Just as the direct-to-consumer crowd wins the day — Warby Parker is public and everyone else is racing to be more d-to-c than thou — a new day dawns.
With it come renewed questions about old assumptions.
Everyone from Wall Street to the C-suite is talking about the value of getting as close to shoppers as possible, cutting out all the middlemen, building brand power and, hopefully, profits.
But profits are still hard to come by, even with the hype machine in full roar. The d-to-c revolutionaries are turning into the establishment — now they’re going to have to defend that turf.
Simeon Siegel, a BMO Capital analyst and one of the more intellectual students of retail on Wall Street, dropped a 27-page deep dive last week, declaring, “DTC’s Not All It’s Cracked Up to Be.”
In it, Siegel comes off not so much as a d-to-c denier, but a wholesale realist and challenges what has become the conventional wisdom in retail with questions that every company will have to answer for themselves eventually.
“There are qualitative reasons to go direct-to-consumer,” Siegel told WWD. “Companies want to own their brand control, companies want to own their consumer data. I don’t begrudge that at all. What we found is that the reason to move direct is qualitative, not quantitative. By in large, the companies that pivoted to direct did not see the lift in revenues, did not see the lift in profitability. Wholesale is the profitable channel.
“The argument is not nuanced, the argument is not opinionated, the argument is empirical,” he said.
Siegel’s reading of financials from across the industry showed that increasing the d-to-c business “has not raised company-level revenues, gross margins, merchandise margins, [earnings before interest and taxes] margins or EBIT dollars.”
The research draws from a decade’s worth of retail history, stitching together the picture from different sets of publicly available data from across the industry. It runs from Capri Holding’s 2018 EBIT margins (which stood at 23.9 percent for wholesale and 16.1 percent for d-to-c) to a head-to-head comparison that showed Ralph Lauren Corp.’s 2019 gross margins outstripped those of the d-to-c Abercrombie & Fitch Co. by 230 basis points.
“Wholesale is this huge business,” Siegel said. “For all the talk of department stores being dead, their revenues are still drastically higher than any brand other than Nike. The question to me is: What does it mean that every big brand is now championing the push to direct? Is that offensive? Is that defensive? And what are the motivations behind it?
“Perhaps the shift from wholesale to d-to-c is a signal that the boardroom is seeing wholesale as being tapped out,” he said. “It’s an acknowledgement that they are large. What we are finding if we look at history is brands become big and brands become profitable if they embrace wholesale.”
That would have the big brands not scrambling for relevance and trying to catch up to the d-to-c start-ups, but moving into new territory having conquered what was the fashion world and is now of a broader universe.
Direct-to-consumer is clearly the brand-building, modern approach to retail, but it also doesn’t seem like the end-all, be-all.
The business and the buzz are existing on different planes.
For now, Wall Street right now is paying up for future growth.
The of-the-moment Warby Parker is a good example, with revenues of $487.5 million over the past four quarters and an enterprise value of $6.2 billion after its direct listing — putting the eyewear disruptor’s value at 12.6-times revenues despite losses, according to S&P Capital IQ. (By contrast, Nordstrom Inc., with revenue of $13.4 billion and an enterprise value of $8.4 billion, is trading at 0.6-times revenues despite EBITDA of $852 million.)
Unless the next generation gets the pass that Jeff Bezos got with Amazon and the opportunity to keep losing money as they grow for another decade, they’re going to come under increasing pressure to prove they too can be big and profitable if they’re going to keep their new backers on Wall Street happy.
Direct-to-consumer has already evolved from a purely digital notion to one that encompasses physical stores and the web. Is it flexible enough to keep evolving and bring in wholesale, too?
If fashion business models follow the trends set on the design side, everything old will be made new again — eventually.
MORE FROM WWD: