Who needs a middleman?

At its peak, the pandemic unleashed lockdowns on pretty much the entire world. The ensuing restrictions forced many businesses (in particular, non-essential services like apparel, electronics, gaming, and book stores) to shut down most, if not all, physical locations that were in operation. The result: new entrepreneurs looking to get into traditional brick-and-mortar retail are hesitant, if not downright scared.

Bloomberg reported in March last year that within 10 days, more than 47,000 chain stores across the U.S. temporarily shut down to “ease the spread” of the virus. With that, it didn't take long before business owners read the writing on the wall: either find an alternative way to interface with customers or file for bankruptcy.

2020 sent 30 major U.S. retailers into bankruptcy. In Canada, 30 brands and retailers (including names such as Lowe’s and Rona, Hudson’s Bay, ALDO, Pier 1, even Starbucks) either filed for bankruptcy or announced store closures.

Reasons behind the retail apocalypse are obviously multifaceted and not strictly pandemic-related. Everything from poor management to the massive shift in consumer behaviour towards online shopping have played important roles in shuttering loads of stores across North America.

As little as 3 years ago, the number of consumers that preferred to shop on their mobile phone was less than half of what it is today, according to PwC’s Consumer Insights Survey. On top of that, today about one quarter of consumers surveyed admitted that they shop online - wait for it - at least once per day! And that number has been growing steadily month after month. See the image below:

The paradigmatic shift to e-commerce is evidently ushering in changes to retail and departmental store businesses globally. The trend was already upon us pre-covid, but the pandemic fast-forwarded its adoption rate three or four times. According to Digital Commerce 360,

“Consumers spent $791.70 billion online with U.S. retailers in 2020, up 32.4% from $598.02 billion the prior year, according to a Digital Commerce 360 analysis of U.S. Department of Commerce data.”

As businesses cut down on physical locations, many are also starting to beef up their mobile offerings. There’s no other way to survive and thrive, since online shopping is here to stay. Take a look at the results of McKinsey’s Consumer Pulse Survey on customer’s online purchasing habits before covid and the expected growth afterwards:

The New Supply Chain Normal

E-commerce has introduced new challenges for retailers, such as increased customer expectations and more data security issues, but it also comes with a few perks for participating businesses. It provides retailers with better and more precise data on customer behaviour than can be collected in store. Also, it could reduce overall costs and assist in streamlining supply chain services.

According to Lean Supply Solutions,

“The traditional roles of stores, distribution centres, and transportation providers have changed dramatically as a result of e-commerce. Retail stores also operate as product fulfillment centres where online orders are picked, packed, and shipped to customers, often within the same day.”

E-commerce has altered the conventional supply chain model in such a way that it has unlocked a portal for manufacturers seeking full control of their brand’s story, including a direct relationship with its customers -- giving rise to what’s now known as the direct-to-consumer (DTC) business model.

Within the last decade, Nike, the biggest sports brand in the world, shifted focus to its DTC sales channel, setting its sights firmly on significant growth for that part of its business for the medium to long term. According to Retail Dive, in 2011,

“...DTC sales made up 16% of Nike brand revenues, or $2.9 billion of the total $18.1 billion the sportswear giant's namesake brand brought in that year (total company revenues, including Converse and other businesses, hit $20.1 billion). By the end of Nike's fiscal 2020, which came May 31, that number had grown to 35%, or $12.4 billion.”

Nike isn’t the only company looking to capitalize on the benefits of the DTC business model. Adidas is now aiming for DTC to be 50% of sales by 2025. Last year, Under Armour execs revealed that the company would exit between 2,000 and 3,000 wholesale doors as it attempts to focus on where the brand is best displayed. And in 2016, Dollar Shave Club, one of the well-known DTC model pioneers, was purchased by Unilever for US$1 billion in cash.

Supply Chain Disruption Fuelling DTC Dominance

Whether it’s B2B, B2C, or DTC, supply chain bottlenecks spell trouble for all business models. And that's especially true in this final quarter of the year, where a lot of retailers rely on higher holiday sales to drive up annual revenues.

That said, DTC merchants have less exposure to supply chain risks and are better positioned to weather the storm than traditional store retailers and, in some cases, even marketplace sellers (e.g. Amazon, Facebook, etc).

For starters, DTC brands aren’t caught in the multi-step distribution network required by physical retailers. Distribution alone creates greater costs, slows down delivery times, and amplifies the potential impact of logistical gridlocks and labor shortages.

Commenting on DTC’s advantage during supply chain disruptions, Global Trade’s Remington Tonar points out that:

“DTC brands have significantly lower fixed operating costs than brick-and-mortar retailers. That’s especially significant when inventory runs low: if nobody has products to sell, it’s far better to be on the hook for small, manageable hosting costs than to be stuck paying a sky-high commercial lease.”

He adds that,

“DTC brands don’t just have lower costs and less risk exposure — they also have more control over the customer experience. While marketplace sellers have little option other than to simply remove listings for out-of-stock products, and real-world retailers are left with bare shelves, DTC brands can respond more creatively...” 

As an aside, despite having more than 60% of its sellers based in China, where there are serious shipping issues (and power outages), Amazon is potentially the most powerful asset for small-scale DTC brands. 

Even though Chinese sellers can no longer take advantage of a previous subsidy for low-cost small package shipping from China, it doesn’t impede fast delivery to their North American and European customers.

Sure, the shipping rates from China have soared dramatically, but with Amazon’s Fulfilment by Amazon (FBA) program, vendors can store their products in Amazon's fulfillment centers, where Amazon workers pick, pack, ship, and provide customer service. Obviously, this will imply additional inventory costs for overseas sellers but it will almost certainly beat current shipping rates, while being a value-add in preserving customer loyalty.

DTC has to be the Retail Model of Choice


On the macro and micro scales, e-commerce has brought about the shift of a generation in how goods and services are exchanged.

Online shopping and the digital marketplace have put manufacturers in direct contact with consumers at relatively little cost, something that was next to impossible before the digital revolution.

Although it’s already happening to some degree, retail brands and businesses need to take a good hard look at their current operating models and value-chain priorities. From the looks of it, DTC appears to be the least exposed and most sustainable fulfilment option for manufacturers who want to remain competitive in our increasingly unpredictable economy.

Aaron Hoddinott

Investor and marketer willing to take big swings at bold ideas.

Aaron Hoddinott

Investor and marketer willing to take big swings at bold ideas.