, , ,

Strong Customer-Centric Brands Need to Consider Shifting More to DTC

WM Circle Logo

By: Wise Marketer Staff |

Posted on September 3, 2020

The pandemic has seen most brands accelerating digital roadmaps that were already in place. This is true especially for retailers, as many were already lagging far behind the leaders like Amazon, Walmart, Best Buy, Sephora and others. However, as the leaders do the same — that’s what leaders always do — they will keep getting stronger and the weak will keep getting weaker. It’s Darwinism at light speed.

By: Phil Rubin, CLMP

Unless your brand is growing through the retailers above, and assuming your brand is strong and customer centric, it’s essential to (re-)consider your distribution strategy. 

As shopping habits have changed, the direct-to-consumer (DTC) trend is accelerating and one that we expect to be more permanent. Most department stores in the U.S. were struggling before COVID-19. Their downfalls were due to a number of reasons: from excessive financial engineering and too many physical stores, to too little pricing discipline, and a similar dearth of relevance and customer centricity.

Having started my career with Macy’s when it was “The Harvard of Retailing”, this is sad to see. Back then, Macy’s had impeccable standards, strategies that tied merchandising to the customer experience, and pricing discipline. Manufacturers, especially those with strong brands, saw Macy’s as an integral and strategic wholesale partner to complement their branded stores. 

But Macy’s 1986 LBO ultimately resulted in something easily foreseen: the business shifted strategy due to the pressure of its debt load. It went from relatively few one-day sales to what eventually became a monthly cadence.  Gone was the pricing advantage held when we sold the same goods as Federated stores in the same shopping centers for $2 more. It also shifted to commissions and strict performance measures, at the expense of merchandising and customer service.

Trends like these at Macy’s and elsewhere have continued for 30+ years and the results are disastrous, for both the department stores — Macy’s is far from alone in its downward spiral — and the brands that rely on them for distribution.

Or relied on them.

Ralph Lauren recently announced disastrous results that included editing 200 wholesale doors, a move that would have been unthinkable until now.  But now it looks to be smart, for a number of reasons.

A strong global brand like Ralph Lauren (RL) doesn’t need Macy’s — especially in its weakened present form — nearly as much as Macy’s needs RL. Macy’s promotional orientation weakens margins for both parties, making it harder for a brand like RL to sell DTC at full price, which is a significantly higher margin than selling wholesale, providing markdown dollars, accepting RTVs (“returns to vendor”), and ultimately lose volume and margin. Not to mention customer addressability and insights.  Ultimately, RL decided it can no longer compromise its brand, margin, and customer experience in return for high volume, low-margin business.

DTC brands are often new brands, not ones that have been around for more than 50 years. RL has been around that long and still has a well-defined brand and leadership focused on the customer, and the notion that bigger is not better, especially when it’s less profitable.

Department stores, multi-line specialty stores, and big boxes without strong brands are on the demise, with the exception of the true leaders like AMZN, WMT, Costco, Tractor Supply, and perhaps Kroger with its new marketplace initiative. The best examples of the laggards start with Macy’s, JC Penney, Lord & Taylor, and even off-price chains like Stein Mart. These retailers haven’t had any brand strength for years, if ever, and now are either in or at risk of bankruptcy. 

If you’re a strong brand and also customer centric, the future is pretty clear: DTC is the way to go, unless you have more strategic relationships with your wholesale channel “partners”. Indirect retail, as many brands have learned, can be unreliable and unprofitable. Further, they have the potential to be more so during critical times, like pandemics, periods of social unrest, and other unfortunate events that are often unforeseen (e.g., weather).

The competitive frontier has been and will continue to be driven by the customer experience (CX), or a customer-first strategy. And as a brand, you need to ensure the best experience for your customer, something not easily done through most wholesale partners.

But wait, there’s more. Beyond delivering your brand via an inferior CX, you get limited data, if any, on your customers, with correspondingly limited insights. There is also limited addressability and of course, lower margins when you sell wholesale versus DTC retail. And if your brand hasn’t been disrupted by your wholesale customer, it’s likely only a matter of when.

The bottom line

If you’ve got a strong brand, you need to seriously reconsider how you do business with certain wholesale partners. The days where you “have to” do business with partners on their own terms are over. Now is the time to reset terms where they are more aligned with needs and wants of your best customer and most accretive to your brand. Shifting from vendor/supplier to supplier/partner means you better align not only selling objectives, but marketing and customer experience objectives — and strategies — jointly for mutual benefit of you, the wholesaler, and the customer.

Here are three places to start:

  1. Identify and/or develop insights on your customers that you and your distribution partners can leverage, and vice-versa.
  2. Reconsider your value proposition in those channels versus your own, including mutual assets like the integration of loyalty program participation for both parties.
  3. Develop joint approaches on how you recognize customers before, during, and after engaging with both brands, again for the benefit of all parties.
  4. If none of those are viable, focus on DTC and other forms of distribution, including affiliates, where you at least have healthier margins than wholesale.
  5. Remember that bigger is often not better, nor more profitable.