Wholesalers have been a key part of the supply chain as an intermediary between the manufacturer and the retailer for a long time. However, over the past decade an increasing number of brands have decided to sell directly to the consumer (DTC), either as their sole sales channel or alongside the more traditional approach of selling through wholesalers. The idea is that DTC saves the manufacturer money by skipping other layers of the supply chain and selling directly to the end-consumer at retail price. However, DTC still has its own challenges and setup costs. So which option is better for brands?
What is Wholesale Trade?
To start, it’s important to understand the basics of what wholesale trade is. Wholesalers purchase products in bulk from manufacturers or suppliers and sell them to customers, who are typically retailers or other commercial or industrial businesses. While some wholesalers will focus on a narrow product range or single manufacturers, many offer a broad catalogue with a variety of different products available.
So what is wholesale trade’s appeal with manufacturers and retailers? The main benefit of this arrangement is that wholesalers can take advantage of bulk discounts, as they buy a large number of products to sell to a variety of different customers. Retailers and other businesses are then able to buy those products at a price that is likely lower than they could have gotten from the manufacturer, as they are working with smaller quantities. The wholesaler can reach a wider network of buyers than the manufacturer, and retailers can purchase a wider variety of products in one place by going through a wholesaler.
The wholesaling industry is massive — according to IBISWorld, the US market alone was worth over $11 trillion in 2022, and it’s expected to continue growing over the coming year. It’s been the go-to option for most manufacturers and suppliers for a long time, but over the past several years, an increasing number of brands have been choosing to forgo the wholesale market and reach out to end-users directly.
What is DTC?
The direct-to-consumer (DTC) model skips over wholesalers and other intermediaries in favor of selling directly to end-users via an e-commerce site, marketplace, or a physical store. Digitally native companies like Peloton, Casper, or Dollar Shave Club launched their businesses through direct selling and many avoid wholesaling altogether.
But these companies aren’t the only ones to try selling directly to the consumer. Some brands that traditionally work with wholesalers have also branched out into DTC in order to expand their options. Nike, for example, offers its products through its own website — including customization options not available elsewhere — as well as through a range of other retailers. Since 2010, the company has steadily increased the percentage of sales made through its website, and the total percentage of DTC sales by companies around the world has also been on the rise.
Why Are Brands Adopting DTC Strategies?
Selling to wholesalers has its advantages: the manufacturer’s products reach a broad customer base, and once they’ve sold them to the wholesaler, they earn money regardless of whether those products ever get sold to an end consumer. Selling products in large quantities allows them to work with a smaller number of customers and provides more predictability in terms of demand, which makes it easier to plan production schedules and stock levels.
One of the main attractions of DTC is the ability to skip the middleman and sell directly to the consumer at retail price, generating more revenue per product. It also provides a direct connection to end-users, allowing for greater control over messaging and retail pricing, creating more opportunities to build brand loyalty, and making it easier to collect feedback and other insights.
But the DTC approach has its disadvantages as well. Without the help of wholesalers and their connections, DTC sellers need to work harder to find and attract customers. They also need to build an e-commerce site along with the necessary supporting infrastructure — packing and shipping orders to a large number of individual customers is a different and more complex operation than sending out bulk orders. The company also needs to be able to support returns in order to provide the type of customer service that end-users expect.
Marketing is another challenge (and expense) that DTC sellers need to tackle. While selling to wholesalers still requires some sales and marketing, it’s a different beast from marketing to end-users. Campaigns for DTC companies tend to be more complex, requiring more resources and a different skillset.
What About Adopting DTC Alongside Wholesale?
For companies that traditionally work with wholesalers, branching out into DTC can provide an additional revenue stream without losing out on the benefits of selling wholesale. And digitally native brands can expand their reach by partnering with wholesalers. But there is concern around how this move could impact a brand’s relationship with its retailers: competing with one’s own retailers could be harmful to one or both parties, and make retailers less inclined to stock those products.
There are ways to take advantage of DTC without cutting out retailers, however. Instead of offering the exact same products to end-users as the ones sold to wholesalers and retailers, a DTC branch could offer a range of products that aren’t available elsewhere, protecting retailers’ sales while giving customers a reason to buy directly from the manufacturer. Some examples:
- Sample sizes or bundles that let customers try out your products before buying full-size versions from retailers
- Customizable products that let the customer select specific features or add personalization
- Unique products that aren’t sold by retailers — this can also be an opportunity to trial new products at a smaller scale and collect customer feedback before scaling up production
- Products that complement the items being sold through retailers, such as shoe polish and laces to complement shoes that are sold in stores
- Subscription services that ship items to customers on a regular basis
There are other ways to work together with retailers as well. Including a list of retail locations on a DTC site will help customers who want to shop in-store, as well as promote retail partners. An in-store event or popup shop can also benefit both parties, giving the manufacturer access to a retail space without the expense of setting up and running one, while the retailer can earn a fee for the use of their space. It may even be possible to partner with a retailer to help fulfill DTC orders, which can be especially helpful for young digitally native brands that are still in the process of setting up infrastructure and logistics.
Is DTC Really More Profitable?
Many brands have chosen DTC as a business model with the expectations that their expenses will be lower and their operations more efficient due to cutting out wholesalers and retailers. This has driven an increasing number of manufacturers and suppliers to either open up a DTC branch or start a digitally native brand that doesn’t work with wholesalers at all. But does this really translate to higher profits?
A 2021 study by BMO Capital Markets found that despite the ever-growing popularity of DTC and the costs saved by forgoing wholesale channels, the strategy may not be as profitable as people think. E-commerce comes with its own set of expenses and challenges, including website design and maintenance, marketing, customer service, and order fulfillment.
The BMO study examined a range of apparel and footwear vendors and retailers, and found that DTC did not raise company-level revenues, gross margins, or EBIT margins. The costs involved in DTC operations resulted in lower overall earnings compared to wholesale selling.
Does this mean that DTC is never worth it? Not necessarily. Every business is different, and it’s possible that some companies achieve profitability through DTC selling alone. Branching out from wholesaling into direct selling can also help mitigate risks and expenses, as the wholesale revenue streams remain in place. But it’s important to consider all the costs carefully and balance the risks and opportunities that such a move entails.
Many digitally native companies struggle with profitability. Several notable DTC brands have gone public and revealed their lack of profit, demonstrating that even well-known businesses like Warby Parker and Casper have had a hard time making the strategy work. Others are opting to partner with wholesalers in order to increase their reach and income. Customer-acquisition costs are rising, particularly with Apple allowing its users to opt out of the data tracking that DTC brands used to find new consumers.
Given this data, most manufacturers and suppliers that decide to take the DTC route should be prepared for the possibility that they’ll need to partner with wholesalers somewhere down the road. Direct selling has its own advantages and appeal, but it’s important to remember what wholesale trade can bring to the table as well.
