FN Investigates: Why the Future of Retail Rests Squarely on Direct-to-Consumer

Following an acclaimed fall 2013 debut, Sarah Flint’s eponymous footwear label — a favorite of A-listers Meghan Markle, Heidi Klum and Blake Lively — has enjoyed a rapid rise. Landing coveted shelf space at Barneys New York, Bloomingdales and Level Shoe is among the most celebrated achievements on the company’s mantle.

So its decision — backed by an investment from supermodel-turned-business-mogul Cindy Crawford — to exit those stores in November and lean solely on its own e-commerce site may have come as a surprise for some. (Crawford is also an adviser for the brand.)

“My mission has always been to offer great quality, incredible shoes 
to women of discerning taste — but as the business grew, we saw that the traditional model drove up prices and limited the products’ reach,” Flint said of her recent decision. “This [direct-to-consumer] move has enabled me to reach more customers and get that much closer to that customer.”

Sarah Flint with CEO Veronica Collins
Veronica Collins (L) and Sarah Flint.
CREDIT: Courtesy of brand

Indeed, a growing number of brands are finding that a more effective business strategy — given the digital revolution at retail — is to narrow their wholesale distribution or ditch it altogether in favor of a path that puts them in direct contact with the product’s end user. Tamara Mellon, Modern Vice, Greats, M.Gemi and Grand Voyage are all examples of the trend — with each brand taking a DTC-centric approach from launch.

Nitin Mangtani, the former head of Google Shopping and current CEO of mobile commerce platform PredictSpring, suggested such firms are headed in the right direction. “Traditionally, brands were always selling through external retailers or a marketplace such as Amazon, and they never knew who the customer was, and the customer never knew who the brand was — so there was not [a lot of] loyalty,” Mangtani explained. “Historically, [the question] was: ‘Can I move 100,000 units of this product?’ Now it’s, ‘Can I sell 100,000 units of this product and know who the consumers were that bought it so I can have a lifelong connection with them and re-engage with them on different touch points?’”

Since its March 2015 launch as a pioneer of DTC footwear brands, M.Gemi has grown to boast a four-times-a-year repeat-customer rate versus an industry average of one — an accomplishment due in part to a distribution model defined by constant engagement.

“Direct-to-consumer allows us to respond to customer preferences — we are seeing and hearing what’s working and making those changes in as little as four weeks,” co-founder and president Cheryl Kaplan said.

In addition to being able to quickly build consumer feedback into products, DTC label Modern Vice is able to connect with shoppers more organically, according to Jordan Adoni, co-founder.

“DTC humanizes the brand,” he said. “I could even be on the phone [myself]. I talk to customers all the time. That part of it is great for them and great for us.”

modern vice, boots, factory tour, jordan adani
Modern Vice is known for its boots and booties.
CREDIT: Courtesy of brand

But by far, the primary advantage for DTC brands is their ability to offer competitive prices.

“The main reason I [went this route] is because I wanted to be able to offer the best quality possible 
at an accessible price,” said Grand Voyage founder Robert Nand, noting his label uses the same factory as other luxury heavy hitters Christian Louboutin and Lanvin but sells for roughly 65 percent less. “For most consumers, quality fashion is so overpriced that it’s not even an option for them. [I wanted to] change the way people perceive buying quality footwear, and to accomplish this, I had to first address the price accessibility.”

The same has been true for Flint, who continues to use the same high-end factories in Italy to create her luxury wares. But after launching DTC, she is able to sell them for 40 to 50 percent less.

“We’ve already had some of 
our new styles sell out in certain colors and sizes — we’ve had an amazing response,” said Veronica Collins, president and COO of Sarah Flint. “You become a fully vertically integrated business, and you own
 — from soup to nuts — everything about your business, which can be incredibly empowering but also challenging.”

CUT OUT THE MIDDLEMAN

Even with its immense benefits, the DTC path is not without difficulties — particularly for smaller brands that initially lack the resources to get the word out. 
“It can be tough to gain traction starting from zero,” explained B. Riley FBR analyst Jeff Van Sinderen. “It’s [completely] do-it-yourself, and for smaller brands, this can be an expensive undertaking.”

By offering broad exposure to an array of customers as well as access to expensive, complex operating systems, wholesale partners can be a significant boon for brands.

Grand Voyage’s Nand said one
 of the biggest hurdles he faced was reaching a larger audience. “Retail is marketing to some degree: Customers get exposed to new brands, and they can see and feel the quality of the materials firsthand,” Nand said. “Being that our online customers can’t see our products in person, we made sure they knew there 
was zero risk in buying from us, 
by offering hassle-free returns 
and exchanges.”

Grand Voyage shoes
A spring '18 style by Grand Voyage.
CREDIT: Courtesy of brand

Grand Voyage has also leaned heavily on social media to boost marketing. (In fact, many DTC brands are birthed out of Instagram, where some have even built sizable followings before actually going to market.)

“Social media is the lifeline to any DTC brand,” Nand said. “Over 70 percent of our business is generated from social media.”

Nevertheless, Grand Voyage has also partnered with retailers Barneys New York and Nordstrom to showroom its collections — a growing trend among DTC labels, which view wholesale accounts as a marketing tool as opposed to a major revenue stream.

Case in point: While DTC is
 the primary component of its distribution mix, Modern Vice has kept the door open to wholesale partnerships.

“Sometimes, strategically, you want to be in a few stores because it helps get people to your site 
and it helps people go in and try shoes on. And they buy shoes there, then they buy from our website,” Adoni said, adding that the brand is in Bloomingdale’s and Free People.

Another challenge is a dearth of financial backing to build the infra- structure necessary to be fruitful.

“When a DTC brand starts out, it doesn’t have 1,000 engineers like Amazon to build an effective web, in-store and mobile experience,” Mangtani said. “And to be successful, these brands have to compete with the best-in-class Amazon.”

M.Gemi store New York Soho
M.Gemi's store in New York's SoHo neighborhood.
CREDIT: Courtesy of brand

Adoni said he understands the financial obstacles of the model all too well. “People underestimate how much it costs to run a direct-to-consumer brand,” he said. “We strive to make everybody happy all the time. We are emotionally attached to the brand and the people who buy it. Direct-to-consumer is not a cheap way to go about the shoe business. You spend less money day to day but more money long-term.”

What’s more, according to Farla Efros, president of HRC Advisory, the logistics are also fraught with margin pressures.

“DTC bears heavy costs along the supply chain, and yields smaller [profits],” Efros said. “Brands have to find inventory holding locations that can service customers at the speeds they expect. Also, the model requires more sophisticated order management and customer service programs in order to mitigate potential customer satisfaction issues, which are incredibly technical and require close eyes.”

But the brands that have reaped dividends attest that DTC’s benefits outweigh the drawbacks.

“[For consumers] it’s that aha moment when it all comes together: You see an ad, or hear about it from a friend, and you actually put them on and see how it fits,” M.Gemi’s Kaplan said. “Up until that point, it’s a new brand and you are buying into the story, but when you see the shoes, you get it.”

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