Wholesale curtailed. Is retail’s favorite model faltering?

Discussion
Photo: Nike
Mar 08, 2021
Carol Spieckerman

Through a special arrangement, presented here for discussion is a summary of a current article from the Spieckerman Retail blog. The following article synopsizes key takeaways from Episode 21 of the Spieckerman Speaks Retail podcast.

The wholesale model has been driving retail for decades. Today, a mini-movement is underway, as brands like Nike and Under Armour announce pullbacks on wholesale relationships.

Late last year, Nike announced that it would withdraw from a handful of middle-market regional players like Belk and Dillard’s. The exit followed Nike’s move in November 2019 to end direct distribution to Amazon.com. In February of this year, Under Armour announced that it will be closing 2,000-3,000 wholesale accounts.

Why are they doing this? Because they can.

What’s really going on is a power shift. These days, the platform owner has the power. Sometimes the platform is a retailer, sometimes it’s a brand. And retailers that are just places that sell brands no longer have a compelling platform, particularly if everyone else carries the same brands.

Nike has built a physically- and digitally-connected brand empire that powers its direct-to-consumer (DTC) sales and brand loyalty. As its platform amps up, wholesale relationships have become a liability that compromises the Nike brand, price control and profitability.

With its platform at full strength, Nike is able to eliminate intermediaries, many of whom were just retailers that sold brands rather than being brands themselves.

Although it’s in the earlier stages of platform building, Under Armour’s decision has a similar rationale. For now, Under Armour has the brand power to back away from some wholesale relationships. But if its DTC aspirations pan out, Under Armour will have the platform power to break ties with many more.

Adding some intrigue to the story, Nordstrom is pulling off its own retreat from wholesale and selectively shifting to a concession model, although it has the customer experience platform and brand equity to pull it off.

The curtailing of wholesaling will accelerate as more brands exercise their options, build out their platforms and strive to take ownership of their destiny (and data). This movement will fuel brick and mortar expansion as brands trade intermediary-based relationships for DTC models.

Even so, very few brands will abandon wholesale completely. The retail scene will look more like a hybrid situation for the foreseeable future. Wholesale isn’t played out just yet.

DISCUSSION QUESTIONS: Is the wholesale model in soft goods retailing at odds with direct-to-consumer initiatives? What criteria should drive brands’ decisions to shift away from wholesale relationships?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Until brands have good penetration of their branded stores, they may continue to operate with a hybrid model of DTC and wholesale."
"I think this is just the inverse of retailer private label. Of course brands will want to take the opportunity to sell direct to consumer and keep the extra margin dollars."
"...the brand vs. retailer battle is more acute than it has ever been. It is, however, a relationship that works because they need each other."

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17 Comments on "Wholesale curtailed. Is retail’s favorite model faltering?"


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Suresh Chaganti
BrainTrust

As Carol says in the post, it is a power play. But it also depends on the product category. High value, discretionary spend items like apparel, jewelry, and luxury tend to build their brands and continually invest in them. With sufficient brand equity, awareness, and recall in the marketplace. At some point, the scales tilt and the need to be choosy and the ability to get higher margins are more important than the need to be everywhere to drive the revenues.

David Naumann
BrainTrust

The drive for brands to shift to a direct-to-consumer (DTC) model is compelling with greater control of customer data and insights and increased margins. However the shift must be done strategically to avoid lost sales due to lack of product availability. The accelerated shift to online shopping has helped, but there is still a large segment of consumers that prefer to try on apparel before they buy. Brands need to make sure they have a core base of stores carrying their product in all geographies. Until brands have good penetration of their branded stores, they may continue to operate with a hybrid model of DTC and wholesale.

Bob Amster
BrainTrust

Wholesale and DTC are definitely at odds. The question is, which brand manufacturers can sell successfully directly to consumers? There are two factors at work here. One is, can the brand manufacturer make money when trying to pinpoint customers to whom they can sell and ship their brand? The second factor is, do consumers want to shop directly from the single source of that brand, or shop where there is a variety of brands in a rich assortment? Time will tell…

Paula Rosenblum
BrainTrust

I think this is just the inverse of retailer private label. Of course brands will want to take the opportunity to sell direct to consumer and keep the extra margin dollars. But just as private label has become a real part of a retailer’s selling mix (so the retailer can gain more gross margin dollars but still sell brands as well), we’ll see the reverse.

DeAnn Campbell
Guest

Going from wholesale to direct to consumer has been building for years. Now that we are at a tipping point for consumer comfort with online shopping, there is nothing to stop major brands from taking back control of their own brand experience by cutting out the middle man. But this sets all of retail on a perilous path. Only brands with access to brick-and-mortar touch points will do well at direct to consumer, which is great for powerhouse brands like Nike and Under Armour. But this places smaller brands who don’t have a store network at a distinct disadvantage. As more brands withdraw from the wholesale model, there will be a surge of store-within-a-store partnerships developing across retailers with large physical store networks to establish that important physical presence to support direct e-commerce — not unlike what Target is doing right now with Levi’s, Ulta and Apple.

Rick Watson
BrainTrust

So many brands are still no good at not only DTC selling, but also DTC operations. This means there will be a role for a retailer for some time, and additionally the consumer finds it valuable too. There will always be a role for brand discovery. With marketplaces crushing everyone online, it’s just that there doesn’t need to be quite as many retailers as there used to be.

Andrew Blatherwick
BrainTrust
There are very few brands that currently have the power to be able to walk away from the retail model and even fewer who could ever do so completely. Nike has always had very tight control of their supply chain. They have rationed retailers and even refused to sell to some retailers if they did not respect and represent Nike brand values. The very rapid development of the online channel has given brands more opportunities to supplement traditional channels with online sales but few of them would have the power to do what Nike has done. Consumers would not want this either. The social experience of shopping is still strong and consumers don’t want to buy everything online nor do they want to have to visit many different shops to make their purchases. Online gives an opportunity to present the brand and build the brand values. Retailers then need to ensure that their brand is strong enough to draw consumer in. There is nothing new in this tension, but the brand vs. retailer battle is… Read more »
Zel Bianco
BrainTrust

This is about margin but it is also about brand consistency. If you think about it, its very much like the automotive business model. You don’t see BMWs or any other car brand being sold by anyone other than a BMW dealer. Even used or, should I say, pre-owned BMWs are sold while being very mindful of the brand. Wholesalers do not become part of the equation until dealers sell cars to wholesalers. It does not surprise me that brands like Nike and Under Amour want to control every step of the brand in the sales cycle and beyond.

Yogesh Kulkarni
BrainTrust

Nike’s DTC movement isn’t really new, but the massive sales shift (over 30 percent of Nike’s revenue is now direct) during COVID-19 has accelerated the move out of its non-strategic wholesale. All along, strong brands such as Nike have cared about direct customer relationships because that’s where they control their own destiny. Under Armor’s revenue issues with liquidation of Sports Authority had also started them out to focus on the DTC build out as well. However more than just protecting revenues, brand image and price leverage, DTC is extremely foundational to these companies in building a digital DNA. Direct consumer data is very important for strategic reasons such as direct product feedback and design, new store technology/experience design and emerging business model designs such as subscriptions.

Jeff Sward
BrainTrust

The wholesale model has been under attack for decades. It’s just that now, finally, brands have options–really, really strong options. Ever since the introduction of the “chargeback,” or maybe better expressed as “margin deals,” the wholesale model has been looking for alternative access to the customer. And now they have it, big time. Margin deals were sometimes totally legitimate risk sharing arrangements. They were mutually agreed to with eyes open on both sides. And sometimes they were outright shakedowns, a pay-to-play scenario that was totally one sided. DTC is as much about brand management as it is about the extra couple of margin points available to the brand. There are retailers who use some brands for their halo effect and do those brands no favors in how they are executed in store. Profitability and long term survival are huge incentives for the push to DTC distribution.

Dave Wendland
BrainTrust

The shift to DTC has been building for some time. And like so many other aspects of the retail supply chain, has accelerated over the past year. As Carol suggests, “Retailers that are just places that sell brands no longer have a compelling platform.”

Margins have become compressed and alternatives to waiting for shoppers to visit physical stores to purchase items make the digital space highly valuable to brands. Not to mention the customer relationship that can emerge.

Wholesalers — and retailers — must convince brands that they bring value or they will continue to find themselves in the crosshairs of this newly-shaped state of commerce.

Ryan Mathews
BrainTrust

Wholesaling has been in trouble for at least the last 30 years across a variety of industries, just look at how many supermarket wholesalers there were in 1990 versus how many there are today. Once e-commerce gained traction the DTC opportunity in soft goods began to grow incrementally. The pandemic has turbo-charged that growth. But DTC or other models that bypass a wholesaler only work for the strongest brands. If you are a mid to lower tier brand and you misjudge your strength with consumers you may be out of business. So the criteria should involve some metric around how much of your sustainable growth is coming from DTC and how fast it’s growing. Even then, a miscalculation based on anomalous market conditions (like a pandemic) may turn from opportunity into commercial quicksand overnight.

Doug Garnett
BrainTrust

Manufacturers should pay attention: When you have a value to consumers it is far harder for retailers to replace your brands with private label. I’ve talked about this for a few decades yet we continue to see manufacturers fail to invest in the advertising they need to retain unique places in consumer minds.

On the other hand, retailers don’t need to be as worried. Even Nike and Under Armour will be back (DTC is not proving the power which was promised). On the other hand, key to understanding Nike’s choice is they moved out of weak retailers. Retailers need to build more reasons for customers to shop in their stores … or they hand the opportunity to leave to the manufacturer.

Rick Watson
BrainTrust

The reality is this: almost no one wants to hold inventory. It’s risky.

Nordstrom’s is a good example but they are by far not the exception. It’s the norm now. Almost every retailer has been asking their brands to dropship for several years now, they are just getting more aggressive about it.

Even Amazon’s wholesale (first-party) orders are getting smaller and smaller — and more frequent.

This pushes more risk onto the brand. The smart brands are using this opportunity to reconfigure their upstream supply chains to hold less product, lower their own MOQs and turn inventory faster.

Xavier Lederer
BrainTrust

It is unclear to me how many brands could do a similar move. Nike’s relationship with Amazon is a good example. In late 2019 Nike stopped selling directly on Amazon. Right now, almost 1.5 years later, there are still many Nike items available on Amazon, sold through 3-party sellers. The product description, images, and UX on Amazon are most probably not in line with Nike’s brand guidelines — but Nike can probably live with that because it is such a powerful brand: their customers know that they can expect better on Nike’s website. And indeed: Nike.com’s sales have surged last year, while sales of Nike’s products on Amazon have declined. Making such a move successfully takes strong brand awareness and brand equity combined with superior website/app experience and experienced e-commerce logistics teams. How many brands have such strong assets to make a similar move?

Allison McGuire
BrainTrust

I think DTC makes a lot of sense if your brand is already a household name and you have your own retail stores. You still need to accommodate the in person shoppers as well as the online shoppers. If you’ve got that covered, take back your brand and build that one to one relationship with the consumer.

Karen Wong
BrainTrust

The power play is related to a.) the capital for vertical integration, b.) price elasticity in the category, c.) the need for volume and d.) the breadth of the product lines. As others have said, DTC works best in mid-to-high discretionary categories.

wpDiscuz
Braintrust
"Until brands have good penetration of their branded stores, they may continue to operate with a hybrid model of DTC and wholesale."
"I think this is just the inverse of retailer private label. Of course brands will want to take the opportunity to sell direct to consumer and keep the extra margin dollars."
"...the brand vs. retailer battle is more acute than it has ever been. It is, however, a relationship that works because they need each other."

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