Many global brands are in the midst of a transformational shift from wholesale to retail, owing to retail’s forecasted role as the key growth driver for many global brands in the next two to five years. That’s especially true in China, which is currently expected to become the world’s largest retail market by 2018, according to the Economist Intelligence Unit.
In this past year, brands like Nike, VF, adidas, Anta, Li-Ning and Xtep have all reported growth in their direct-to-consumer (DTC) channels in China compared to 2014 and are expecting DTC to continue to grow as a percentage of total revenue in China. Meanwhile, luxury brands like Michael Kors and Ralph Lauren have continued to buy back franchisees and licensees to take back control of distribution and increase their owned retail store presence.
This shift to DTC is not an easy journey. Based on our work with brands over the years, there are five key challenges that make this shift hard:
- Engaging consumers. Running a DTC business means having the ability to define and tailor the entire customer experience, whether that be in-store, online or via mobile. Fully engaging the customer, understanding her needs and making customer-centric decisions all require a different approach to work. In a predominantly wholesale-driven company, this change will take time, requiring a sustained and reinforced shift in mindset and priorities. Typical seasonal go-to-market processes will need to be enhanced to ensure that consumer insights and needs are captured and integrated into strategic, financial and assortment decisions.
- Controlling inventory throughout its lifecycle. Owning inventory throughout its full lifecycle is a big responsibility that directly impacts retail profitability. For retailers, this control of inventory is both an opportunity and a risk. A wholesaler making the transition to retail often needs to add new processes and skill sets to its organization to ensure proper management of its products across channels, regions and stores from launch to clearance.
- Developing new relationships with wholesale partners. Brands will need to consider the impact of DTC pricing, assortment, promotion and clearance decisions on wholesale partners, often requiring renegotiating the partnership’s terms and policies. Especially in China, where most wholesale partners operate single-brand stores that may not appear any different from brand-owned retail stores, alignment is important in maintaining brand positioning and a consistent customer experience.
- Breaking down organizational silos. DTC functions in traditionally wholesale-driven companies usually have evolved through ad hoc practices over the years. As a result, retail and e-commerce are often isolated and treated like just another wholesale vendor. Better support of DTC growth and maximization of both wholesale and DTC channels will require integrating both sides throughout the entire end-to-end product development, financial and assortment planning and in-season management processes. This will require an evaluation of roles and responsibilities and new incentives to promote better communication and collaboration.
- Managing and utilizing more complex data. Effectively managing a retail business and supporting new retail processes require different data and metrics. This means that systems will need to be able to accommodate different business rules and definitions and also provide access to different reports and analytics for different channels. Additional complexity is added when these differences have to be reconciled for planning, analysis, leadership dashboards and financial reporting. Making investments in technology is often necessary to enable this flexibility and greater automation and sophistication.
Brands that have successfully navigated these challenges have taken a holistic approach by balancing strategy, process, organization and technology. Willingness to shift mindset and establish a different way of working internally and externally and to break down silos to integrate different functions and processes is needed for sustainable and profitable DTC growth that will ultimately also benefit wholesale.
Shifting focus from a wholesale, partner-driven, sell-in model to a retail, customer-centric, sell-through one will significantly impact virtually every process in an organization.
Key retail processes that will need to be added or integrated into existing wholesale processes to address the new DTC business challenges include:
- Who is my customer? Are my customers different by category, market and channel?
- Which products have performed well in each channel in the past and why?
- Do I need to differentiate my product offering by channel?
- How do I reconcile my DTC category strategy with my wholesale tasks and align with the overall product/brand strategy?
The concept of brand strategy or a design-led category strategy may not be new, but a customer-focused category strategy is often a missing piece for brands making the shift to retail. A well-developed DTC category strategy requires identifying and understanding end-customer needs through insights, feedback and analysis, while brand- and product-led strategies are often driven by market trends and marketing appeal. The DTC category strategies will need to be integrated with wholesale partner feedback and shared with product development and design teams to inform seasonal line development—making timing and coordination critical to ensuring informed decision making across functions.
Merchandise Financial Planning (MFP) and Open to Buy (OTB)
- How much inventory do I need to achieve my sales targets?
- Will I be sharing inventory across channels and regions?
- What actions can I take to balance sales, margins and inventory turns based on actual perform-ance relative to plan and financial goals?
MFP and OTB are not the same as financial plans created by finance or accounting teams, nor are they the same as wholesale account plans. MFP is done pre-season, taking into account the category strategy to inform the DTC assortment plan and buy to achieve a balance of the financial goals of sales, margins and inventory turns. In contrast to the mostly sales-driven wholesale account plans, MFP is also meant to guide in-season activities and decisions regarding inventory flow, markdown and open to buy. Aligning on which retail metrics to plan and review, and at what level and frequency, is a critical step in ensuring a robust MFP and OTB process and will facilitate reconciliation and rolling up plans across DTC and wholesale.
Assortment Planning and Buying
- What products do I need to address my customer’s needs? How unique should my assortment be by store, market and channel?
- How many launches or drops will I have per season?
- What is the right number of styles to offer, and how deeply should I buy of each style?
- What are my store capacity constraints?
The process of developing a DTC assortment and buy plan needs to be proactive and integrated with the global line development process. This is one of the benefits of a vertical operating model, where the brand controls everything from product concept to retail sales. Being able to identify and incorporate DTC assortment needs into the product line can increase adoption rates, minimize SKU proliferation and increase sell-through and sell-in. As many brands become better retailers, the next step is to take those DTC channel learnings and start to guide wholesale partner buys—a step that furthers a brand’s desire for greater control over a customer’s experience, regardless of channel, as well as supporting wholesalers in achieving better performance.
Enhancement and implementation of the above three process steps helped a $2 billion footwear and apparel brand to identify DTC product gaps and performance issues early. The Asia team was able to share these findings with global design and product development teams before finalizing the seasonal line. This early communication enabled the Asia team to influence the final global product line and ensure that certain types of products would be available to address Asia market needs, decreasing regional buy uncertainty and pressure. Additionally, during the category strategy and assortment planning processes, the brand was able to identify an opportunity to decrease assortment breadth by 10% to 20% while still satisfying customer needs and its financial goals for the season.
Flow, Allocation and Replenishment
- What is my product lifecycle? When is the right time to deliver product into stores?
- What is the right place, right time and right amount of product to send across channels?
These processes are the key to effective inventory management. The tactics executed during flow, allocation and replenishment need to be informed by the buy and MFP while also taking into account actual performance and changes in customer demand. Supporting better decision making across these processes demands coordination with wholesale around product launch dates, especially when there are differences between DTC and wholesale preferences, as well as more granular data and analytics. Optimizing flow, allocation and replenishment not only ensures profitability but can also reduce operational complexity and costs associated with stock balancing, store transfers and markdown activities.
Promotion, Markdown and Clearance
- What is my pricing and promotion strategy?
- When and how much should I mark down products? Does this conflict with my wholesale partner’s plans and operating terms?
- How and where do I plan to clear my aged inventory?
Promotion, markdown and clearance decisions support selldown of inventory, ensuring room for new products and the ability to meet end-of-season financial targets. The key here is to anticipate and plan for these decisions while establishing a process to quickly take action as needed in response to actual performance. The challenge with these decisions is figuring out how to balance them with your wholesale partner’s policies and plans. DTC and wholesale teams may need to work differently and proactively to get wholesale partners onboard regarding different in-season tactics. This will likely require a reevaluation of markdown and clearance timing and support terms with wholesale partners.
We have seen many companies in China struggle with these inventory management processes. The result is often frustration and wasted time and money spent addressing the symptoms but not tackling the root causes. For example, a common symptom of poor inventory management is the prevalence of store-to-store transfers, which are often done manually and are very time-consuming, in-season. Many of these transfers could have been avoided with better upfront decision making about what and how much product should go to each store or channel and when and how much promotion or markdown to take to drive sales and clear inventory.
As this case shows, getting all these processes established and synched up with existing wholesale milestones will not only benefit DTC but also positively influence wholesale.
A COLLABORATIVE ORGANIZATION
Enabling these new processes will require rethinking the organization and how well it supports collaboration, scale and speed. Brands need to answer key questions like:
- What is the right DTC structure, and what are the proper roles and responsibilities to enable faster and better decision making while supporting scalable growth?
- Which skill sets should be developed, and how can the right behaviors be incentivized to promote and reward cross-functional collaboration and retail focus?
- What is the size of your DTC business, and how much do you anticipate growing DTC relative to wholesale?
- How much product and brand experience tailoring do you want by region or by country? How much control will be given to the country?
- How much consistency is desired between retail and wholesale, and how much do you anticipate retail influencing wholesale or vice versa?
An ideal structure should encompass key functions critical to executing the DTC process—buying, planning and allocation—but will also need to balance specialization with collaboration. In their quest to grow retail and e-commerce, many wholesalers have inadvertently created silos that need to be broken down to effectively support ongoing DTC growth. Buying, planning and allocation functions need to be able to work together and be incentivized to maximize DTC by focusing on the end customer and inventory. And once this more collaborative DTC organization is established, the next step is figuring out how to bridge DTC with the wholesale team.
Access and definition are common challenges faced by many brands undertaking retail transformation. Many companies face the twin challenges of existing systems and master data not being configured to easily provide visibility to retail metrics and performance data. And even if access isn’t an issue, many retailers are shackled with inconsistent or incorrect definitions, making it hard for the business to make informed decisions and reconcile them across channels.
Here are five key metrics every retailer needs to use:
While many businesses begin with simple Excel tools to support DTC analysis and decision making, as DTC grows in size and complexity, it may require investment in systems to address workload constraints or the need for more sophisticated analysis. There are many types of systems and tools to choose from. Because this process can be very costly in terms of time and resources, prioritization and preparation are critical. Consider the following questions:
- What are the business’s pain points and their root causes?
- Which critical system functionality will address these pain points?
- Is the business clear on how it wants the system to work and on how to support its way of working?
- Is it aligned on process and priorities?
Often, companies believe a system or some sort of technology will fix their business challenges without realizing that process and organizational gaps are really the root cause. Successful system implementation requires well-defined processes to inform how a system should be configured and the functionality required to support the business. Without a robust process or organizational changes, system implementations can become drawn out and ineffective, leading to even more frustration and unnecessary costs.
While the road from wholesale to retail is full of challenges, for companies prepared with the right processes, organization and tools, it can be well worth traveling.
With the growth of retail in China, brands need to quickly determine how to compete and grow in a more retail-focused way that can benefit both DTC and wholesale channels. Without understanding the need for change and investing to make that change happen, companies risk scalability and profitability issues as they continue to grow.
21 December 2016