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3 Reasons why D2C brands shouldn’t abandon wholesale

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As e-commerce ramped up during the pandemic, brands made an unprecedented shift away from wholesale retail partners.

With millions of consumers now working and studying from home, it made sense to focus on bringing their offerings into people’s lives via social media, shopping apps, and e-commerce websites, rather than physical store partners that consumers were no longer visiting.

The result? The stratospheric growth of direct-to-consumer e-commerce. In 2021, D2C e-commerce pulled in $129.31 billion – an increase of 15% in 2020, which saw the biggest year-on-year increase on record.

Coca-Cola, Nike, Crocs, and Yeti are just some of the brands that have been transitioning over to D2C selling over the past few years. After cutting ties with major distribution partners including Amazon and Macy’s, Nike set an ambitious target to generate 30% of its sales via direct channels by 2023. They exceeded this goal in 2020, and expect to hit 50% direct sales this year.

Nike’s success in ‘going it alone’ seemed to herald a new era of retail, where legacy department stores and marketplaces no longer held the keys to the castle. 

But this isn’t quite the full story. In fact, forecasts are showing that the boom of direct selling is already over.

According to eMarketer, D2C e-commerce growth is set to decline considerably during 2022, hitting just 18.2% compared with 40% in 2020 – a clear sign that a D2C-reliant approach may carry some risk moving forward.

In this post, we’re going to explore some other reasons why retailers, both large and small, shouldn’t be so quick to abandon wholesale selling:

1. Consumers are venturing back into stores

E-commerce’s rapid growth during 2020 and 2021 was primarily driven by stay-at-home orders and public health restrictions aiming to contain the spread of COVID-19. With an unprecedented number of shoppers moving online, commentators were quick to predict that these newfound habits were going to stick as the pandemic progressed.

This was backed up by the number of consumers continuing to work remotely and shifting out of downtown areas. But with vaccines and booster shots now widely rolled out, signs are showing that brick and mortar is mounting a steady recovery. 

March 2022 saw e-commerce sales decline 3.3% from the same period a year prior, while in-store retail sales rose by 11.2% – the first time since the onset of the pandemic. Major retailers, including Macy’s and Best Buy, are also seeing the proportion of sales coming from online direct sources dropping compared with last year. 

This corresponding rise and fall in brick and mortar and e-commerce’s fortunes reflects how consumers are feeling more comfortable venturing into stores. It also shows that despite the convenience of shopping online, the allure of getting to discover and browse products in real life is proving tough for digitally-native brands to compete with.

As recovery out of the acute phase of the pandemic gathers pace, consumers are seeking to find a balance between in-store shopping and buying online. In sum, a diversified selling strategy that embraces both direct and wholesale is your best bet to capture this omnichannel audience.

2. Difficulty growing brand awareness

D2C e-commerce brands have a distinct advantage over brick and mortar in the early days. They have access to millions of potential customers across social platforms where they can build brand recognition – without the high overheads that come with running a physical store.

However, this early advantage quickly dissipates once brands have been in the marketplace for a few years. The hard truth is that maintaining such a high rate of growth is expensive and unsustainable in a highly competitive digital landscape.

Nobody exemplifies this challenge better than Allbirds. A favorite of the Silicon Valley elite, the sustainable footwear brand saw robust brand growth as an online-only seller while also ramping up its own network of physical stores. But with net losses ballooning to $45.4 million after filing for its IPO, the brand is in the process of opening up a wholesale channel, with permanent partnerships with department stores like Nordstrom a possibility in the near future. 

With easy digital growth opportunities exhausted, Allbirds is pursuing a shift in sales strategy to achieve profitability and continue building brand awareness. It’s a good example of how being digital-first enables fast growth at the beginning, but quickly peters out as acquisition costs rise. 

3. Profitability is not guaranteed

Pursuing greater profitability has been one of the biggest motivators for brands choosing to become direct sellers. It’s easy to assume that cutting out the middlemen will result in brands pocketing a bigger share of the pie, but research is showing that in many cases, the opposite is true. 

According to an analysis by BMO Capital Markets that examined over 20 brands including Nike, Canada Goose, and Urban Outfitters, wholesale channels are actually resulting in better profitability than direct-to-consumer channels.

Yes, you read that right!

Even though D2C retail offers brands undeniable advantages like better capture of customer data, higher revenue per item, and more control over branding, this has to be weighed up against higher operating costs in the form of storefronts, direct-to-consumer order fulfillment, and customer acquisition. 

The result, according to BMO, is that the gains of larger profit margins are ultimately lost. For example, they found that American Eagle and Gap’s margins ended up being below that of Ralph Lauren and PVH, who rely heavily on wholesale selling.

The takeaway? Brands, especially those who are trying to scale, should never assume that D2C e-commerce automatically provides a pathway to bigger profits. 

The verdict: Hybrid retail is the pathway to success

D2C e-commerce definitely has its perks for the brands who are investing in it wisely, as shown by the success of brands like Nike and Glossier. Direct selling enables merchants to create one source of truth across their marketing and selling channels, while also having a direct line with customers to stay in touch with what their audience wants. 

But there are also plenty of stories out there about the struggle to become profitable and maintain growth when online audiences max out. For brands who are still in the process of establishing recognition with audiences, choosing a D2C-only model is unlikely to pay off over the long term. 

Well-chosen wholesale partners who share your brand’s vision can help you to scale your business effectively and give you access to a much larger pool of customers. Moreover, being able to leverage an established logistics network enables you to leapfrog the traditional growing pains of being a fast-growing e-commerce business, such as keeping pace with demand and ensuring fast delivery timeframes. 

As increasing numbers of consumers pivot back to in-store shopping, having a presence at a well-known retailer in addition to direct selling channels gives you a major advantage over online-only competitors. Hybrid retail models give you the flexibility to capitalize on evolving consumer habits while putting your products in more places. What’s not to love?

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