Rising Costs, Slowing Growth Forcing Vendors to Elevate Direct-to-Consumer Strategy

May 10, 2012

Topic: Retail

If you were to ask outdoor apparel or footwear executives to name their top three priorities for 2012, building their direct-to-consumer, or DTC, channel is likely to be on the list.

DTC sales are nothing new for soft goods vendors. For years, Columbia Sportswear and The North Face have complemented their wholesale businesses with owned retail — a combination of retail stores that stock current merchandise (so-called “concept stores”), as well as outlet stores. While outlet stores help vendors liquidate excess inventory in a way that protects both their brands and their dealers, full-price concept stores provide a vehicle to showcase a vendor’s full product line and brand story, often in high-rent retail districts or other markets underserved by independent dealers.

When the Internet took hold and consumers moved online to shop, brands followed. Today, nearly all outdoor brands sell at full price direct to consumers over the Internet — some using third-party e-commerce platforms like Shopatron to enable their dealers to fulfill orders.

But when rising input costs and slowing sales began squeezing profit margins in 2008, many CEOs began looking to their DTC channel for other reasons — namely to hasten penetration of overseas markets, accelerate overall sales growth and enhance margins.

“The owned retail store component of our direct-to-consumer business has allowed us to preserve gross margins during a volatile and challenging business environment,” Columbia Sportswear CEO Tim Boyle told analysts during the company’s first quarter earnings call. Columbia Sportswear’s retail operations, which included 43 outlet and eight branded stores in the United States at the end of last year, now account for 25 percent of its net sales.

After buying Timberland last year, VF Corp. said it would generate roughly $300 million in new sales for the company by expanding its retail operations. DTC revenues are expected to grow 15 percent and reach 20 percent of total revenue at VF Corp. Outdoor & Action Sports Coalition in 2012. One of VF Corp.’s five strategic initiatives this year is providing consumers the best possible retail experience wherever they shop. The coalition expects to open 110 stores for Vans, Timberland and The North Face this year, the bulk of them overseas.

At Wolverine Worldwide Outdoor Group, which makes Merrell, Chaco and Patagonia Footwear, DTC revenues grew in the mid-teens last year and are approaching 10 percent of total revenue. The company now operates 89 brick-and-mortar stores in North America, including 12 Track n’ Trail stores. Deckers Outdoor plans to more than double its number of stores in 2012 by opening four new locations in the United States, 10 in Europe and 10 in Asia. Most of the new shops will open in prime shopping areas of major cities such as Paris, London and New York.

Gramicci CEO Marty Weening said the company’s online store and distribution through Amazon.com have played a key role in stimulating pent-up demand for its vintage products among “Gramicci Heads,” who may have lost track of the brand while raising children in the 1980s and 1990s. While Gramicci’s wholesale business continues to grow, the company’s total sales via Gramicci.com have skyrocketed 35 percent a year over the last six years and offer a greater return on investment then its wholesale business.

Having seen how the online marketplace has led to price transparency and the demise of specialty retailers of other products, like books, music and consumer electronics, executives view a robust DTC channel as essential to controlling their brands’ destinies.

“Really, the only way in which we can ensure the long-term success of the brand is to really take control of where it is placed, how it looks and how it is marketed to consumers,” said Angel Martinez, chairman, CEO and president of Deckers Outdoor Corp.

This means brands are increasingly adopting the full spectrum of options, including wholesale distribution through specialty retailers, as well as owned retail and online sales.