The entire concept of selling apparels or fashion directly to shoppers sounds simple and interesting too! Getting closer to the consumer is always a great strategy for any brand. The success of a brand is the degree to which it is able to win the hearts of consumers and further enhance its list of loyal consumers. It not only increases the timeliness of customer feedback, thereby helping in more nimble product changes, but also brings higher profit margins. Besides, it also builds loyalty through inclusive product branding.
But how frequently it happens today represents a major shift in retail. Over the last several years, fashion retailers that collected brands under a single roof played a lead role in determining which fashion brands were bought by shoppers or, for that matter, which brands were shoppers interested in – going a long way then to shape their images.
Yes, lots of fashion labels have their own stores, but to set up a worldwide network of stores to reach all prospective customers is an arduous task and expensive too. However, much has changed in the last decade wherein owing to the rapid emergence of e-commerce and social media, brands have been successful in connecting and selling Direct to Customer (DTC) cutting out all retailers or so-called middlemen on the way.
The pivot to include more digital innovation means more fashion brands have embraced DTC strategies to gain a substantial share of their sales back from retailers and wholesale partners – and most importantly to control each point of interaction that a consumer has with her/his shopping experience.
In fact, over the last few years, there’s been a rapid shift in consumer behaviour towards digital shopping – and the pandemic-hit 2020 and 2021 have only further enhanced it. Direct online sales saw strong growth in 2020, with DTC sales surging by 24.3 per cent in the US alone. The same trend is seen throughout Europe. And fashion brands have been leading the race…
So, it wasn’t surprising at all when US sportswear giant Nike, a brand valued at nearly US $ 35 billion, saw DTC sales account for an estimated 33.1 per cent of their revenues in 2020. What was notable was that back in 2011, DTC sales were only 13.5 per cent of total Nike revenues. By emphasising on digital innovation and app downloads, Nike has steadily increased its move to e-commerce and DTC sales in less than 10 years. ‘Just Do It’ is what Nike believes in and it seems to be ‘doing it’ quite well.
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In 2011, DTC sales made up 16 per cent of Nike brand revenues, or US $ 2.9 billion of the total US $ 18.1 billion its namesake brand generated that year. However, by the end of Nike’s fiscal 2020, the number had jumped to an impressive 35 per cent, or US $ 12.4 billion. Here, one also needs to consider that the brand’s revenues too had grown over the decade to US $ 35.6 billion (or US $ 37.4 billion company-wide).
In fact in 2017, Nike launched a progressive strategy for the DTC model by bringing down the number of wholesale distributors for its products from 30,000 to just 40. That was enough to catch all attention!
2021 hasn’t been any different for Nike! In its recently released Q4 2021 results, Nike beat all analyst expectations as its Q4 sales rose by 96 per cent compared to the previous year and 21 per cent compared to the fourth quarter of 2019. The full year revenue shot up 19 per cent to US $ 44.5 billion, while net income more than doubled to US $ 5.7 billion.
What’s important is that the results were yet again driven by robust growth of Nike’s DTC business, which saw sales surge by 32 per cent for the whole year, compared to 12 per cent jump in sales to wholesale customers.
The numbers are clear indication that Nike is opting towards the latest trend of cutting out the middle man and moving towards selling directly to consumers at the cost of traditional retailers. Somewhere closer to 40 per cent, Nike now aims for direct sales to represent 60 per cent of its business by 2025.
But it isn’t Nike alone! adidas also rolled out a four-year strategy recently wherein it too stressed on having a DTC-led business model – in addition to staying with only strategic wholesale partners and investing significantly in digital business. The strategy also comprises funneling US $ 1.2 billion into a digital transformation between now and 2025.
In concurrence with retailer’s end-of-year results, adidas announced a four-year plan, dubbed Own the Game, which calls for a shift to a DTC-led model. The retailer plans to gain market share and increase currency-neutral sales by an average of 8 to 10 per cent annually between 2021 and 2025.
And how! Besides planning to aggressively expand its already booming DTC business, including e-commerce, adidas aims to digitalise its operations and stores, with core focus on sustainability. There are also plans to triple its members to around 500 million by 2025. The efforts are similar to what Nike has done, which is ditching wholesale accounts and beefing up its digital and DTC business as well.
The sportswear retailer adidas expects DTC to account for half of total net sales and generate more than 80 per cent of targeted topline growth by 2025. It also plans to double its e-commerce sales from US $ 4.8 billion to somewhere between US $ 9.5 and US $ 10.7 billion. To do so, the retailer plans to shift towards becoming a DTC-led business model, built around membership and by its network of own retail stores and e-commerce. Notably, adidas had made US $ 23.8 billion last year.
Germany-based apparel and athleticwear manufacturer Puma too saw its DTC business, which includes owned and operated retail stores as well as e-commerce, increase by 31.3 per cent to € 346.8 million in the first quarter that ended 31 March 2021. Similarly Lululemon Athletica, the Canadian athletic apparel retailer, also witnessed its DTC revenue double from US $ 1.14 billion in 2019 to US $ 2.28 billion in 2020 and as per Trefis, the numbers could go up marginally to touch US $ 2.51 billion in 2021. The DTC model has huge operating margins when compared to firm’s retail business and with e-commerce growing well, it could reap rich dividends for Lululemon.
Then there’s Under Armour, the American sports and casual apparel retailer, which creatively enhanced its business during the pandemic. Through proactive demand constraints and tight inventory management, Under Armour is in the healthiest position it’s been in a long time. One of the fashion retailer’s proactive demand constraints has been to close accounts with undifferentiated retailers. Patrik Frisk, President and CEO, Under Armour, estimated the company would be exiting between 2,000 and 3,000 retail doors in 2021.
Also, Under Armour’s 400 brand stores and factory warehouses are integral to drive DTC strategy and increase demand for its products globally – the focus is to have DTC make up 50 per cent of its sales by 2025.
During the fourth quarter of 2020, Under Armour saw a surge of 25 per cent in online sales, which helped enhance revenue growth in the DTC channel. The quarter also saw the retailer’s DTC channel record a growth of 11 per cent to touch US $ 655 million. The pandemic-stuck 2020 saw the retailer posting 40 per cent growth in online sales, thereby contributing 47 per cent to total DTC revenues. And it doesn’t stop here! The retailer continues to focus on boosting DTC business through store expansion initiatives and enhancement of its e-commerce platform.
With some of the world’s largest fashion retailers moving fast towards DTC business model, the trend is here to stay, but somehow it is not so easy for multi-brand retailers like Macy’s, Target, Walmart or Nordstrom that have complex business models operating with a significant number of vendors across multiple product categories. In fact, DTC for legacy multi-brand retailers is a layered challenge presenting logistics constraints that require a suite of technologies and partnerships to pull off.
However, one cannot overlook the fact that the DTC model has been growing stronger year-on-year with many larger brands leaning towards the model to make it the primary channel. As a major share of DTC is online, the explosion of e-commerce during this year has consolidated DTC’s position in the industry thereby providing an ideal opportunity for the retailers to shift their focus to selling directly to consumers. This new decade could well be the decade of DTC business.
