A study from BMO Capital Markets, “DTC’s Not All It’s Cracked Up to Be,” found that although many apparel brands are aggressively shifting towards direct-to-consumer (DTC), underlying profitability may be better selling through wholesale channels.
“Over a decade ago, when e-commerce began its meaningful ascent, the world expected the channel to pose a boon to retail margins,” wrote Simeon Siegel, lead author and retail analyst, in the report. “There was no rent, after all. That was until it became clear that e-commerce costs were variable and ended up driving a material company-level profit drag.”
“We worry a similar issue is unfolding again with a broad-based push across the largest wholesale-dependent brands to DTC (both via company-owned stores and e-commerce), away from the wholesale channels upon which they healthily built their retail empires,” Mr. Siegel added.
Based on available data, BMO’s analysis found DTC has not raised company-level revenues, gross margins, merchandise margins, EBIT margins and EBIT dollars. The study explored a wide range of apparel and footwear vendors and retailers.
The analysis determined DTC gross margins average 2,350 basis points above wholesale, but the costs to run DTC operations, in most cases, leads to lower DTC earnings before interest and taxes (EBIT) margins than wholesale.
E-commerce, which is driving the DTC push, also “comes with its own set of expenses that are absent from wholesale” including fulfillment, logistics, heavier marketing, technology and heightened returns. These expenses can “quickly erode” any benefits from not operating physical stores.
“What’s more, it seems a matter of public record by now that e-commerce has been a margin pressure to the sector, not a boost. A fact shown well through the recent filings of digitally native disruptors,” Mr. Siegel wrote.
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 causing the discrepancies, including stronger margins coming from international and factory outlet businesses as well as scale benefits for wholesale-skewed brands.
Nonetheless, the report noted being able to better control and elevate a brand at DTC “may be reason enough to pivot” despite any margin risks.