BMO Capital Markets found that brands that grew DTC did not see a notable increase in revenue, merchandise margins, EBIT margins or EBIT dollars.
Dive Brief:
- Despite arguments that retailers can benefit by cutting out the middleman, most direct-to-consumer EBIT margins are “meaningfully below” wholesale margins, according to an updated report from BMO Capital Markets on the benefits and misconceptions surrounding wholesale versus DTC.
- The latest update of BMO’s 2021 report on the DTC selling channel shows that companies that grow DTC sales have not seen a notable increase in revenue, merchandise margins, EBIT margins or EBIT dollars, per the report sent to Retail Dive.
- According to BMO, a retailer’s wholesale-to-retail markup may be among the most important factors in determining if a DTC pivot is harmful or beneficial to profits. Higher-margin companies may actually benefit from pivoting to DTC, the analysts found.
Dive Insight:
The updated BMO report seeks to show that “the push to DTC from wholesale mostly appears to hurt, not help, overall company profitability.” It was done in response to the broad-based perception that shifting to DTC is margin enhancing.
In looking at profitability, BMO compared brands’ fiscal year 2022 EBIT margins with a five-year average. For the majority of studied brands, DTC-only EBIT margins were below the five-year average, as were third-party retailers, while hybrid retailers were above their five-year average. Contrary to BMO’s earlier finding that gross margins get worse as DTC increases, the analysts noted a general lift in gross margin as DTC penetration grows. However, the same was true for many companies that didn’t experience a change in DTC penetration, making the true impact unclear.
During an interview two years ago with Retail Dive, BMO’s Simeon Siegel suggested that, based on his firm’s findings, building a brand solely through DTC was misguided. “What we found was that brands pivoting away from wholesale, rather, to direct did not see the increase in revenues, did not see the increase in gross margin rate, did not see the increase in operating profitably, and did not see the increase in operating profit dollars that we’ve become so accustomed to hearing about,” Siegel said.
What the first BMO report suggested about DTC overhead costs eating into a brand’s margins still, for the most part, holds true today. The new report did find that some DTC prestige brands were able to increase their EBIT margins despite the additional costs because they were selling much higher-priced items and could absorb digital costs for fulfillment, logistics, heavy marketing, technology, and heightened returns.
A number of emerging brands have been gravitating towards wholesale as they seek to expand their consumer base and meet shoppers where they are, while others are pursuing an omnichannel approach to selling as a way to reach more consumers and share the cost of doing business. While investing heavily in digital the past few years, for example, Nike has since pivoted back to wholesale and is building out those partnerships at the same time.
Other recent studies offer further support to BMO’s claims that DTC has slowed for brands post-pandemic and led many of them to seek expanded platforms through wholesale or by opening their own brick-and-mortar stores. Some digital-first brands have suffered from slowing sales and insufficient funding as of late, such as vitamin company Care/of, which this month closed down.
