• Sourcing Journal

DTC, Drop Shipping and the New Normal



Retail has undergone a seismic shift over the past decade, driven by changing consumer appetites for both what they buy and how they spend. With shoppers demanding more choices and faster fulfillment, retailers have been forced to evolve, leaving behind the longstanding models upon which their businesses were built.


That has meant examining the costs and benefits of wholesale, with many opting to employ tactics like drop-shipping to reduce inventory liability and giving shoppers a greater breadth of options on their e-commerce sites. Meanwhile, brands have leaned into the power of direct-to-consumer, and have learned to connect with shoppers face to face, or screen to screen.


“There’s an enormously powerful trend toward disintermediation, and the parties that are being disintermediated are the retailers,” Mark Cohen, director of retail studies at Columbia Business School told Sourcing Journal. “The fact is that brands are increasingly going direct-to-consumer because they can—and in some cases because they have to” due to unfavorable terms set by retailers, hits to margin, and, more recently, store closures and bankruptcies.


The rise of Amazon has contributed to the protracted uncoupling, he added. The massive e-tailer allows brands to maintain control of their own “stores” on the platform, while reaching an intensely loyal Prime shopper and reaping the benefits of the company’s logistics arm, he added.


This confluence of circumstances has led to a “contraction of the mall business,” Cohen said, with “the department store genre continuing to disappear from view.” As stores attempt to mimic some of the qualities that have made platforms like Amazon so successful—namely, an endless aisle of options and fast, free shipping—they’ve relinquished their roles as curators and arbiters of taste, acting more akin to brand landlords.


“They’re trying to emulate the marketplace that is Amazon, and in most cases they’ll fail at that,” he opined. “They won’t have the resources to either provide the overall assortment, or they won’t have the operational and financial resources to service the customer.”


As department stores in particular have moved toward different models—commissions, leasing out space and drop-shipping—they’ve seen interest from both brands and consumers wane, he said. Premium and luxury fashion players have elevated their own consumer experiences, both online and in-store, generating loyalty and saving margins in the process. Meanwhile, shoppers are increasingly finding little to incentivize a department store visit when so many of the same products are offered elsewhere—especially online.

“The lack of differentiation in product is felt,” Cohen said, noting that department stores used to “live and die on the concept of exclusives,” or proprietary products produced by brands that could only be found in one place. “There’s very little of that left—and a lot of it is bogus,” he remarked, noting that consumers can see through attempts to distinguish items as unique based on a few inconsequential design features.


Department stores have also accelerated their descent into obscurity by building out off-price channels that cannibalize their core businesses, he asserted. While store chains like Nordstrom built a devoted base on consumer experience—clean, well-assorted stores and excellent customer service—the Nordstrom Rack shopper is willing to forgo the pleasantries in pursuit of a great deal. Saks Fifth Avenue, Macy’s and Neiman Marcus all fell prey to the trend, he said, and it has only served to condition shoppers to set their sights on greener, cheaper pastures.


The proliferation of options, both brick-and-mortar and online, has led to a disintegration of the wholesale model that used to serve as retail’s foundation. “We’re looking at market forces that are causing the industry to eliminate all the middle people,” Cohen said, projecting that the trend will “completely overwhelm the industry” over the course of the next five to 10 years.


“Consumers used to be tethered to their local mall,” he added. “Now, they’re not stuck.”

“The traditional wholesale model is completely changing right now, and there are definitely advantages and disadvantages for both brands and retailers,” Erin Schmidt, a senior research analyst at Coresight Research, added.


In moving away from purchasing product from brands outright, retailers reduce the cost of ownership and mitigate risk, she said. They can more easily pivot to new styles after getting a quick read on sell through, rather than letting blouses and blazers take up valuable rack space for an entire season when shoppers are really craving loungewear, for example.


But moving onto new and different terms of engagement has come at a cost. Labels are a retailer’s currency with consumers, and if a store’s lineup thins out, shoppers will follow their favorite brands to their DTC channels. “If major brands leave a department store, [the store] loses part of its image,” she said.

Retailers are starting to become sidelined by luxury and mainstream labels with the experience and infrastructure to service shoppers on their own. Brands are streamlining their key accounts and pumping investment into reaching consumers on their own terms, Schmidt said. The move not only helps brands hold onto margins, but it also helps them keep key consumer insights within their grasp, allowing them to respond to trends “so much faster” than if they were waiting on a retailer to deliver the data.


Some retailers, like Nordstrom, are making proactive changes to the way they assort both their physical stores and website, knowing that brands are seeing the writing on the wall when it comes to wholesale. At the retailer’s Investor Day event in February, the company announced that it would shrink its wholesale business from 85 percent to 50 percent of overall sales, making way for drop-shipping and revenue-sharing partnerships. The retailer said it also planned to expand its web assortment to include a whopping 1.5 million products, up from 300,000.


These changes, which took place in the wake of the pandemic, point to the undeniable rise of digital. Web sales made up 55 percent of the company’s business in 2020, and drop-shipped items accounted for one-quarter of the products sold at the retailer’s anniversary sale last summer. “They’re now a digitally native department store,” Schmidt said. “They expanded their inventory online to include so many more offerings for the consumer than they could possibly have in store.”


Schmidt believes that the move could offer small, emerging brands the opportunity to grab some online real estate with a trusted national retailer. They’ll benefit from being validated by the heritage chain, while Nordstrom will be able to offer its shoppers what they crave: something new.


“It’s going to take a lot more investment in marketing to highlight these emerging brands and categories,” she said. “But it’s what the department store needs right now—freshness.”


That “injection of trends” will help retailers stay relevant, she said. “The biggest challenge—and opportunity—is going to be held to taking this endless aisle and getting the consumer to focus in on exactly what you want them to see.”


The move away from traditional wholesale has presented green designers with some attractive opportunities, Bob D’Loren, CEO of Xcel Brands, agreed. And as more established brands continue to strike out on their DTC paths, department stores are likely to build out their own stables of private label brands to fill the void.

In the wake of these changes, the company, which designs, markets and distributes goods for labels like Isaac Mizrahi, Halston, C. Wonder and Judith Ripka, has leaned into drop shipping for its retail clients. “I’ve instructed our wholesale teams here that we will drop ship for anyone,” he said, noting that the company’s stable of brands have a longstanding history in wholesale.


The challenge with drop shipping is forecasting demand, though. “Without history, it’s hard to buy inventory,” he said, “So that puts additional pressure on us as wholesalers and brand owners to have our own DTC platforms.”


Firms like Xcel must walk a fine line between ordering too much product—and being forced to discount goods at the end of the season—and ordering too little, leaving retailers feeling shortchanged. Amid the challenges posed by the pandemic and by recent logistics delays impacting goods produced overseas, as well as ever-shifting consumer appetites, the company has opted to take a better-safe-than-sorry approach for the spring 2022 season. “I can tell you that internally, we made a decision with apparel to just reduce our forecast not take the inventory risk,” he said.


Rather than over-order, Xcel will have to communicate clearly and often with its retail partners about the availability of product. “It’s very challenging,” D’Loren added. “We’re either going to end up in one place or another at the end of spring 2022—either people are going to have too much inventory or far too little.”

For brands and fashion firms that are pivoting to drop-shipping, “this is a very tricky moment,” he opined. Most retailers want their suppliers to block out a certain amount of inventory for them, even if they’re not buying the goods outright. But brands have to think about the end goal of moving product across all of their retail channels, including their own websites and stores. “You have to be able to run a dynamic inventory, otherwise you’ll get caught with too much and you’re back to liquidating,” D’Loren said.


“It’s almost like running a trading desk, if you will,” he explained. “Do I go short on Customer A for this week because demand’s down, and go long on this customer?”


Balancing customer demand and brand health can feel like a high-wire act for firms like Xcel, which have invested in new strategies and forecasting tools to help navigate the new wholesale landscape. “It’s been an interesting journey to get here,” he said. “The kind of planning and inventory allocation engines that you need are a little more sophisticated than what I think most wholesalers were accustomed to.”


Meanwhile, in order to facilitate their own DTC sales as well as drop ship for retail partners, brands have had to build out their third-party logistics networks to reach a new degree of sophistication and speed. “I think it’s harder for the smaller players that don’t have the warehousing, don’t have the tech infrastructure, the ERP systems, and the warehouse management systems that are needed,” he said.


Those in the position to invest in drop-shipping for the long-term will also rethink storage and shipping, he said. “The players who are really smart will set up drop-ship warehouses either over the Canadian border or on the border of Mexico,” he said, in order to take advantage of Section 321 of the Trade Act, which allows shipments valued at less than $800 to clear Customs and make their way directly to consumers duty-free. By first quarter of 2022, Xcel Brands expects to move its main Los Angeles warehouse to Tijuana.


Wholesale’s evolution is not without its growing pains, but D’Loren cautioned against viewing the shift as a rejection of traditional retail as a concept. “There will always be a need for stores—maybe not as many as we have today,” he said, noting that he believes the U.S. is generally “over-retailed.” Shoppers still enjoy the process of browsing and buying in a physical marketplace, he added, “and stores are always going to be a part of the customer journey.”


While traditional wholesale has been on the decline for years, according to Mohit Mohal, managing director for management consulting group Alvarez & Marsal’s consumer and retail group, department stores now have an opportunity to pivot and prove their necessity to brands and shoppers—and he believes their robust footprints may still prove a boon, not a bust.


“I would say that department stores have been sitting ducks for the last decade,” he said, as they’ve been rapidly outpaced by off-price channels and brand-owned DTC. “I’m actually glad that with the pandemic, they got this jolt which has woken them up to the reality of the new normal.”


Many of Alvarez & Marsal’s clients—“especially the established brands”—have been questioning the strategic need for wholesale as a part of their portfolios, Mohal said. But the one thing that keeps them tethered to the concept is the sheer ubiquity of department store chains in the U.S. “No matter how many stores you open as a brand, you can never have the coverage or reach that a department store network can offer.”


But retailers must make a concerted effort to shift from “transaction centers to customer experience hubs,” he added. That means digging into omnichannel capabilities that allow shoppers to browse and buy across multiple touch points, improving the in-store journey through personalized services like styling, and pioneering inventive solutions that tap into consumer crazes like resale.


While e-commerce saw an undeniable and astronomical lift during the pandemic, Mohal believes that turning away from the physical realm in an attempt to compete digitally is all but a lost cause for most. “There’s a huge push to hire digital stylists and marketers who can really engage on social media, which is fine,” he said. “But they’re forgetting one big thing—the 800-pound gorilla in the room. Amazon now controls 35 percent of the U.S. apparel, footwear and accessories market, and it’s only going to get stronger.”


Pivoting to dropship in an attempt to offer shoppers more variety online may prove effective for retailers in the short-term, he opined. But as brands become more adept and experienced at fulfillment, they’re going to wonder why they’re bothering with a middle man at all. “[Drop ship] is actually incentivizing brands to aggressively build either their own DTC, pursue online marketplaces or create subscription models,” he argued.

“[Department stores] are scampering to build digital, but I’m actually surprised,” he added. “They have this huge asset in terms of reach and in-store experience.”


“Absolutely, they value the experience they get to retail, and I also think they value the point of view that both retailer and brand provide,” Matt Katz, managing partner at management consultancy SSA & Co. said of shopper appetites for physical retail. Still, he said, “I think no one is regretting the investments were made to push digital forward.”


Brick-and-mortar players have doubled down on e-commerce over the course of the past year—a choice that likely saved their businesses, and one he believes will only make them stronger in the long term. The pandemic forced consumers who had never interacted with a brand or a retailer online to become adept at purchasing everything from apparel to groceries through the web, and hose behavioral shifts are likely to stick, he said, along with expectations for convenience and flexibility.


“At the same time, it has forced sub-performers at brick-and-mortar to close, and now what’s left are retailers that can perform,” he said. “I think what you’re seeing is the recognition that retail is multi-and-omni-channel.” With so many choices on how and where to buy, stores must do their part to protect consumer relationships—and that means offering a frictionless experience on shoppers’ terms.


Both brands and retailers must learn to leverage the goodwill and loyalty they’ve built “through experience, through feel, though availability and through fit—those things are still ever-critical,” he added. The two parties need each other, he argued, in order to deliver the multi-faceted experience that consumers have now become conditioned to crave.


“I think that retailers are looking for partnership and differentiation, and brands have an understanding of where their products are best distributed, and now they’re trying to marry those two objectives,” he said. “Those are the macro factors in coming up with an assortment and a solution that consumers are going to gravitate to.”

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