Is consumer-direct less profitable for brands than selling wholesale?

Photo: Nike
Oct 05, 2021

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.

DISCUSSION QUESTIONS: How confident are you that DTC is a more profitable path for brands than wholesale selling? What factors may account for lower DTC profitability than wholesale, and are they short or long-term in nature?

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"The benefits may far outweigh the expensive learning curve and infrastructure costs if a brand wants to develop a long-term pathway to success. "

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17 Comments on "Is consumer-direct less profitable for brands than selling wholesale?"

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David Naumann

For manufacturers that have never sold direct-to-consumer (DTC), there are a lot of process development costs to absorb and a learning curve on e-commerce marketing and fulfillment processes. In addition, as the BMO Capital Markets study indicates, there are a lot of incremental costs when you shift from wholesale to DTC. The companies that are probably the most successful at DTC are those that have refined the processes over years of experience.

Liza Amlani

The learning curve is quite real and a brand really needs to understand its consumer before shifting gears into a full on DTC strategy.

If the purpose is to capture data and get closer to your customer then DTC could be the right strategy. But if you are looking to scale and be on shelves and department stores where your customers are shopping, then the wholesale model could be your only way to capture market share.

Christine Russo

Customer acquisition costs are being likened to rent. Maybe they are equal — maybe they are more. They are probably less. What’s missing from the report is that the retailer gets their customer data that they wouldn’t get via a third-party seller/wholesaler. So what is the value of client data and does it close the gap?

Ray Riley

I didn’t think “omnichannel” as a buzzword could be eclipsed in retail circles, but DTC has taken that prize. The decision for direct versus wholesale has many factors. Gross margins, variable fulfilment costs based on weight of products, and purchase frequency come to mind.

In other words, if you’re a DTC mattress company (lower purchase frequency), do you really want 100+ of your own shops in the U.S., or will having a more balanced wholesale presence in places like Costco or Bed Bath & Beyond where physical customer traffic aggregates make more sense? In this case, we’re already seeing this one play out on both ends of the spectrum with Casper.

Oliver Guy
Oliver Guy
Global Industry Architect, Microsoft Retail
1 year 4 months ago

Going DTC clearly has a learning curve. These brands do not have the prior experience of selling and distributing single items to end-consumers and are not able to benefit from the economies of scale that they have selling larger volumes wholesale.

From a consumer purchase perspective there is also the lack of aggregation – for example if a consumer is buying three items at once with different brands a retailer acts as an aggregator – one order, several items processed and shipped together. If the consumer buys the items from the brand owners there are three separate orders with associated costs in terms of processing and distribution.

Ken Morris

Initially it may not be profitable until the infrastructure is in place and the subscription model takes hold. Until then, retailers will need to focus on controlling delivery logistics to reduce costs. Only a few will be able to attain the economies of scale that the wholesale world thrives on, though. I do envision a future where the subscription model, coupled with the Internet of Things (IOT), drives profitability and becomes the prevalent model for commodities. IOT, leveraging RFID, holds the prospect of changing retail as we know it.

As for marketing with DTC, costs can and should be shifted toward direct communication with customers and away from general branding via digital. This is the real value of DTC, building engagement and trust that will actually promote a subscription model.

Neil Saunders

There is a lot of truth in the analysis, not least because the costs of customer acquisition and retention as well as distribution can very quickly erode margins. However the truth will vary from brand to brand. A big brand like Nike can push up margins by doing more DTC. It has a very powerful name, maintains key distribution partnerships, and has its own network of stores. Moreover, pivoting more to DTC is part of a strategic play to get out of retailers that don’t align with Nike’s image and where margins are somewhat lower in the first place. Other brands do not have these advantages so their economics will look very different.

Carol Spieckerman

Like a lot of things in retail, it depends. Wholesale relationships can be a risky rollercoaster ride for brands when retailers play high-low games or push private brand portfolios to the limit. Even so, wholesale relationships can make a lot of sense now as supply chain snags and worker shortages disproportionately impact smaller players. Big retailers have the scale and influence to navigate these challenges. DTC success can’t be flipped on like a light switch. It takes time and commitment for DTC initiatives to earn their keep. Regardless, brands that operate multiple business models and lean into diversification are better positioned all around.

Dave Wendland

For nearly the past decade I have suggested that DTC could become a winning formula for certain brands (keeping in mind that it is not a great strategy for all types of products or categories). That said, the benefits may far outweigh the expensive learning curve and infrastructure costs if a brand wants to develop a long-term pathway to success. Here’s why:

  1. It establishes one-to-one relationships with consumers (no middleman);
  2. Mounting promotional expenses working with third-parties can be better spent;
  3. Personalization/curation becomes more attainable;
  4. The value of the relationship opens up new avenues to uncommon partnerships.
Jeff Sward

There was a time when wholesale brands made it look easy, so retailers went into the private label business. Turns out, for anything other than basic, core products it’s not so easy. And there was a time when the retailer made it look easy, so brands opened their own stores. Not so easy. DTC should be the more profitable route. The retailer gets to keep the wholesalers profit or the wholesaler gets to keep the retailer’s profit. Hence the rush for both to pursue that path. But it wasn’t easy before e-commerce and social media and now it’s downright complicated. The complexity of the skill sets necessary to get product from design to factory to DC to customer, by whatever channel or last mile tool, is a lot more difficult than most people realize. And DTC brands going public while losing significant sums of money are ample testimony to that. It’s going to take a couple more years for the jury to give us a verdict on this.

Andrew Blatherwick

What makes apparel brands believe that when retailers, which have all the infrastructure already in place, find DTC less profitable, they can make it more profitable? The cost of the infrastructure and handling of returns alone make it very difficult to become more profitable. What it also does is open the brands up to greater competition from other online brands without having the distribution opportunities through retail. Just take returns alone; the level of returns are very high and the brands have no history or experience of dealing with them and no route to market to get rid of them. This in itself is a huge drag on profit.

Only the really strong brands are able to take this step and make it work well and profitably. They also do have the added incentive of being in greater control of their brand equity. The rest do not have that and are kidding themselves if they think they do.

Craig Sundstrom

My, what a sweeping question! My intuitive response is that profitability is built on volume/efficiency, and it’s a lot easier to pack X number of items in a crate (and ship it to a wholesaler) than sending out X packages (DTC). Whatever the last mile costs may be, they fall on someone else shoulders. Ergo: wholesale wins. But there are whole industries, such as (periodical) publishing, that have been built on a DTC model. So let’s make the answer, seemingly cowardly, but nevertheless correct: it depends on the business.

Ananda Chakravarty

The best brands do both. Few pure plays have successfully navigated ecommerce, for instance. DTC, for most wholesalers and manufacturers, will need to be a dual wholesale-DTC model to start, regardless of growth. Profitability is tempered and cost savings are learned over time as the company shifts. However, this is a question of channel mix more than one of which one is really more profitable.

Profitability will be affected by many factors, but most prominent would include the wholesalers learning curve, propensity for customers to buy direct, channel competition, wholesalers understanding of customer engagement, and setting expectations across customer segments. No walk in the park, and even the best manufacturers will be challenged. Long-term effects may offset this initial time and money commitment.

Doug Garnett

DTC is usually LESS profitable (there are very few exceptions). I can say this confidently after having spent decades in DTC.

What accounts for lower profitability? Some core services are costly: Seller pays for pic & pak — at retail customer does it. Seller pays for shipping — at retail customer picks it up (and mass shipments are cheaper than one-offs). Returns are costly without stores for returns — they are also generally higher than store returns by 100% or more.

Then, there is the advertising cost required to drive business when product is not in a store. This ad cost is huge — and as business scales the ad cost grows instead of decreasing. We’ve seen this time after time with Warby, Amazon, and many more.

For a deeper dive on the economics, I highly recommend reading some of Kevin Hillstrom’s MineThatData blog. Hillstrom is a DTC lifer with extensive experience in catalogs and more.

Brian Cluster
DTC is not like other sales channels where you can simply compare volume and profit and promotional performance. DTC has additional costs such as new data needs, new shipping costs, and likely more talent resources to get the DTC up and running. But on the other side, there are benefits of insight, collaboration, and customer loyalty that is different than traditional wholesale benefits. DTC can offer multiple unique use cases including new product testing and collaboration with customers, being able to communicate and market in an unfiltered way to consumers, and lastly, gain a first-hand view of digital shopping behaviors. By taking this data about customer preferences and shopping behaviors and arriving at insights that are supportable, brands can go to their wholesale partners and share these purchase behavior insights or test results to drive their business forward. Without DTC, many manufacturers may not have the window of insight into digital shopping because many retailers don’t share it. With DTC, they can come to the table as a more valuable partner and encourage data transparency… Read more »
Nicola Kinsella

Can you put a price on owning the customer experience? What about the data?

While there are some up front costs in going direct and getting it right, the long term benefits are huge. You get to have more meaningful conversations, get faster product feedback to drive innovation. Not to mention the added margin.

The problem is, most brands aren’t set up to ship parcels. They ship pallets. But maybe they don’t have to. What if brands could consume orders and send them to their distributors or retail partners for fulfillment? That way they could own the relationship and the CX, but outsource the headache of parcel delivery. They could also reduce gray market sales of their merchandise by distributors. It’s a longer term play, but definitely worth pursuing.


Retail has a steep learning curve under the best of circumstances. Brands with the leverage to make immediate changes to their distribution mix (Nike, Levi’s, Adidas) are seeing marked success well documented in their earnings reports. DTC as a strategy is not the problem in and of itself. The problem is that every brand thinks they can go from Warby Parker to Nike over night by piecemealing the components of a profitable DTC operation. Scale is expensive and without the capital for vertical integration outside their core competencies, brands should look to outsourced solutions who have already navigated the mine fields.

"The benefits may far outweigh the expensive learning curve and infrastructure costs if a brand wants to develop a long-term pathway to success. "

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