sense. Sources pointed to CPG food and personal care brands as a tough sell for DTC. Basic commodities and lower-priced products are harder to profitably sell online, and consumers generally shop for them in a larger store like a grocery store or mass merchandiser.

Even a category like accessories is difficult to sell on its own, according to Gandhi.

"It really depends on who their customer is and how their business is oriented to say to what degree they're going to go DTC," Gandhi said. "For an accessories brand, I don't think there will ever be a big push and will ever be DTC because of the nature of how a consumer buys accessories. They always buy it when they buy apparel, so they probably will rely more on wholesale."

It's a reminder, in an industry that has generated a lot of excitement over the likes of Warby Parker and Casper, that selling DTC has its limits. And not every brand is built for it.

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These traditional brands are shifting to a DTC model. Here's how. - Retail Dive
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