What Is the Direct-to-Consumer Sales Model and Why Should You Care?

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After a short stay in bankruptcy last year to reorganize her business, Mellon’s plan now is to sell her shoes directly to consumers online, and perhaps in her own retail stores in the future; bypassing department stores and boutiques entirely. In the meantime, the header on Tamara Mellon’s Facebook page reads: "Excuse me while I rewrite the rules of luxury."

Photo: Tamara Mellon

Tamara Mellon isn’t the only designer brand moving to the direct-to-consumer model. Misha Nonoo has discussed similar plans. This month Thakoon is evolving to sell its product in-season exclusively on Thakoon.com and in its first brick-and-mortar store.

"This is how I think the next generation of luxury brands are going to be built. I don't believe the next billion-dollar brand will be built in the way I built Jimmy Choo," Mellon told Racked. "The way we used to build brands was wholesale and retail. The last brand, probably, to be built like that was Michael Kors. Now today our customer she lives in digital, and unfortunately as an industry, we operate in analog, in a 50-year-old, 60-year-old business model and the customer doesn't want to shop that way anymore."

What Is Direct-to-Consumer?

Think about the buzziest brands right now. Are you thinking Glossier, Everlane, Outdoor Voices, Reformation, Bonobos, and Warby Parker? What about AYR, DSTLD, Cuyana, M. Gemi, The Arrivals, La Ligne, Monogram, Mott & Bow, and Bikyni?

These are all fashion companies that were born online selling directly to customers via e-commerce, without selling their product through department stores, boutiques, or other retailers. Now existing luxury brands are borrowing the same exact strategy from this new crop of e-commerce start-ups by cutting out any middlemen and doing away with wholesale.

Why Is It Catching On Now?

It some ways, direct-to-consumer could be seen as an antidote to the current fashion system, where collections are delivered to stores in the wrong season and some say the fashion week calendar is totally out of whack. "People just don't shop like that anymore. Nobody thinks four months in advance what they're going to wear," Mellon says.

Besides, by the time merchandise hits stores, it feels stale because everyone already saw the runway collection on Instagram six months ago. Customers are also trained to wait for sales, since that winter coat that became available in August is often discounted by the time it’s cold out. Meanwhile, designers are under pressure to churn out more clothing faster and faster.

"There is starting to be a sea change in fashion and products in general. I think that company executives and designers are both trying to figure out how to navigate the landscape created by the internet and social media. The old system required designers to make so many clothes, every conceivable derivation, assuming that people wanted choice," Flora Gill says. Gill ran womenswear brand Ohne Titel with fellow designer Alexa Adams from 2007 to 2016, shutting it down this year to pursue new opportunities.

Adams thinks all this choice is overwhelming to shoppers. "When there is no clear choice, they just sort by price, and that hurts companies too. There is a disconnect right now between the industry and the customer it is trying to serve," she says.

What Are the Advantages for Shoppers?

Direct-to-consumer startups stress that they’re ultimately giving shoppers a better deal than the traditional retail model — think Warby Parker’s $100 prescription glasses, or Everlane’s "radical transparency" manifesto that promises to peel back the curtain on retail markups.

Corey Epstein, co-founder and creative director of direct-to-consumer jeans brand DSTLD, doesn’t mind his company being compared to Everlane. "A lot of customers find us trying to find Everlane for jeans. We're happy that there are other brands paving the way and helping to spread the messaging and understanding of the traditional market," he explains.

Photo: DSTLD

"By the time clothes are sold to customers, they are marked up as much as 10 to 12 times. Then they go through this very vicious sales cycle. When you go buy a car for $50,000, if you saw it on sale for 30% off the next week, you'd freak out. In clothing, it's accepted. If you want something first, you're going to pay this ridiculous markup. Or you can wait to pick off the racks what's left over at more fair pricing. That's just not very customer-friendly." Instead, Epstein says DSTLD is able to sell premium denim for a third of the price of its competitors, all by bypassing boutiques and department stores.

When Tamara Mellon relaunches her brand, she’ll drop new shoes on the website every month and the prices will be lower, thanks to her new direct-to-consumer model. She thinks customers will appreciate this new pricing structure.

"By reducing our retail price, they understand that this is an honest buy that we're giving them," she said. "They don't feel like they have to wait for a sale. It's not going to be on sale. It's going to be relevant, it's going to be new, and it's going to be a better retail price."

What Are the Advantages for Brands?

This week, two huge American fashion brands both showed major signs of department store markdown fatigue. First, Coach announced it will remove its products from 250 department stores. Then, Michael Kors said it will send department stores less product and that it wants to be excluded from promotions, starting in February.

"It's creating confusion in the consumers' mind relative to the value of the Michael Kors brand when it's being seen so often on sale in so many different places," Michael Kors CEO John Idol told analysts on an earnings conference call. "We have to correct something that we think is actually having a negative long-term effect for the brand."

With a direct-to-consumer model, brands can control the markdowns on their product and avoid the issues with discounting that Coach and Michael Kors are facing. It’s also possible to create an ecosystem online to tell a brand story — like Glossier’s pink, sticker-covered universe — instead of being crowded on the racks with a bunch of other companies.

"Marketing directly to the consumer gives you more control over the message you send. Rather than being coopted as part of a larger trend or part of a multi-brand store, you create a personal experience and aesthetic. The customer needs to feel that connection to a brand, ethos, lifestyle, etc. to warrant buying it," Adams theorizes.

Direct-to-consumer brands can also carry more inventory online than they ever could in stores, and can offer special services to customers. Another advantage is the ability to hold on to customer information for marketing purposes or get sales data directly in real time, which can inform design decisions.

DSTLD is able to tell that, for example, black ripped skinny jeans sell well in smaller sizes, but raw straight-leg denim doesn’t sell as well in those same smaller sizes. "We are adjusting what quantity we produce based off our previous demand. That's something we couldn't do in the traditional world. Brands don't even know what is selling until two months after when they get a report from the department store," Epstein says.

For direct-to-consumer companies with physical shops, interactions with customers can turn into product. "We use the Studio Shop as a test kitchen to develop future seasons," AYR's co-founder and CEO Maggie Winter says. "Jac [Cameron], our creative director, can see how people are shopping and can respond pretty quickly to any opportunities that we discover." AYR’s petite sizing is one of Cameron’s initiatives discovered through the shop.

What Are the Disadvantages for Brands?

This retail strategy isn’t without its disadvantages, of course. A new direct-to-consumer brand could require significant capital to get started.

"You have to actually produce the product and have it on your shelves in order to sell it. It's much more difficult to get financing if you don't have that order from Nordstrom, if not impossible," Epstein said. "It's hard to launch with one T-shirt, and that T-shirt order might cost $10,000. If you want to have a collection of 100 products, you're talking about a million dollar investment."

Even if you have the product, it’s not like shoppers will then automatically come to your website. "You have to have a great PR and marketing organization. You need to get the word out there that you exist, buy paid search terms, buy Facebook ads, talk to as many influencers as possible, etc," Sucharita Mulpuru-Kodali, e-commerce analyst at Forrester, says.

Photo: AYR

Besides, there are still people, believe it or not, who won’t buy clothes online. The Nielsen Global Connected Commerce survey polled consumers in 26 countries this year and found that 55% of respondents responded yes to the question of whether they’ve ever purchased fashion products online. That’s still 45% who’ve never shopped for fashion online.

That could be why direct-to-consumer online companies like AYR are being sold in department stores. "Until the technology exists where you can reach through your computer screen and feel how amazingly soft our jeans feel, we're going to have a physical presence," Winter said, explaining that AYR will soon be in 12 Nordstrom stores nationwide.

This spring, Bill Blass — which relaunched last year as a direct-to-consumer brand — popped up in Bloomingdale’s in NYC. "By launching as a direct-to-consumer brand, we did not have a vast physical footprint via retail partners," Kelly DeMeester, business director at Bill Blass, says. "Being in a prime location at Bloomingdale’s 59th Street flagship, where thousands of people shop daily, was a coup. The visibility gained by being front-and-center with the Bloomingdale’s customer garnered attention for Bill Blass more rapidly."

What’s Next?

Even though department stores are going through tough times (like losing their spots as anchors at malls nationwide), Mulpuru-Kodali won’t count them out. "Department stores are still $100 billion in retail sales — they are essential for distribution for many brands," she says. "But brands can grow bigger selling direct-to-consumer. Also, consumers love brands. They Google brands. If you have a direct-to-consumer presence, you're more likely to capture a higher margin sale which long-term is life-saving even if you use department stores as awareness building opportunities."

Photo: AYR

As direct-to-consumer evolves, perhaps the case of Sports Authority could be viewed as a cautionary tale. The big box retailer failed to innovate and found itself in competition with its own top-selling brands, as companies like Nike focused on drawing customers directly to its website or its own brick-and-mortar stores.

Mellon thinks the answer for department stores during this transition might involve shop-in-shops at department stores where retailers could have complete control and then pay department stores a commission of sales. But for now, she appreciates that her company was small and nimble enough for her to pivot out of wholesale and go toward direct sales.

"I think, if I still owned Jimmy Choo today, what would I do? Because I had hundreds of millions of dollars stuck in an old distribution system, which I'm watching decline every year," she says. "My sales aren't going up, they're going down. There's all these big brands stuck in an old distribution system and they're too big to pull out. They're going to have to gradually transition their business [to be] more direct. It's going to be a long painful journey."

"The fashion industry is going through what the music industry went through several years ago," she says. "The way I often describe it to people is we all still want to listen to music, but we don't go to Tower Records and buy CDs anymore. We download it online. That's what the fashion industry is going through right now. Women still want great clothes, they want great shoes, and product. They're just going to buy it in a different way."