The DTC model is failing to generate profits; Companies are rushing to partner with retailers like Target
For most new DTC brands, wholesale is a matter of "when," not "if."
Digitally native brands are securing retail partnerships at a rapid clip.
Analysts say brands shouldn't overlook retail partners but need to choose the right ones.
Ten years ago, emerging digitally native brands like Dollar Shave Club wouldn't have dreamed of selling wholesale.
The novel idea of brands selling their products directly to consumers online and "cutting out the middleman" seemed to make financial sense. Without a retail partner cutting into profit margins, brands could make more money and pass on savings to consumers.
Now, that strategy is being upended.
For the majority of digitally native brands, the question of when to start wholesaling isn't an "if" but a "when." Most are realizing that retail partnerships are an unavoidable part of the path to developing a large and profitable business, particularly as customer-acquisition costs rise.
"Digital natives first restricted themselves to their own websites. Then, that evolved into selective storefronts still owned and operated by the brand, which has now evolved into allowing others to sell products," Simeon Siegel, the managing director for equity research at BMO Capital Markets, said. "It's the de-DTC era."
Digitally native brands embarking on retail partnerships isn't a new phenomenon. Harry's entered Target in 2016, paving the way for many DTC-first brands like Native and Quip that would follow the razor startup into big-box retailers. Dollar Shave Club did not start wholesaling until late 2020.
But a convergence of circumstances is making 2022 a banner year for direct-to-consumer brands rushing into wholesale expansion.
Two years into the COVID-19 pandemic, supply-chain disruptions are still common, and consumers are increasingly prioritizing convenience. Sales are up at mass retailers like Target and Walmart. Meanwhile, DTC darlings like Warby Parker, Allbirds, and Casper have gone public exposing their lack of profitably. And nearly a year ago, Apple announced updates to its iOS 14 operating system that allowed users to opt out of the data tracking that DTC brands relied on to keep customer-acquisition costs low.
This month, the SoftBank-backed activewear brand Vuori launched e-commerce in seven countries, accompanied by several wholesale partnerships in local markets, including Selfridges and Barry's Bootcamp. In March, the children's clothing brand Primary launched shop-in-shop areas in 100 Buy Buy Baby stores and on the retailer's website. The men's skin-care brand Hawthorne launched a line of 14 products in 1,200 Target stores.
DTC is proving a challenging business model for established brands as well. In a note written last month after Nike's third-quarter earnings call, Siegel pointed out that while the brand's DTC business was attracting more customers, profits from direct channels declined.
"We believe this result increasingly represents the norm, not the exception," he wrote.
Operating a direct-to-consumer e-commerce business "comes with its own set of expenses" that wholesale players don't have to contend with, including shipping, fulfillment, technology, and marketing, Siegel said in a January research note titled "DTC Isn't All It's Cracked Up to Be."
"Companies are finally starting to acknowledge and realize that wholesale is not a bad channel," Siegel said.
'You have to be ubiquitous'
Primary was planning to start selling retail by opening its own brick-and-mortar store in fall 2020, but the childrenswear brand scrapped the idea when COVID-19 struck. Instead, Primary made its retail debut this year in Buy Buy Baby stores.
"To be honest, getting a physical store up and running at a time when we had fewer than 50 people was a really big effort," Christina Carbonell, a cofounder of Primary, said, adding that the brand intended to one day open its own retail stores. "The opportunity to tap into a partner that has the infrastructure already set up just made it so much easier to get to scale quickly given that they already do it."
Primary's shop-in-shop areas at Buy Buy Baby stores "really got us excited" about the prospect of working with a wholesale partner, Carbonell said. Buy Buy Baby's registry business also serves as free advertising for Primary.
The first wave of DTC brands that launched in retail stores, like Harry's and Native, positioned the moves as customer-acquisition plays. Now, founders of digitally native brands say they're increasingly focusing on wholesale partnerships as essential to profitability.
"The new line of thinking is very different. You have to be ubiquitous. You have to be everywhere. You can't look at it as a single channel," Brian Jeong, Hawthorne's CEO and cofounder, said.
Hawthorne codeveloped an exclusive line of skin and hair products for Target after customer feedback indicated that despite its availability at Nordstrom and on Ssense, there was demand for the brand at convenient big-box retailers.
"We see the strategy as a multichannel business moving forward," Jeong said. "The Target shopper can choose to buy eye cream on our website, or the DTC customer can go to the local Target in a pinch and buy face wash. We're not worried about it."
'Proceeding with caution'
Some DTC brands are able to avoid going all in on wholesale partnerships until much later phases of growth.
Coterie, a premium-diaper-subscription startup, isn't planning on a major retail rollout until it has achieved a significant amount of brand awareness from its e-commerce business, Frank Yu, its cofounder and CEO, said.
For now, the brand relies on its first-party data to learn as much as it can about its customers, which Yu said would allow Coterie to make better-informed decisions on when and where to start wholesaling in a bigger way.
In February, Coterie started selling in 450 Whole Foods stores across the country but is "proceeding with caution" on a larger rollout to big-box retailers, Yu said.
"For a subscription-based, online, primarily DTC business, I think the runway is still very long," Yu added.
Siegel agreed that digitally native brands should be selective in choosing retail partners but said counting out wholesale altogether would be a mistake for most.
"Be careful about who your partners are. Don't sign up without doing the due diligence, but understand that there are always going to be good partners," he said.
To that point, the baby and toddler brand Lalo opened its first retail store in New York in November but is planning to launch with a wholesale partner later this year.
"There's only so many ways to expand margins and continue to grow online-only and through our own channels," Michael Wieder, the cofounder, president, and CEO of Lalo, said. "It's not that much different than working with an influencer. They come with their own perspective and point of view, and it gives us an opportunity to align with their network."
Still, some DTC brands are continuing to hold out on wholsale. DTC bedding brand Brooklinen is focused on expanding its own fleet of retail stores by tripling the number of locations this year and doubling that in 2023. CEO and cofounder Rich Fulop said the goal is to operate 25 to 30 stores by 2024.
"By not entering those wholesale relationships, we're able to capture more margin, which is important to the business from a unit economics standpoint and in terms of customer experience," said Fulop.
Fulop stressed that Brooklinen has no plans to enter wholesale in the forseeable future, but he also understands it may be something that inevitably happens. "We're not 100% closing the door on that," he said. "But we want to avoid it for as long as we can."
