How Brands Can Achieve Profitable Growth in the Long-term

It’s a tough market out there for brands–the DTC darlings of the past few years are falling from their highs, and retail sales are slowing. Add increased marketing, shipping, and materials cost, and we have a recipe for reduced profits.

As a result of these increased costs, some huge DTC brands have gone belly-up (SmileDirect) and others have started to sell  wholesale  (Glossier, Casper). Some of these brands may still show growth, but are spending more money than they are making, thus growing unprofitably. The revenue growth may look good on paper, but as a brand operator you know that this isn’t sustainable for more than a few months.

However, not all hope is lost–the game has shifted from ‘growing at all cost’ to growing profitably. Retail can be a very profitable channel without many of the drawbacks of DTC. 85% of commerce spend still happens “in real life” at retail locations. And it’s hard to overstate the benefit of letting customers see and touch your product before making a purchase.

The question becomes, how do brands get into coveted retail locations? For brands selling to retail, online marketplaces and traditional distributors promise lead generation and market penetration, but charge a hefty price. Some marketplaces charge upwards of 15% per transaction, while distributors charge up to 35% or more for international fulfillment.

Is it worth it? To answer that, we need to look at the problem from a few different angles.

Online Marketplaces–one stop shop, or expensive black box?

Online Marketplaces have been around for decades, with eBay and Amazon serving as the first wave. When they first popped up, they promised easy access to customers at a low cost, and for the most part, they delivered on this promise. However, over time these marketplaces increased their fees and have created a convoluted system for getting in front of new customers and maintaining relationships with existing ones through their marketplaces. 

Using Amazon as an example, brands have faced increased fees and a worsening lack of transparency over time. For example, Amazon recently began charging sellers to split their fulfillment across multiple locations, an unwelcome sudden change that some sellers are up in arms about. In addition to shipping costs, some sellers were compelled to pay the new inventory placement fee, which could be up to 5 times their shipping expenses.

Worst of all, it has become harder to get discovered as more brands have entered the market. Amazon actually benefits from this problem because they charge sellers for ‘sponsored listings’. When a seller pays this fee to Amazon, they show up earlier in the page count when a customer searches. This of course eats into a seller’s margins and reduces the experience for customers, as sometimes they see a sponsored product versus one that suits their needs the best. At the end of the day, Amazon wins while consumers and sellers miss out on value.

How bad are these fees? In the past year alone, Amazon Sponsored ads have increased in cost by 11% on average (with no signs of slowing down):

We see a similar issue cropping up in marketplaces like Faire, which were initially gold mines for customers, and over time have proven less profitable. Here are some issues brand’s we’ve talked to have faced:

• Discovery–If you’re not one of the top 2-3 brands per category, you’ll have trouble getting discovered

• Undercutting–Faire has no issue with listing your competitors alongside you, some of them at a lower cost for similar products

• Insight–You have a complete lack of insight into inventory, sell-through rate, or product placement

Worst of all, you don’t own the retail relationship–meaning you are at the whim of these marketplaces when it comes to pricing, returns, and platform fees.

Love it or hate it, Faire is here to stay. And we don’t think that’s a bad thing–after all, for low-effort access to retailers, Faire is hard to beat. However, in the long haul, brands stand to increase margins by 10% or more by shifting a majority of their retail base to direct. Our suggestion is to make use of Faire’s initial benefits (free shipping, net 60 terms) for a year. But over the course of that year, develop a personal relationship with your retailers on Faire and try to move towards owning the retail relationship after the year is up, off of the marketplace. This will translate into you having a stronger relationship with them, while potentially earning significantly more profit for your business. 

Traditional Distributors–the ticket to market penetration? Or necessary evil?

Distributors will always have a place in commerce–after all, it’s hard to overstate the value of boots-on-the ground sales. Not to mention some markets are completely gatekept by these players (looking at you, grocery and alcohol). They purchase your product at a significant discount off of MSRP, typically 25% but up to 50% depending on market and geography.

The hard truth is that distributors are swamped with brands to manage and simply can't fulfill all their expectations. No amount of education, training, or incentives can change this situation.

If we take a closer look, distributors make a lot of promises, and tend to fall short–at a high cost:

• Customer service–while brands want to believe distributors are in their corner, the reality is that only the largest brands are a priority.

• Promotion–theoretically, distributors reserve some of your MSRP for marketing and promoting your product. Most brands we talk to find that this simply doesn’t happen–unless you’re a top brand in your category.

• Returns–if your product is returned, or damaged in shipping, you will incur that cost directly. And you’ll have little negotiating power.

• Fulfillment–this is a recurring theme, but you’ll have little ownership over the retail relationship. And again low insight into sell-through, inventory, and placement at the store-level.

How to drive profitable growth

It’s a simple strategy—move as many retail relationships as possible in-house. This approach offers the dual benefit of improving margins while providing better insights into what matters to your retailers, thus increasing retention and boosting sales. By focusing on profitable growth, you can create a more sustainable business model.

From our analysis, brands selling to independent retailers currently channel about 80% of their revenue through marketplace and distributor channels. By reducing that to 10% (increasing direct sales to 90%), brands could see a margin improvement of 10% or greater. While this may seem like a lofty goal, modern software and tools offer a unique opportunity to give you better access to your customers and disrupt traditional middlemen, granting your brand profitable growth.

It’s important to recognize that your largest retailers may still require distributors and sophisticated in-house EDIs to fulfill orders. However, we don’t believe this is necessary for the independent channel, where direct relationships can flourish and contribute to profitable growth.

The retail landscape is evolving, and only solutions that add real value should earn your business. Focusing on profitable growth by enhancing direct relationships with retailers not only strengthens your margins but also ensures you remain competitive in an ever-changing market. Embrace this shift and capitalize on the opportunities it presents for long-term profitable growth.

Conclusion

Everyone’s wholesale channel looks a little different. It’s a complicated, and in many ways archaic, ecosystem. However, we have a strong belief that moving to owning retail relationships will future-proof your business, driving profitable growth in turn.

If you are interested in learning more about how Vanik can help you grow your retail business by owning your retail customer relationship, set-up time to chat with us.