Is DTC the natural end-state for e-commerce?

Context: A tweet from Shopify President Harley Finkelstein spurred my thinking on the topic. This post is my attempt at reasoning and determining if I agree with the premise. It should be read more as "thinking out loud" as opposed to a firm point of view.

Most of this thinking is not my own. I’ve spent the last few months living in e-commerce with my team at Versett (Omid & Betty) and more recently had thoughts triggered by recent posts from Elena Burger and Web Smith of 2PM.

The question at hand: Is DTC the future of retail?

Let’s start by disambiguating DTC in the modern age. We tend to think of DTC as a creation of the internet, but all that did was usher in a new wave of DTC brands, especially in the CPG space. DTC means brands selling their products directly to customers. Nike does this. Apple does this. They may also use other channels/retailers, but they sell direct as well. 1 Just because you sell online does not make you a DTC brand, and vice-versa.

And what are retailers? They are the brand-less distributors: Nordstroms. Target. Walmart. Sport Chek. Yes, some of these companies may have private label products, but for the most part, their business model relies on brand suppliers and the distribution of those products.

Where do retailers fit into the ecosystem?

Retailers aggregate supply for brands, funnelling large amounts of customers through their shopping experiences and exposing them to various products. This power has historically been unmatched, giving retailers a position of power among brands.

The internet created an unprecedented opportunity for new brands effective at growth marketing. Brands could get directly in front of customers at previously affordable and scalable rates. This change introduced a new wave of DTC businesses as the barriers were low and growth was fast.

Generally speaking, a brand’s incentives were more closely aligned with a customer’s values when there was no middle-layer of retailers and distributors:

  • control over clear messaging that is in the best interest of a customer
  • control over fair pricing with limited markup
  • direct relationships with your customers
  • lower costs and markup for customers

Thinking through this, I initially believed that DTC was the future. We were in a Blockbuster-Netflix moment with traditional retail playing the role of the blue and yellow giant. This is exactly what happened to travel agencies and perhaps retailers are simply in denial about reality. We’ll ignore the fact that some travel agencies still exist today, but it was clear to me that the natural endpoint for retail was DTC.

But that’s not the case.

There is a natural ceiling for small companies doing online only. They are at the mercy of rising CAC and fierce competition. Those low barriers for starting a DTC brand? All of your competition is in the same boat. To break through to the next level, you must enter the physical work and into the masses.

Physical presence still remains the best way to buy and discover brands, especially for most individuals. It’s ironic how much I think about digital/DTC as the future, yet I still crave the experience of wandering through bookstores or random stores, even if not buying anything. Especially in today’s times. What I believe the future holds is an alternate shape of the in-person retail experience. Something more experiential? Personal?

The clear benefits of exposure have a price, and physical space is often prohibitively expensive for smaller players. Your friend’s thriving DTC brand likely can’t afford a meaningful amount of real estate. This leaves a clear option: retailers. Retailers present a large audience in an affordable manner, at the expense of giving up control over the end-to-end customer experience.

So, what is the retail opportunity?

I don’t think anyone has figured out the retail opportunity yet. In-person retail will likely continue to evolve at a glacial pace. Even though in-person retail is still 70%+ of sales, we may be only seeing the short-term impacts of Covid and digitization. Profitability has likely taken a hit, and given the high operating costs of in-store retail, I wouldn’t be surprised if the foot-traffic threshold for bankruptcy is lower than we think. I believe the in-store experience of tomorrow will look quite different from today. Look at DTC brands that have popped up in-store: Peloton, Casper, Tesla. These are a lot more experiential than traditional shopping outlets.

When it comes to retailer e-commerce, I haven’t seen anyone doing this well. You may have retailers in Asia introducing live-stream QVC, but for the most part, North American retailers all have the same e-commerce playbook: 10% off for signing up to their mailing list and the same SAP/IBM/Enterprise-company e-commerce platform with a different skin.

In the end, it looks like DTC is the right playbook for many companies, but I can’t foresee a world without mass retailers any time soon.

  1. For this sake of this post, we will ignore the implications of running a multi-channel approach like this as you will likely be restricted to MSRP’s that are offered in retail locations as well.

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