Will Retailers Follow Nike’s Playbook? Why More Brands Are Moving To DTC Operations And Away From Wholesale And Marketplaces

When news broke in March 2022 that Nike would reduce the amount of inventory it sent to Foot Locker stores, it signaled that the storied shoe brand was deprioritizing its closest retailer relationship in favor of expanding its direct-to-consumer (DTC) sales. The announcement sent Foot Locker stock tumbling and raised the question of whether other major brands will soon follow Nike’s lead. Has DTC overtaken other retail business models like wholesale and marketplaces for good?

To better understand the rise of DTC, I spoke with Dirk Hoerig, co-founder and CEO of commercetools, the leader in digital commerce solutions. The inventor of “headless commerce,” Hoerig is a pioneer in enterprise software and a major advocate for pushing brands to adopt flexible, customizable cloud-native solutions in order to provide modern commerce experiences at any touchpoint.

Our conversation covered everything from the customer relationship benefits of DTC to the technological infrastructure needed to support it. To flesh out our understanding of the current retail landscape, we also examined Prosper Analytics & Insights data that revealed interesting trends around online and social shopping.

Gary Drenik: Brands have relied on wholesale operations for decades. What are the downsides of this relationship, and why are brands noticing this now?

Dirk Hoerig: The major downside of reliance on wholesale—or marketplaces, for that matter—is the watering down of the brand experience. When brands sell through a third party, they sacrifice control over how their products are displayed and presented to the customer. And ultimately, that means they don’t fully own the customer relationship.

Until a few years ago, most brands simply accepted this situation as a cost of doing business. Then, when the pandemic drastically weakened foot traffic to brick-and-mortar retail stores, many brands were pushed to invest heavily in their websites and other channels like social media that allowed them to sell directly to consumers. Now that they’ve seen the benefits of DTC sales—including stronger customer relationships and wider profit margins—they don’t want to go back.

Of course, many brands—including Nike—had already begun their DTC journey long before Covid-19. Digital-native darlings like Warby Parker and Allbirds proved the model could work in the apparel and accessories space. They quickly became known for their consumer-oriented operations, buzzy advertising, and competitive pricing, making them some of the most prominent consumer brands of the last decade. While DTC was certainly on the rise, the pandemic significantly accelerated the market-wide transition towards this model of operations.

Drenik: Why is right now a good time for brands to test out bigger direct-to-consumer models?

Hoerig: Brands now have the proof points that DTC works for big brands, not just startups selling a handful of products, and they want to replicate that success. You can see these dynamics playing out in apparel and accessories right now. Nike is a trailblazer in the DTC space, driving up its revenues and market share by quickly adopting the trend. Competitors like Adidas and Under Armour have announced shifts toward DTC, too—but to some degree, they are still playing catch-up.

According to a recent Prosper Analytics & Insights survey, 27% of respondents purchased from Nike in the past six months, in comparison with the 22% who purchased from Adidas or the 14% from Under Armour. Other brands in the apparel and accessories space will need to follow suit and jump into DTC soon—or they risk getting left behind.

Another reason for brands to try out DTC is that the pandemic permanently shifted more commerce online, especially in spaces similar to Nike’s. That same Prosper Analytics & Insights survey reported 54% of respondents are buying more apparel and accessories online, and 26% of respondents are buying more shoes online. That’s a huge opportunity for brands that act now to build direct relationships with customers online and build long-lasting brand loyalty.

Drenik: What effect will this have on shoppers? Will they favor marketplaces over DTC? Or will they even notice the difference?

Hoerig: It’s likely shoppers will continue to flock to DTC options over marketplaces based on price alone. Inflation is on everyone’s minds right now, and consumers are on the lookout for deals. According to a recent Prosper Analytics & Insights survey, low prices (85%) led the list for the importance of services when shopping online. The DTC model lets brands lower their prices by cutting out the middleman, whether it’s a wholesaler or a marketplace, and eliminating associated facilitator costs.

Consumers are also drawn to the unique and memorable brand experiences offered by DTC options. For example, many DTC brands engage shoppers by replicating the in-store experience online. Nike in particular has invested heavily in this, with capabilities like scannable QR codes and augmented reality (AR) try-on that bridge the gap between digital commerce and in-store interaction. When it comes to DTC, experiences like these will keep shoppers coming back.

Drenik: DTC is an undertaking for brands, even established ones. How do they make this decision, and how can they execute it without too many bumps in the road?

Hoerig: For brands that are used to selling through third parties, DTC is a major shift in their approach to selling. They have to learn to engage customers directly across every channel they’re on, from direct mail to email to social media. They also need to deliver seamless online experiences that are on par with those offered by major retailers and marketplaces.

Brands also need to pivot those experiences quickly to keep up with shifting customer preferences. The past few years have brought on the rapid rise of new commerce trends such as single-click checkout. Right now, social media-based selling is hot. According to a recent Prosper Analytics & Insights survey, 39% of consumers use the “shop now” button to buy products on Facebook at least occasionally, and 29% do the same on Instagram. The brands that don’t hop on these trends quickly will disappoint shoppers and miss out on market share as customers move to brands that provide these experiences.

Ultimately if your brand is trying out DTC, it’s important to take a look at your tech stack and consider modernizing your digital commerce backend. In today’s rapidly evolving trend landscape, you don’t want to be locked into legacy solutions that require lots of coding or take days or weeks to update. A headless commerce approach takes advantage of APIs and other flexible, cloud-native technologies to enable nimble shifts in approach.

By making it easier to test out new capabilities—for example, adding a BNPL widget to your checkout page or setting up social selling—headless commerce encourages experimentation. Your brand shouldn’t invest heavily in every new commerce trend, but you should at least test most of them, paying attention to the trends your customers are most interested in. By evaluating trends, you can quickly discover which capabilities work best for your brand and your audience and build a robust DTC strategy around them.

Drenik: Thank you Dirk for your insights on the rise of DTC and how brands can capitalize on it. This is definitely a trend that will continue to reshape retail markets — and brand’s digital commerce strategies — for the foreseeable future.