Understanding Direct to Consumer Sales, Part Two: The Vendor Perspective

In this month's issue of the Pulse, the Running Industry Association is presenting the second of a three-part series where we take a deep dive into the topic of brands' Direct to Consumer (DTC) sales policies. The RIA's goal is to inform and provide perspectives from all sides of what is a complex topic. Part One examined the issue from a retailer point of view. This month we'll examine brand perspectives, and in the third part of the series we'll present potential solutions and best practices.

Vendors to the run specialty space agree complaints from run specialty stores around DTC approaches – particularly frustrations accessing DTC inventories and competing against brand’s online promotions – have been increasing.

The grumbles arrive as two of the industry’s hottest brands, Hoka and On, have told the investment community they’re seeking to grow DTC faster than wholesale. However, all brands are believed to value the power of run specialty stores to convert individuals into running enthusiasts through in-store fitting, community runs, and other local efforts amid the conflicts DTC selling is creating.

“I would hope that from all of the brands’ points of view that none of the things that the retailers are frustrated with are things that the brands are trying to do on purpose to frustrate the retailers,” said one running footwear brand executive. “They're things that they're trying to do to service the consumer that have friction points with specialty retail.”

Editor’s note:  Given the sensitivity of the topic, some brands wished to remain anonymous, or provided some comments off the record. The RIA allowed this to ensure transparency and candor. 

Access to DTC Inventories

The main complaint from run specialty stores is around inventory sharing. Footwear brands keep two sets of inventories – one to support its wholesale partners and another for DTC selling. For run specialty stores, the frustration is when a consumer wants an item that’s available online but is out of stock at the store and not accessible through the brand’s wholesale stock.

In some cases, the products available online are special colors in a style that’s exclusive to online selling, but it may also include out-of-stocks of a popular model that the consumer winds up purchasing straight from the brand’s website. 

One running brand executive said his team is open to exploring ways to dip into DTC inventories to support wholesale partner needs, including if an in-store customer wants a special size, such as a 14 or a width 4E, that a store generally doesn’t stock, or any color that’s available online.

“We know full well that there are instances where a store is spending 20 to 30 minutes fitting a customer and ultimately that customer needs a size or color that the store can't order because it's out of stock, but our website is showing it’s available,” said the executive. “There's nothing we want more than to be able to ‘save that sale’ at retail.”

However, such situations are so far handled “on a one-off basis” as the brand is still working on formal procedures to transfer that item from its DTC channel to its wholesale partner. In some cases, a rep may purchase the item on the brand’s website with their own credit card, provide it to the store, and then look for ways to reimburse herself or himself. A store may purchase another model to make up the difference.

One consideration is not creating havoc for the brand’s DTC team, which has its own growth objectives and aims to always have a full-size run in stock to not disappoint online consumers.

Opening DTC inventory to wholesale risks causing the DTC team’s forecast to be “blown up,” the executive said. He added, “Instead of having to satisfy say five to 10 units on a monthly basis, they’re now being asked to satisfy hundreds of units on a monthly basis – all on an unplanned basis.”

He believes a misperception by many stores is that the DTC channel has an abundance of inventory to support wholesale’s missing stocks. The executive said, “They're not sitting on a goldmine of product. Nor are they stealing product from wholesale.”

An executive at another running brand acknowledged the problems sharing inventories causes for the DTC side. Creating a separate DTC team with their own goals has benefits as a DTC team’s skill sets include aspects such as geotargeting, social media outreach, working with influencers, and online functionality while wholesale is all about relationships, he noted.

Sharing DTC inventories to support wholesale needs, especially around a popular model, could cause the DTC inventory to get “depleted very quickly,” leaving the DTC team at risk of missing their growth targets while also disappointing customers with out-of-stocks online.

The higher margins that brands earn selling direct rather than through wholesale are also a consideration. The executive said, “In all honesty, if you had a finite amount of inventory, 100 pairs, would you rather sell it straight to the consumer or sell it for wholesale to the retailer and then have the retailer sell it to the consumer? The brand more times than not will probably try to choose the one that's most profitable.”

Coordination in handling one-off inventory requests also can be a challenge with some DTC teams reporting to a brand’s president, but other DTC teams reporting to a separate DTC group with broader online objectives, the executive noted.

Still, he believes many stores are shortchanging the opportunity to leverage brands’ drop-ship capabilities that could enable the offering of an “unlimited selection” of product from their selling floors.

Discounting on Brand’s Websites

A secondary frequent complaint is that branded websites tend to be overly promotional, undermining attempts at selling full-price product inside stores.

One running brand executive said most stores understand that the items being marked down are last year’s models. Many are offered at discounts to support the phasing out of older models to new updates, but often prefer to emphasize the new models. The exec said, “We're very happy with how our UMAP policy protects the full-price selling interests of run specialty.”

The exec said his brand’s DTC business is planned for growth, but at a lower trajectory than its wholesale growth objectives. He said, “Our organization’s #1 goal, specifically, is to expand the brand’s footprint within the run specialty channel. DTC will continue to service consumers that are accustomed to shopping directly – across a variety of different product categories – from brands’ e-commerce sites.”

He added, “We feel strongly that our run specialty partners elevate our product and enhance our voice – many of our focuses (marketing, events, distribution policies, etc.) are aimed at driving consumer traffic towards the local buying option.”

Another running brand executive likewise agrees that most run stores would rather avoid selling discounted product, but he also indicated the higher margin a brand can earn selling direct helps offset losses on sales of discounted items.

The executive also noted that part of the reason brand websites have been promotional in recent years is because of cancellations first caused by the pandemic and then the related supply-chain bottleneck impacts. He admits promotions are a problem with brand websites ideally focused on product discovery and brand building, and felt the industry collectively could do a better job with inventory management and “forecasting accurately.”

Customer Acquisition Through Direct Engagement

Another benefit of DTC is customer acquisition with brands now able to take a hybrid approach of reaching customers directly but still through their run specialty wholesale partners, also. The optimistic view is the additional brand’s online outreach–- through advertising as well as social media outreach – will complement the more community-driven efforts by local stores to expand the total addressable opportunity for run specialty, although such moves risk fraying relationships with run specialty wholesale partners.

Hoka and On have both recently announced plans to expand DTC faster than wholesale while planning to deepen relationships with key wholesale partners. The brands cite the benefits of higher margins, access to customer data, customer acquisition, and retention. Both have highlighted online’s ability to reach younger consumers.

Hoka’s sales grew 22 percent in the third quarter ended March 31, led by a 38 percent hike in DTC sales. DTC accounted for 40 percent of Hoka’s sales in the period, up from 35 percent a year ago. Deckers Outdoor, Hoka’s parent, has set a goal for Hoka’s DTC to represent 50 percent of sales.

David Powers, Deckers’ CEO, told analysts about Hoka on a February quarterly call, “Third quarter growth was primarily driven by gains in the DTC channel, as intended, with Hoka diligently managing the wholesale marketplace to drive market share gains with high levels of full-price sell through."

Last November, On stated that it would be adding fewer additional wholesale doors moving forward as it looks to focus on its existing partners as well as growing its DTC presence through e-commerce and owned stores. While the brand's 2023 Q4 was highlighted by 46.2 percent of sales from DTC compared to a 40.7 percent contribution in the same period in 2022, On's wholesale partners observed strong sell-out numbers at full price, both in their brick and mortar locations as well as their online presence. 

On further stated that the brand would continue to manage their different channels very consciously. They will be adding a lower number of incremental wholesale doors in the future than over the past years, and see a significant potential for deeper penetration at strategic accounts, same store growth and ongoing market share gains. 

Martin Hoffmann, co-CEO and CFO, told analysts on a call, “The significantly higher DTC share serves as a further validation of our DTC focused multi-channel strategy and the exceptional  momentum of our own channels.” 

Dan Schade, On’s GM Americas, stated further that "Our exceptional growth is validation of our ability to bring consistent innovations to market and balance our wholesale and direct distribution. Our DTC business is expanding, but at the same time, wholesale plays a crucial role in our winning omnichannel strategy. Moving forward, we’ll add fewer wholesale doors so we can focus on our existing retail partners in core channels."  

Altra Amplifies Storytelling Online

Joe Toth, head of North America sales at Altra Running, said Altra’s foremost DTC goal is to offer the “best representation of our brand,” including showcasing the product range, technologies, and brand story “in a deeper or more meaningful way” to help consumers better understand what Altra stands for. He added, “In all honesty, you can't tell the same level of storytelling and detail on a retailer's website or within a retailer's brick-and-mortar environment.”

Altra also aims to grow DTC sales but “not at a disproportionate rate to the rest of the marketplace. We're trying to grow it with the marketplace,” he added.

Toth said Altra recognizes the run specialty stores have the clout to “make or break the future of a brand” in establishing credibility with runners. He stated, “We absolutely do our very best to prioritize our retail partners as part of our strategy.”

Owned by VF Corp. since 2018, Altra sees both DTC and wholesale sales staff report to the brand, and is often able to handle requests from run specialty stores to secure inventories that had been reserved for DTC selling. Altra also remains open to dialogue to resolve any complications DTC is creating for store partners.

Toth said, “We have strategies, clarity, and things in place, but we are willing to evolve and change them on a regular basis as we learn and have healthy conversations with our partners that are helping us drive our business in the marketplace.”

rabbit Sees “Symbiotic Relationship” With Run Specialty Stores

Paul Astorino, VP of marketing and sales at rabbit, said the running apparel brand gets few complaints about its DTC approach, outside an occasional MAP change policy that a store may have missed. He believes that’s partly because one of rabbit’s co-founders, Monica DeVreese, also owns a running store, Santa Barbara Running, with her husband.

“We understand on a daily basis what happens at a running store from the buy to servicing customers, to building a community and clearing out inventory. We get that,” said Astorino. “The other thing that we understand is how a specialty store makes money, so we try to balance our financial goals with that.”

Unlike Lululemon and Vuori, rabbit allows stores to sell its brands online. He said, “We want people to find our brand. If someone finds it elsewhere online, wonderful.”

In the case where a wholesale account is missing an item, rabbit’s wholesale and DTC managers more than often find ways to maintain internal business targets while fulfilling the store’s need.

“We think it's a symbiotic relationship,” added Astorino. “We can't succeed without specialty, and I feel like we help them succeed in their business. And the more we just listen to one another, the more runners get served in general and the more we both make more money.”

Astorino said apparel can be “trickier because there's so many more SKUs.” However, he doesn’t see the category as challenged as the footwear side in modeling inventory levels between wholesale and DTC.

“The margins are so different between DTC and wholesale for specialty that if you start to swing all your inventory over to specialty, then your entire margin profile will collapse,” said Astorino. “I can see those guys building these brick walls between the two inventory buckets.”

Diadora’s “Respect The Fit” Stance

Diadora stands out for its unique profit-sharing distribution model within the run space. Under the “Respect The Fit” program, all Diadora tier-one running product in the U.S. is sold solely via the run specialty channel and no specialty running product is discounted on Diadora.com. Also, a portion of the profits from Diadora’s DTC running business at the end of the year is allocated to the brand’s top specialty run stores in line with commitments to represent the Diadora brand.

Bryan Poerner, CEO of Diadora USA, believes through their continued DTC pushes, brands are “going after consumers that the running store has created for them” through their in-store fitting process and community efforts.

“We generally believe that there is a shared ownership of building consumers,” said Poerner. He also sees the rampant discounting on many branded sites likewise taking customers “out of a store.”

Poerner noted that Diadora was able to “start with a blank sheet of paper” when the Italian brand entered the U.S. running space in 2017, and overhauling distribution would be a seismic change for many established brands. He further said Diadora works to “plan way more carefully” to avoid having to discount online. 

Still, Poerner said Diadora will readily accept less margin in shifting DTC inventories to support wholesale accounts’ needs, on the belief the stores are the “gateway” to consumers and build brands one pair at a time. He said, “I just don't think you can ask these amazing stores to build consumers with you and then compete against those same stores.”

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