Retailer Greed Will Breed D2C Activity
Direct to Consumer is a riskier approach but offers brands more data, higher margins, and more control.
In a standard vendor-retailer relationship, retailers have category-based margin targets and will only take on products that satisfy financial thresholds. Retailers also take allowances to fund fulfillment operations (if they are not already requiring dropship), return losses, and/or general marketing costs. From a third-party perspective, service and referral fees make up a sizable percentage of total revenue for many brands selling on marketplaces such as Amazon or Walmart.com. Consequently, vendors and sellers alike must decide if each channel’s expected contribution to the bottom line justifies the cost to sell through it. At what point does it make sense for brands to do it themselves? And which way is best for each business? Regardless, there is a clear tradeoff between the two channel types: customer base and immediate sales potential in exchange for data, margins, and control.
In response to a year during which physical locations drove far less revenue, retailers were forced to increase investments in all sides of eCommerce and partly repurpose physical locations to fulfill digital orders. Amazon is buying planes and rapidly growing its last-mile delivery effort, announcing expansions near Boston, Philadelphia, Tallahassee, and Buffalo all in the last few weeks. Walmart is adding automated warehouses to its stores to help with pickup and same-day delivery. Target has expanded same-day pickup to 1,500 stores and, in early Q4, doubled the amount of parking spots allotted to curbside pickup. All are sizeable investments and major retailers like these will be looking for ways to regain some margin. In order to help offset these increased costs, it’s likely that vendors will make price concessions and increase marketing participation, and also that sellers will implement increased fees. The question is, why not look at adding direct to consumer (D2C) to the mix?
For many brands, decreasing or even sacrificing the sales potential of massive marketplaces and retailer sites is a scary thought. According to CNBC, Amazon currently controls about 50% of the eCommerce retail market and doesn’t have much competition in the United States. Similarly, the New York Times reported Tumi, the luxury bag manufacturer, was faced with an ultimatum from Amazon after using a middleman to increase control over the Amazon retail channel. Tumi was told to “stop selling through the middleman, or do not sell to the retailer’s 150 million customers at all.” That is a clear exercise of Amazon’s control.
While the volume potential of mass retailers is a certain upside, these relationships are expensive to maintain. Currently, Amazon “collects 27 cents of each dollar customers spend buying things its merchants sell, a 42 percent jump from five years ago,” according to Instinet, a financial research firm. This slow squeeze strategy has helped Amazon become the dominant player in the space, and as such brands find themselves asking if a pivot to a D2C business model would alleviate some of their margin concerns. This approach begs the question – do we compete with big eComm, sell through them, or take a hybrid approach?
One key benefit of D2C is first party data – a valuable resource in forming the strongest possible customer relationships. If customers are willing to share information, D2C sites own all the customer data they collect, while eComm retailer platforms own the data and decide what to report. A D2C brand owns the customer relationship, just as Amazon, Walmart, and Target do with their customers.
The other major considerations are margin and price control. While average margins vary by category for each channel, D2C cuts out a lot of the referral fees, allowances, and platform fees that bog vendors and sellers down. D2C also allows the brand to sell at a balanced price to avoid devaluing the brand or deterring customers. In other words, with rich data, better margins, and pricing control, D2C brands can provide the optimal experience for their customers.
Of course, each brand (and product) has its own unique properties, and some products are not feasible for D2C due to the squeeze between competitive prices and the cost of goods sold (COGS). With these considerations in mind, listing the entire product catalog may not be a realistic possibility. However, if you sell products online, diversification is key and D2C is a channel ripe with opportunity for further growth, even if only for a fraction of your total catalog. If you have ever been frustrated with fee hikes, MAP violations, and decreasing margins, evaluating D2C as a sales channel is not a “should-do,” it is a “must-do.”