The three founders of the On sneaker brand – Photo: On
Footwear brands find wholesale business a better fit than direct-to-consumer
Some of the world’s biggest footwear brands have been backing away from wholesalers’ shelves in favor of direct-to-consumer (DTC) channels, but new developments in shoe retailing are signaling that wholesale might prove to be the right fit for shoes in the long run.
Nike’s reduction of its allocations to Foot Locker appears to be slowing and the athletic shoe brand recently invited wholesale partners onto its campus for the first time in three years, according to The Wall Street Journal. Michael Binetti, an equity analyst at Credit Suisse, has taken this as a sign that the top athletic footwear brand is beginning to reembrace wholesale as a channel.
Nike furthermore recently announced a new design partnership with one of its third-party retail partners, Glossy reported. Jennifer Ford, the owner of women’s sneaker retailer Premium Goods, has designed a new Nike Air Force 1, which will be available at particular women-owned sneaker retailers chosen by Ms. Ford herself.
Startup sneaker brands are also demonstrating success on retailers’ shelves, The Journal reported. Swiss high-end sneaker brand On, for instance, has focused on retailers to sell its shoes. Wall Street estimates show On achieving a compound annual growth rate of 66 percent in its fourth quarter, compared to competitor Allbirds’ 17 percent growth rate over the same time frame. Allbirds, the DTC brand which only recently opened up its product for sale at select third-party retailers, has yet to turn a profit, while On has proven profitable. Allbirds also spends more money on marketing than On.
While wholesale sales strategies may be growing popular again and benefiting some brands, not all retailers are seeing the turnaround. As recently as the end of last year footwear wholesalers were making major strategic changes to address the impact of direct-to-consumer competition on their business.
In December Designer Brands, Inc., which owns DSW, announced a goal to double its sales of own-brand products in response to national brands moving direct-to-consumer. Earlier, in April, Roger Rawlins, CEO of Designer Brands, told investors that one in every five pairs of shoes was now sold via direct-to-consumer channels.
Discussion Questions
DISCUSSION QUESTIONS: What do you see as the biggest challenges facing Nike and other footwear brands that have focused much of their resources on direct-to-consumer channels? Do you see a resurgence of traditional wholesale relationships on the horizon?
Poll
Loading …BrainTrust
Georganne Bender
Principal, KIZER & BENDER Speaking
Nikki Baird
VP of Strategy, Aptos
For many brands, direct-to-consumer is a sensible pivot. However it also needs to come with a recognition that consumers do not shop only one channel and they visit a lot of stores. If a brand does not have a presence in those channels and stores, then there is a risk of it losing out. Some strong brands like Nike may figure that their consumer loyalty is so strong it doesn’t matter, for many others this will not be the case. Even for Nike, there is a risk. The pullback from Foot Locker has resulted in the retailer boosting its partnerships with other brands like Puma and Adidas. And sales of those brands have grown very nicely. Main message: don’t put all your eggs in one basket.
Is anyone surprised by this news? Of course retail distribution offers significant advantages over an exclusive DTC strategy. One need only look at all the DNVBs trying to open stores to see the value of retail stores as part of a healthy marketing mix. Even brands of massive scale will have to be very effective to successfully convert to a DTC-only strategy — or they will have to open a lot of their own stores. And — the circle is complete.
Many sporting goods retailers did 50 percent+ of their business with Nike before they were frozen out by the firm in its push for DTC business. That forced many to close their doors forever as without Nike they could not survive. The market is shifting away to other brands like On. Their wholesale model is shaking up the market, yet there are fewer outlets for the product.
Keep in mind that most retailers are aiming toward true omnichannel sales. Each brand will reach an equilibrium point between DTC and wholesalers, while online-only footwear brands will have a steep learning curve for this complex world. If major brands are needing to work hard to figure this out, imagine what it’s like for startups.
Consumers are extremely price-sensitive now, so they’re going to shop multi-brand retail. DTC-only strategies make sense for brands with high brand loyalty, and for higher-price point brands, but in categories that are more commoditized consumers are embracing more marketplace-esque retail. Removing access points from shoppers rarely aids growth.
There is now more than abundant evidence that DTC e-commerce profitability is hard to achieve. Really, really hard. It was absolutely worth trying, but CAC and returns have proved to be formidable obstacles to profitability. Hello, my good friend Mr. Retailer. I applaud Nike’s efforts in the DTC environment. They needed to send a signal to the retail world and they needed to prove, or not, whether DTC could actually take the place of wholesale. Turns out — no. It’s a huge lesson for shoe and apparel brands and retailers. Choose your partners wisely and stay true to your brand promise. The dual goals of growth and profitability don’t mesh well sometimes, and it looks like profit is reclaiming its rightful seat at the table.
It doesn’t matter if it is online, brick-and-mortar, or feet on the street. For sneakers, it is all about eyeballs. The DTC move reduces the number of eyeballs. Even a leading brand like Nike is rethinking the model.
Having unique programs and products for various channels is an excellent idea. Customers can go to the Nike site and design their own sneakers. But Nike should still stock the most popular kicks that their crowd is wearing in stores, and make them easy to find.
I have not been a big fan of DTC. As some here point out, consumers want choices unless they are emotionally married to only or or two brands per category. I still believe that retailers do a better job of selling direct or omnichannel than manufacturers and, while this model may add a layer of cost to every product, retailers are more effective at selling than manufacturers. Call me wrong.
One of the biggest challenges in DTC is fit. It’s the same old, same old: how do I know the shoes I buy online will fit? Brick-and-mortar retailers that sell Nike fit the type of shoe to the customer’s foot and planned use. Online, you may need to order several pairs for size before making a decision to send one or both back. In a store, you can work with a store associate, try on, and purchase additional items on impulse.
I would say Nike is realizing it went a little too far pulling out of stores. Not every customer is comfortable or interested in buying footwear online.
Beyond the lack of shelf space and opportunities to sell their products, one of the biggest challenges for footwear brands focusing on direct-to-consumer channels is the cost of returns. Consumers are notorious for bracketing online shoe purchases — buying three sizes and returning the two that don’t fit. This is a huge incremental cost to brands, especially if they offer free returns shipping. As footwear brands that have shifted to direct-to-consumer experience reduced revenues and increased costs due to returns, many may shift a larger share of their business back to wholesale (IMHO).
Specific to Nike and its most recent pullback from wholesale, I have heard that they’ve come back to wholesale not truly to redevelop those relationships, but to offload over-inventoried styles. Which in itself demonstrates that there’s more to wholesale than meets the eye. But you have to have good relationships with channel partners in order to keep them both healthy and engaged. Whether Nike has learned that remains to be seen.
I think reference should be made to Zappos (now part of Amazon) for significantly opening the possibility of buying online or direct. They proved consumers have an appetite for this kind of purchase.
I speculate that the success of online shoe sales generated a lot of thinking at various shoe brand headquarters’ along the lines of, “if we did that look at the margin improvement we would receive!”
Now here we are with “the marketplace” reminding us yet again that consumers have different buying behaviors and a multi-channel approach including brick-and-mortar retail partners is probably the right go-to-market strategy. Nike has some explaining to do in their bid to hit the reset button.
Back to the future!
I agree with Georganne that with shoes and many other online purchases the question of if a product will fit is a large obstacle to customers buying DTC. How do they ensure a fit? They buy several sizes at that same time or over time in a series of purchases, both of which raises the cost of returns.
There are some brands that want to have some type of exclusivity, selling through their own channels (branded stores and DTC). For most, that exclusivity means limiting exposure. Wholesale relationships with retailers means more opportunities for visibility and sales. I always questioned why a brand like Nike would pull away from their retail “partners.” Even after reading explanations, I couldn’t understand how that could be better than having distribution through multiple retailers.
I predicted long ago that the DTC focus at Nike couldn’t be long term. In fact, it was only given the appearance of working by the pandemic.
Both the economics and consumer behavior of the DTC channel limit its potential. It never was a viable option for a long term Nike strategy. I just hope they figured it out in time.
When it comes to footwear DTC has some decided limitations starting with the loss of retail “billboarding” to returns. There may be a return to traditional wholesale relationships, but the competitive landscape has changed. For one thing, there are fewer physical retailers than there used to be. And that means that if manufacturers decide they need physical wholesalers those wholesalers ought to be in a stronger bargaining position. More importantly, we are still in the middle of a retail inflection point in terms of consumer behavior. In this case, the consumer will literally vote with their feet.
Nike will need to continue adjusting in order to understand how to balance DTC and wholesale, but the brand is not at the forefront of disrupting the industry. As brands like On find success and huge popularity, the want for the product trumps where the brand is actually sold.
Dismantling from Foot Locker may have been a play to make Nike more exclusive, but there is a clear need to make the brand more enticing on other levels.
Many footwear brands that with significant presence of brick-&-mortal and online channel, pivoted to DTC, with a vision to improve profitability by leveraging owned-audience. Over the years, brands like Nike and Adidas have built strong foundation of loyalty programs, 1P data bank, customer audience segmentation from website visits, mobile app, email subscribers, transaction at store POS and other customer journey touch points. However, there are numerous retailers such as Foot Locker and SportChek (Canadian Tire-owned Sports retailer) have strong coast to coast retail coverage and loyalty membership subscription. Footwear brands must focus on working in the entire value chain to come up with a winning formula to make the partnership happen with wholesale distribution.
As we’ve seen over and over — and over — again on RW, clothing sales are a problem when conducted online (the sizing problem, as it were). And while athletic shoes, due to their inherent flexibility, probably don’t have the same difficulties as dress shoes, or pants, there’s still an issue. So to the extent that most DTC was envisioned as being online sales — and though not 100%, I think the overlap was large — it was never going to satisfy the market 100%; there’s still a place for traditional retailers … and their vast armada of physical stores.
The growth of DTC does not imply the end of the B2B business because either channel can exist and operate in a free economy. While these channels may weaken with time, new channels will continue to emerge with the advancements in technology. However, this transformation is gradual.
DTC, in my opinion, is always a good idea, but any channel should not be entirely ruled out. Retailers should consider those channels that fit well with their business vision and the kind of customer experience they want to offer.
Having a B2B heritage and attempting to do B2C is tough.
The entire business model is different. Managing customer relationships, picking singles rather than pallets and evaluating margin are just some of the challenges.
Consumer goods companies can learn from retailers to utilise a consumer transactional relationship but a big challenge can be when different approaches to market are compared financially — a retail model very often struggles and this can impact future investment.