Why D2C models shouldn’t be the standard setup for fashion retail
What is D2C and how does this model work?
Some of the biggest brands in Fashion and Sportswear today are proudly ‘focusing on the consumer’ and offering Direct-to-Consumer (D2C) initiatives of increasing depth and breadth.
Brands that have succeeded in executing this kind of strategy have benefited from additional margins and a much closer relationship with their ideal customers. D2C gives brands the ability to leverage technology, agile production and nearshoring to sense and quickly adapt to consumer demands and produce limited quantities of hot products that sell.
However, as we’ll explore in this article, D2C isn’t the panacea it’s widely touted as being, and retailers still have a vital role to play in meeting consumer demand.
The advantages of a D2C model
The Direct-to-Consumer sales model has gained incredible popularity in recent years, providing advantages for both the brand and the consumer. The business model dovetails neatly with increased digitisation and the general shift towards more online shopping – predominantly via online marketplaces – as well as brand-specific apps and webshops.
The reasons why brands choose D2C are quite clear, consisting of:
- Keeping a better margin of total revenue – By cutting out the retailer, brands are able to save costs and take a bigger margin themselves. When brands target their most profitable items, they are able to control production so that it matches demand more closely.
- Control over the customer experience – Brands that sell directly to their end-customers can create and control customer experiences that reflect their brand identity and brand story.
- Knowledge of the customer via interaction and metrics – Increased digitisation has been a chief catalyst for the D2C model. As consumers more frequently make purchases via smartphones/other connected devices, it has become possible to get more insights into the drivers of customer behaviour.
- Marketing powered by a direct customer relationship – Not only can marketing campaigns be more tightly focused and well-designed, but they can also be delivered directly to the customer using the contact details and methods they have provided. This may be direct marketing via an app, email, SMS, social, or website, based on ultra-specific targeting campaigns.
D2C: great for brands, but bad for the retailer
While some of the biggest brands in fashion and sportswear are making significant gains thanks to their D2C initiatives, these gains are ultimately cannibalizing sales from the multi-brand retailers who find themselves cut out of the game like the proverbial ‘piggy-in-the-middle’. This can be seen from the clear inverse relationship between Nike’s increased D2C sales, and FootLocker’s projected decline in sales for 2022.
Multi-Brand Retailers (MBRs) have had to bear the costs of these ‘successes’, as margins and revenue shifts away from their physical and online stores to the brands themselves. Furthermore, MBRs miss out on exclusive deals, they lose the power of joint marketing activities, and the best-performing SKUs disappear from their inventories.
But all is not lost.
D2C isn’t capable of meeting the total consumer demand, and MBRs have distinct value to offer brands that cannot be achieved otherwise.
Why D2C alone isn’t the solution
Despite the big benefits for brands, a D2C model isn’t necessarily the perfect way of selling. While control of the customer experience is seen as a major benefit, brands lose control of the customer experience soon as the goods are passed to the last-mile delivery provider. As 36% of consumers experienced a shipping delay in 2020, this presents a strong risk that the brand cannot shield itself from.
As consumers have become accustomed to extremely high expectations of service provision (like free delivery, free returns, and next-day delivery), it is clear that they are fully exposed to these obligations, and the costs they incur.
When companies offer free returns, consumers are more likely to use ‘bracketing’ – where they buy several items and return the ones (for free!) that they don’t like after trying them out. While the biggest brands can absorb these costs, smaller brands may struggle to execute a successful D2C model because of this, and similar burdens. The technical challenges of managing fulfilment and returns may also start to shift the balance of cost vs. benefit for smaller brands.
How Multi-Brand Retailers provide enduring value
While enthusiasm about D2C is easy to find, there are numerous ways that MBRs can continue to retain a vital role in the market by providing irreplaceable value to the consumer, and the brands they come to buy.
Some ways that MBRs offer irreplaceable value:
- Provide exposure to a ready market – People will always want to go out shopping. When they do, they will see brands in the store. MBRs therefore provide a ready, willing, and captive audience of potential customers who are more likely to buy and less likely to return or ‘bracket’ purchases.
- Handle the service burden – Brands don’t need to handle the service burden when MBRs do this for them. MBRs can also offer omnichannel shopping, and offer all the convenience of online, mail-order, Buy Online Pickup In Store (BOPIS) or in-store shopping.
- Multi-purchase power – Brands who offer D2C miss out on the power of multi-purchase or ‘complementary’ shopping, and the value provided by expert merchandising. This enables additional sales to be captured by grouping dissimilar items and different brands that are frequently purchased together, because of the customer intention.
- Advertising has a broader appeal – While a brand can leverage ultra-specific advertising that targets their best customers, they miss out on selling to their other customers. MBRs can execute broader marketing campaigns that capitalize on bigger trends – Brands cannot do this alone.
- No brand loyalty for most customers – The super-fans might love a particular brand, but most consumers do not care. Is it Adidas, Puma, or Nike? For them it doesn’t matter. They’ll look around the store at several shoes (and many other products) and choose whichever is most attractive or on promotion at the time.
Is DTC here to stay, and what other trends we can expect?
Firstly, it’s important to recognize that D2C isn’t an island – it’s a peninsula which is firmly attached to the rise of omnichannel sales, generally.
Consumers will continue to purchase in whatever way is most convenient for them, and sometimes this might by via a brand’s own app or website, and sometimes it isn’t. D2C is just one of the ways that consumers want to buy right now, and this will continue to be the case until something more convenient comes along.
Recognizing that D2C is just part of the broader omnichannel trend, it’s vital that brands retain the value that is provided by retailers, and use this value by working more closely together in the future.
Through collaboration, each party can absorb and deal with the challenges of the other just as ‘one hand washes the other’. Physical stores make an essential part of the ‘omnichannel’ formula – this is why Digital Native Vertical Brands (DNVBs) have expanded to physical stores from wholly online D2C models. Retailers therefore can still provide a part of the ‘D2C model’ by potentially shipping to the customer directly from their inventory, or allowing pickup in store, for example.
Multi-brand retailers are more than the sum of their parts
When brands and retailers work together, they can generate strong synergies. While it’s great that brands can collect more detailed customer insights, it is a waste to not use these in physical stores too. Taking a deep understanding of the customer and applying it to the MBR’s physical store and website, brands can potentially sell even more of their products via those outlets, for example. And this works in the other direction too, as the retailer gets a different perspective on the consumer – for example when they help them try out an item and get consistently similar qualitative feedback, or when they process returns and see patterns there.
These qualitative insights can add a different dimension to our understanding of the customer, by sensing the customers that aren’t captured – the walk-aways. D2C initiatives are largely blind to this area, as they are focused on the ‘lowest-hanging fruit’; their superfans, loyal customers, and the high-margin items that sell best.
For these synergies to manifest, brands and retailers need to work in close partnership – and this requires trust and transparency.
In essence, they must act like a vertical company, even when they aren’t, and work in total alignment – instead of naively pursuing their own, quixotic goals.
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