When to switch from distributor to direct-to-consumer retail?

by | Jun 14, 2017

Thanks to the relative ease of e-commerce and marketplaces, many manufacturers, distributors, vendors and suppliers are considering making the jump from simply supplying retailers with products to adding a new sales channel to sell products direct-to-consumer.

If they do decide to sell direct-to-consumer, what’s the best approach? Should they build their own e-commerce online retail site, invest in a brick-and-mortar location or utilize a marketplace like Amazon or Shopify? Or are they better off just sticking with their current business model and allowing the retailers to deal with consumers?

Why suppliers make the switch to retail

We’re already familiar with brands that have opened up their own retail stores and outlet stores, such as Nike, Columbia Sportswear, Coach, Apple, Samsung and Microsoft. In fact, many of the big brands that have made the leap into direct retail are in the fashion/apparel or technology industries. Many of the big brands made this move because they were losing sales to retailers who were creating and selling their own private label products for less, while still selling the name-brand clothing at the full retail price.

This cut into the brands’ market share, and so the distributors are beginning to compete with their own retail customers to keep from losing out to the private label products. One way to regain lost ground is by selling directly to consumers, whether via their own retail outlet, e-commerce store, joining a marketplace or all of the above.

Preparing to take the plunge

Once that decision has been made to strike a path into retail, the next step for suppliers is determining how they want to do it. Entering into the brick-and-mortar retail space is the most expensive option, but offers face-to-face contact with the brand that can’t be replicated with an online presence, while also adding multiple fulfillment options (ship to store, ship from store, buy online pick up in store – otherwise known as BOPIS). Building an e-commerce site is another option and can also be spendy, as well as requiring significant testing to ensure that it works correctly. Selling over social media can be pretty cheap and easy depending on what the product, but isn’t suitable for all products or target markets. Joining a tried and tested marketplace is probably on of the top choices, as far as price and reliability because they’re already set up to serve just such a purpose. Depending on the level of ambition, all or a combination of approaches could work.

Once a supplier is successfully selling online, the data could be a good indicator of whether or not opening up a retail store could be a possibility. If there isn’t a retailer in a certain region, but there are many drop ship orders going to that area, a brick-and-mortar store could be a great choice. For example, if an outdoor sporting goods retailer drop ships a lot of products to Boulder, Colorado, but doesn’t there isn’t a significant retail presence, that could be a clue for the distributor to open up their own store in Boulder. Of course, this means suppliers need to examine drop ship and e-commerce data to map out where the customers are, with something like the SPS Commerce analytics solution.

Setting a retail price

Once the methods of sale are decided, suppliers will need to determine how they’d like to set the retail price. Obviously, it’s not just a matter of naming a price – the price will have to be set in a way that pays for whatever infrastructure is needed to enter the retail space, such as covering e-commerce costs, marketplace fees, income of newly added employees, cost of maintaining a brick-and-mortar location (if that’s a chosen route) and more. Additionally, the need to calculate what consumers are actually willing to pay, and what their retailers are currently charging. After all, they don’t want to cannibalize from their retail customers — selling a few thousand units isn’t nearly as profitable if a customer that moved tens of thousands of units is lost in the process.

The big brand distributors do their homework, and they know their market and their brand. They know what the price should be, or in some cases, they dictate what the price will be. Apple, for example, has said that retailers cannot go lower than their full price on items, but they’re free to give a rebate for another product in conjunction with the sale (e.g. “Buy this computer, and get a $50 rebate on these speakers”).

Not all vendors, suppliers or distributors want to make the leap into retail. It adds a whole new level of direct contact with consumers that vendors otherwise didn’t experience. To sell direct-to-consumer, businesses often have to hire additional people to work customer service, or existing employees may need to be retrained. New processes to accommodate retail orders would certainly need to be planned.

Even so, stepping into the retail space could be a good choice for a vendor’s bottom line. Many other suppliers and manufacturers are taking the plunge, so they wouldn’t be doing anything out of the ordinary and they would be in good company.

If you’re a supplier considering entering selling direct-to-consumer, whether via e-commerce, brick-and-mortar store or other retail channel, SPS Commerce can help you source additional products, analyze your sales data, and manage your inventory. To learn more, please visit the SPS website and our retail experts can answer your questions.

Scott Bolduc

Director of Supply Chain Strategy at SPS Commerce
Scott Bolduc is a multi-time winner of the Supply & Demand Chain Executive Pros to Know. He has worked with e-commerce retailers on their growth strategies and helped retailers transform their freight spending strategies to maximize efficiencies.
Scott Bolduc

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