How successful fashion brands navigate the move from DTC to wholesale
In recent years, direct-to-consumer fashion commerce has grown remarkably, allowing customers to buy from brands directly. This trend has allowed brands to eliminate many working capital costs.
However, with the proliferation of DTC brands and the ever-changing landscape of fashion ecommerce, many brands are now increasingly looking to go beyond DTC by partnering with wholesalers.
In this article, we'll explore how forward-thinking fashion brands are seeking to boost sales by running a wholesale channel alongside their DTC sales – and how they strike the right balance between the two.
The only constant in commerce is change. When DTC became popular during the pandemic, wholesale struggled, but when COVID-19 died down, DTC struggled to sustain growth, and wholesale recovered. It's important to keep tabs on the market, determine what's best for your business, and act accordingly.
Nowadays, a new crop of DTC brands are tapping into wholesale partners early on to build awareness and expand their consumer base. Finding the right balance between DTC and wholesale just might be the key to your fashion brand’s profitability.
Get your DTC-wholesale balance right
At some point, many fashion brands transition from DTC to wholesale, and end up generating some or most of their sales from department stores and other retailers.
Getting a wholesale partner is an attractive option for many fashion brands. Although online-only retailers have replaced department stores as the primary wholesale accounts, chain stores still play an important role. However, finding the right balance between sales channels is becoming increasingly difficult. Brands should aim to generate 20 to 50 percent of their sales from online wholesale sales.
Don't compete with your retailers
If your DTC efforts focus only on making sales, you may end up creating a conflict and unnecessary competition with your retailers. This has the potential to hurt both your DTC and wholesale efforts. Consider how your DTC website can play a different role with consumers.
Having a mindful DTC strategy can help you create a mutually beneficial arrangement that helps both you and your retailers grow your businesses. Differentiate your products from those sold by your outside retailers. In order to avoid competing with the retail base you’ve painstakingly built over time, you can hold back certain products you sell exclusively to consumers. This can be done by offering products online that greatly differ from those your retailers are selling.
Brands that structure their wholesale partnerships in the right way and with the right retailers can get themselves in front of a bigger pool of potential customers.
Make sure you can afford wholesale
Small brands should consider if they have enough money to produce their initial wholesale orders, as retailers don't always offer an upfront deposit to begin production. A smooth run with one retailer will boost your reputation with others.
Most retailers require 60-day payment terms (on shipment). This means you may need to pay your vendors before you get paid by the retailer. Granted, the transaction is profitable for the brand in the long term, but this can create a cashflow challenge by reducing liquidity on a regular basis. This may result in your entire business living on the float.
Working with retailers
Many emerging brands still want to sell wholesale once they reach a certain size, despite multi-brand retailers' difficulties over the past decade. To get noticed by a retailer, you need to have industry connections and a good sense of the retailer's target customer.
How to choose a retailer
Similar to the right approach to digital marketing, instead of throwing advertising out into the world without direction, you want to target a specific audience through demographic or psychographic factors, or online behavior that aligns with your brand and product for the best fit. In that way, finding the right wholesale partners is targeting your audience, but in real life.
When deciding where to sell, consider the store's location, its relationship with shoppers, and reputation. As in any business arrangement, there are no limits to the number of details that can be negotiated. Use your brand position as leverage to influence the conversation.
Choose stores that believe in your brand and are willing to give it time to grow. However, just because a store carries a popular brand doesn't mean it's a smart partner.
Ensure that the physical stores will create a compelling shopping experience for your target audience, making them want to return and buy again. Brands should prioritize stores with strong sales associates and outstanding customer service.
Take your time when selecting a retail partner to identify one that aligns well with your brand's interests, values, mission, and principles before entering into a long-term wholesale relationship. A strong relationship and trust between parties is crucial, whether sales are wildly successful or disappointing.
There are many different kinds of retailers, and just like when considering the benefits of DTC or wholesale, there are benefits to working with both big and small ones.
Working with big retailers
Big retailers give you instant recognition, larger audience sizes, and exposure. However, since everyone else is fighting to get the same status and exposure, there is fierce competition to get in.
To ensure your products are being marketed and pushed alongside everyone else, you have to compete with brands that may have much bigger marketing budgets and headcounts than you. There's also a lot more relationship management that goes into courting buyers who work at the big names.
Working with small retailers
When dealing with small retailers, you don't get the same scale, but they tend to be much more flexible in terms of price, have more targeted audiences, and provide a more human touch – something that deeply resonates with shoppers nowadays.
How to manage small retailers efficiently
Finding and maintaining relationships with small retailers can be a major hassle. Smaller retailers place smaller orders, and you have to fill a lot of them to make up the volume of one larger retailer. This process has historically been the domain of tradeshows and in-person buyer relationships, but is now in big part replaced by digital wholesale platforms.
That is where Centra comes in, fixing the legacy distribution model and taking much of the burden off your shoulders. By giving you tools to sell through both DTC and wholesale channels, the Centra ecommerce platform allows you to centralize your processes and democratize product discovery across both channels.
With Centra, you can create a wholesale experience that mirrors direct‑to‑consumer ecommerce. You can invite merchants to a digital showroom with individual pricing, global tax calculations, shipping management, and more.
Centra aims to fix the legacy distribution model by addressing the key expectations of fashion buyers:
Modern fashion merchants no longer want to place wholesale orders via offline meetings with sales reps. To remain competitive, brands are increasingly switching to digital wholesale.
Merchants want the same buying experience as your DTC clients – virtual showrooms, individual pricing, and the ability to place orders on their own. With Centra, the wholesale buying experience mimics that of familiar direct‑to‑consumer shopping, making it pleasantly simple to buy.
|DTC||SMALL RETAILERS||BIG RETAILERS|
|Initial cost of investment||High||Low||High|
|Risk of returns||Medium||High||High|
Online marketplaces like Amazon or Zalando can offset some of the digital marketing costs of direct sales and help brands compete with pure direct-to-consumer businesses that were built with the expectation of paying higher consumer acquisition costs.
For a deep dive into using marketplaces to boost your DTC sales, head over to another post on our blog.
Reasons to consider wholesale
Wholesale may not always be the best way forward, but there are a couple of key arguments in favor of considering partnering with a retailer to grow your business.
The customer base that your wholesale clients have built will help you grow your consumer base. This is likely the main advantage when selling products to large retailers or chains. In other words, if you sell wholesale, you can spend less time chasing individual end users and more time improving your products.
When selling through wholesale, you will be moving your products with greater predictability. This is an advantage - instead of selling your products one at a time, your bulk wholesale orders generate a decent-sized predictable and regular income. Retailer orders and reorders - unlike DTC sales - typically follow a predictable schedule, which can be helpful for planning and streamlining your production process.
The rising cost of running DTC
DTC businesses have significantly higher operating costs than retailers. Marketing, advertising, and SEO are all backend costs that come out of pocket for a DTC brand.
Due to factors such as rising online advertising costs, running a DTC business is much more expensive compared to wholesale retail, and is getting even more costly as inflation rises. There is also the post-pandemic recovery in traditional retail across the globe. The NPD Group reported that in-store sales accounted for 64 percent of total retail sales in September 2021, as consumers crave in-person experiences in a post-COVID-19 world.
When selling to retailers, the cost of doing business is much lower. Among other things, the retailer takes on the responsibility and cost of marketing. A physical store also serves as a hybrid solution for retailers, providing storage and sales space.
Historically, wholesale has been a great option for brands in terms of security – they fulfill an order and get paid regardless of what's actually sold. In return, however, they need to sacrifice a part of their commission on those sales. Wholesale relationships can be profitable provided there is a sensible profit margin for the brand (e.g., a >70% product margin is a good benchmark). Large orders are fulfilled in bulk at a much lower cost per order, but economies of scale still work to your advantage.
For retailers, it's also a pretty good setup. Buyers get to choose exactly what they want, how much they want, and when they want it, plus they can purchase products at a lower price and still make a fair profit off of the markup. The downside is they may be left with a surplus of goods that eventually need to be marked down if they're not sold – or returned to the vendor (RTV).
Soaring DTCs shipping and digital advertising costs
DTC businesses are increasingly reporting losses as inflation, shipping, and digital advertising prices have skyrocketed over the past two years. It is becoming difficult to ramp up margins high enough to make up for the soaring fulfillment and shipping costs. Combined with consumers' renewed interest in traditional retail shops, these costs make sustainable growth through DTC alone more challenging than ever. This entails losses in sales and declining customer numbers.
Distribution and scale
Beyond the costs associated with building an audience and customer base, DTC brands face a unique challenge – the lack of scale in terms of production and operations. There are two possible strategies to overcome the challenge of scaling beyond DTC:
Wholesale partnerships – greater contribution margin while keeping CapEx, fixed costs, and selling, general and administrative expenses (SG&A) low. This, in turn, can give vertical brands increased negotiation power with factories and service providers in order to lower their outlays. More money can then be invested back into growth and fixed costs.
Opening own brand stores.
Many DTC/Digitally Native Vertical Brands are too small to devote a lot of resources to raising awareness of their brand. With social media so noisy and crowded, they may find it hard to be noticed. But partnering with retailers can provide a discovery path, harnessing traffic generated by the retailer as well as the collection of brands they carry.
Probably the most crucial perspective for DTC brands to consider when assessing potential wholesale partners is how this partnership will influence their brand equity. Developing and implementing your brand, community, and ethos is a painstaking, meticulous process. Partnering with the wrong retailer could easily undo all the hard effort invested in building your brand.
Ideally, brands should be looking to maximize the synergy effect and brand-retailer compatibility.
When wholesale may not be the best move for your brand
DTC operations tend to do better than wholesale operations for some brands, and vice versa. There are many examples of DTC companies that have been successful. However, there are also some caveats that may make wholesale a less desirable option for some brands.
Less control over sales, drops, and discounts
Overall, the sales cycle is going to look different. The bigger the retailer, the bigger the growth opportunity – even if it takes longer than you're used to. With DTC, you can push and pull sales and promotional levers at any point, but retailers are on a fixed yearly schedule. With wholesale, you'll have to stick to their old-school calendars and understand their sales cycles and resets. Because you get paid differently, growth will also look different – you need to be prepared for this challenge.
Loss of direct audience relationships
Brands selling through wholesale are completely cut off from the consumers who buy their goods. Their products are available to a much larger potential customer base, but they've got no contact with those customers. Retailers fundamentally cater to the taste of an average consumer and may not care that much about your carefully built image, target audience, and pixel-perfect storytelling. This goes against many fashion brands' goals and strategies. DTC and DNVB (digitally native vertical brands) brands are typically built on identifying and carefully catering to niche audiences that require specific products tailored to their needs.
This is not the case for retailers – they just want to sell more and drive revenue. Their needs may not necessarily align with your priorities and strategies.
Loss of control over storytelling
For digitally native brands, great product and brand marketing – images, models, and storytelling – is paramount. It’s the most powerful and important driver of growth and value creation.
However, it is not the retailer’s business to help your brand marketing-wise. In the long term, the integrity of your brand and product cannot be aligned with that of the retailer. Their goal, just like yours, is to delight their own customers and sell more. Your product is just merchandise that happens to be sold through their store.
Lack of control over customer experience
Direct-to-consumer is important as it gives brands complete control over their products, pricing, relationships with customers, and marketing. But, they're on their own when it comes to growth – wholesale automatically opens millions of doors, wheeras DTC requires brands to work hard in order to gain visibility and attract customers.
The customers acquired through the wholesale channel will very likely understand you as a brand owned and distributed by the retailer. Few customers buying the product in the physical store will try to find your own channels and become your direct customers. Furthermore, you won't be able to see the customer journey, since the retailer carefully guard customer information and transaction details.
As a founder, you treat your brand as your baby and expect full control over the entire customer experience. When doing wholesale, you must learn to let all of that go. You will have less (or no) control over the way the product is displayed, and when it’s on sale. Also, you will not be able to directly collect customer feedback and improve the overall brand experience.
Digitally Native Vertical Brands (DNVB) have the advantage of surgically translating marketing capital into demand generation, finished good supply, and supply chain production and material forecasts. Purchasing bulk wholesale will disrupt that optimization, compromising the stasis of your supplier base, warehousing, and operational teams.
This includes modifications to direct fulfillment operations optimized for your customer experience versus optimized for the retailer's own 'door to floor' ideals.
Selling to retailers is not the same thing as selling to customers. If your products linger on the retailer's shelf, you will inevitably get them returned to you. Sales space in brick-and-mortar stores is limited – products that don’t sell well need to be cleared by the retailer to make room for more in-demand items.
These are two most common outcomes in such a scenario:
Price reductions – e.g., clearance sales, drops, seasonal discounts, etc.
Return to Vendor (RTV) – the retailer boxes up shop-worn inventory and sends it back for restoration, unpacking, and restocking. The brand will also have to refund the retailer for the returned goods in addition to the variable costs.
Lack of control over pricing
Manufacturer's Suggested Retail Price (MSRP) is a term originally created to give brands some degree of control over the price at which the retailer sells their product. But it's worth remembering that MSRP is just a "suggested" price, nothing more, and the retailer is under no obligation to respect it.
When entering into a wholesale partnership, the brand and the retailer are typically aligned on the suggested price, which the brand defines. However, depending on how sales go, the retailer can lower the price to spur more demand. Moreover, if multiple retailers sell your product and one of them reduces the price, it will very likely trigger a domino effect of price reductions over which the brand has no control.
|Pros||• Higher profit margin at point of sale • Higher customer engagement • Better targeting and remarketing opportunities • Better audience building opportunities||• Large customer base • Easy access to new audiences • Advertising and marketing costs are on the retailer's side|
|Cons||• Higher operating costs (SEO, marketing, online advertising) • Smaller customer base||• Lower profit margins at point of sale • High cost of entry for new, small brands (tradeshows, vendor relationships)|
Retail is still strong and relevant. Over the past two years, in-store sales have ramped up, and retailers are reporting stronger numbers than pre-pandemic. Although the pace of ecommerce adoption is not slowing down, it is not expected to replace retail any time soon.
Deploying a sound wholesale strategy is a nuanced process that requires consideration of many factors. Customers are no longer avoiding brick-and-mortar shops. Rather, they are eager to be involved in the shopping experience on a more personal level than online shopping allows. This creates growth opportunities for brands that develop and execute a smart wholesale strategy and use the right tools to showcase their products to potential partners.