There’s mounting evidence that wholesale remains more profitable regardless of the mass shift towards the direct-to-consumer model due to Covid.
It’s been found that wholesale provides greater control, access to data, a higher revenue per item sold, and total gross margin when compared to similar businesses that utilize a DTC model. This can be further demonstrated when comparing these businesses’ EBIT (earnings before interest and taxes).
- Increasing competition – as more businesses migrate to the virtual space, more noise is created as more businesses bid for a share of voice.
- Privacy – The inception of GDPR and CCPA regulations has limited the capacity for businesses to communicate unsolicited messages to potential customers.
- Ad blockers – due to the noise created by the increasing competition and bombardment of ads at various audiences, installing ad blockers have become more commonplace, making it harder for DTC brands to be seen.
- Returns and free shipping: e-Commerce spent its early years highlighting widespread “30-day return policies” and “free shipping,” which is taking a toll on DTC margins.
- The rising cost of ads – with more DTC competitors in-mark than ever before, the cost-per-click is skyrocketing. This can eat into the merchant’s profit margin or even exclude them entirely if their user acquisition cost is too high.
Although DTC profitability benefits from reduced rent and labor costs, other expenses add up over time. For example, fulfillment, logistics, heavier marketing, technology, and high returns.
Ultimately, both DTC and wholesale have pros and cons, so it’s up to the brand to decide which model is best for their business.
Why are brands attracted to DTC in the first place?
The COVID-19 pandemic and subsequent lockdowns have created an environment of comfort and necessity around online shopping. People worldwide have adapted to “stay at home” orders that require many purchases to be made online. Even as the world starts to reopen, some of that online shopping behavior will remain.
Additionally, DTC provides companies greater control over their brand, customer relationships, sales channels, and fulfillment.
When does DTC make sense:
While wholesale has a clear edge over DTC when comparing EBIT most of the time, there are some situations where DTC makes sense. However, this often depends on the product.
To determine whether DTC suits a brand, two questions need to be answered:
- Can we accurately target the right customers?
- Are these customers happy to shop online and from a single-brand source, or would they prefer to shop in-store where there’s a variety of brands available?
If both of these questions are yes, it may be worth exploring a DTC model.
However, keep in mind that, based on data, only brands who also sell their products via bricks-and-mortar stores do well in DTC.
Support for Wholesale brands:
Talk to us today if you’re looking for a powerful way to utilize hyper-local ads to drive traffic in-store and pick your products off the shelves.