Post-Covid Prediction 4: Moving beyond DTC

June 17, 2020

Toolio’s fourth prediction about the retail landscape after Covid-19 looks at how brands will continue to diversify distribution channels, while managing and balancing inventory effectively for more points of sale. You can see the rest of our post-Covid predictions here.

First came the supply chain disruption, then the demand shock. The pandemic’s long-term impact on retail will not be on supply or demand levels, but on distribution channels. Since the beginning of store closures and wholesale order cancellations, brands have been trying to figure out the right distribution strategy to overcome current challenges and succeed in the "new normal."

As stay-at-home orders were enforced in many countries around the world, online demand skyrocketed. Retailers like Inditex, owner of Zara among many other brands, saw online demand surge by 95% in April. Once the stores open up, some of this demand will shift back into retail, but it will be hard to know by how much, and the channel mix will be in flux for a long time to come.

For brands with large wholesale accounts, the situation is even more complicated and perilous. With large order cancellations or significant inventory stock-piled in the department stores, brands aren't in control of what happens next. Many will struggle to align strategies between direct and wholesale, creating a downward markdown spiral. After Covid-19, brands and retailers will question the fundamentals of the wholesale model in its current form.

Distribution strategies will remain in flux for the months and years to come, but when the dust settles, brands will have more control over distribution channels and points of sale will proliferate. Wholesale will morph into new formats such as leased spaces and online marketplaces, which will allow brands to get closer to their customers.

Multi-channel distribution will continue to flourish.

The savviest retailers have spent years creating omni-channel strategies that blend physical and online retail to engage consumers wherever, whenever and however they want. Brands that continue to explore new distribution strategies and customer experiences supported by the right tools to manage them will be the winners.

At the start of e-commerce, many brands put out statements that brick and mortar was dead. Many of those same brands have since opened up stores, and some even launched catalogs. Even after this pandemic, direct to consumer (DTC) brands’ path to profitable growth will be an increased mix of online and offline channels. Sales will continue to move online, but a website with social media advertising will not be enough to reach customers. Digitally native brands will continue to invest in pop-ups, open stores and explore new channels to aid in brand discovery  such as Neighborhood Goods and Showfields.

DTC brands will also explore innovative ways to leverage traditional wholesale channels or collaborations with pre-internet companies to aid in brand discovery. Consider the Nordstrom strategy where digitally native brands partner with the giant retailer through drop shipping partnerships and branded shop-in-shops, introducing small assortments with limited SKUs online and in a handful of store locations. Another recent example is the All Birds x Adidas collaboration. Partnering with companies like Nordstrom and Adidas whose marketing and distribution spans far beyond that of younger DTC brands allows these companies to reach new customers, in more geographies and different formats. 

Wholesale will move towards concession models.

Covid-19 put brands with large wholesale accounts into a dangerous situation. Many have cancelled orders sitting in their warehouses or deliveries sitting in over-inventoried stores where they cannot control sales or liquidation strategies. Department stores’ markdowns will cannibalize brands’ sales and put further strain on their finances.

Many of these issues are an effect of how the wholesale business is currently structured. Brands are on the hook for performance through gross margin agreements and markdown allowances, but have limited control over where, when and how their inventory is sold.

What happens next for wholesale will vary greatly based on individual brands and retailers. Larger brands with shop-in-shop strategies will move towards a concession model, and smaller brands may help fund an in-store brand manager. In each outcome, brands will have increased ownership and direct management over inventory. These changes will be embraced and encouraged by retailers as their liquidity issues will reduce their appetite for heavy inventory investments.

Brands will expand digital distribution via marketplaces.

For expanding distribution online, fashion brands once looked to multi-brand sites that operated similarly to brick and mortar wholesale. However, the format that is gaining most traction is marketplaces, which offer the benefits of multi-brand without the downsides of wholesale. As it becomes increasingly expensive to bring customer eyeballs to their sites, brands will bring their products to the eyeballs via marketplaces.

Which marketplace is right for each brand is full of nuances, but the need to leverage and manage marketplaces is not. Even Amazon, which most fashion brands avoided pre-Covid, is becoming part of the post-Covid conversation for distribution. Along with Amazon, large big box retailers such as Walmart and Target have created marketplaces that increasingly cater to DTC brands. Fashion marketplaces such as Farfetch, Orchard Mile and CoEdition have emerged, and traditional retailers such as Urban Outfitter are using new services (like Mirakl) to offer extended assortments via marketplaces on their sites. Brands will increasingly participate in these marketplaces to reach their customers more economically.

Increased control will increase complexity.

As distribution shifts online and into new formats, brands will be in more control of their destinies. Winning brands will intimately understand these different channels and manage them closely. They will realize that the customers in each channel have distinct expectations and will devise unique assortments and pricing strategies for each point of sale.

The proliferation of points of sale and increased control over decisions are advantageous for brands. However, this transformation will bring its own challenges around pre-season planning and in-season management. In the traditional wholesale world, pre-season assortment decisions were primarily left to retailers’ account managers. Post-Covid, brands will have to closely analyze sales by channel and build targeted assortments for each. In-season management will also become more complex as brands will have more control over replenishment and pricing decisions and will need to actively transfer inventory between channels depending on performance.

Takeaway

To manage this transformation effectively, brands will have to step up their planning and merchandising game. They will have more data at their disposal than ever before and will rely on digital and data-driven planning tools to interpret and leverage this information. Next generation merchandising platforms will empower brands to manage this complexity by centralizing data, automating workflows, digitizing collaboration and providing actionable insights by channel.

You can see the rest of our post-Covid predictions here.

Looking for more? 

Toolio is building the technology and know-how to manage this transformation. If you want to learn more about how technology can help you effectively manage an increasing number of channels, request a demo of Toolio.

Eytan Daniyalzade
CEO & Co Founder