Big brands that have been pushing their own online stores over retailers, are realising that there is a “big advantage” in selling via a mass store retailer as rising marketing costs hit their bottom line.
Brands such as Sonos, Sony, Dyson Samsung and a conga line of others have been tipping millions into trying to drive traffic direct.
The move back to retail store shopping is also hurting the direct sell brands such as Kogan and Iconic.
The high cost of driving traffic to stores is even hurting some of the biggest brands in the world including the likes of Nike and Adidas with several brands now reevaluating their relationship with retailers.
According to analysts what’s changed is that companies—and other, more-established brands that followed some of the big brands down the direct sell path have found that cutting out the middleman was harder and more expensive than they anticipated.
Brands such as Kogan built themselves on the belief that traditional retailers were relics of a bygone era.
Now, they and their peers are struggling to manage stock levels, warehousing and supply issues during a downturn which traditional retailers have been handling for decades especially during downturn periods.
What changed? These companies—and other, more-established brands that followed them online, found that cutting out the middleman was harder than they anticipated.
“Wholesale is profitable from day one,” claims one online retailer who is now facing the pain of being an online only business.
Referring to the practice of selling goods through a third party such as high street stores “E-commerce takes longer. Some digital brands never reach profitability because they spend so much money on marketing to acquire customers.”
The low interest-rate environment that existed after the 2008 financial crisis spurred venture capitalists to funnel money into digital startups and give priority to growth over profits. Investors bought into the idea that brands such Kogan and Iconic understood their customers better than retailers did and would make more money over the long term, investors and industry executives said.
The miscalculation was the rising expense of acquiring customers online and the cost of storing stock that did not sell through quickly, they said.
As one major retailer told ChannelNews “During a downturn we can push the stock liability back to a supplier and only take stock in when we have sold stock out. An online seller such as Kogan cannot do this. This has resulted in stock and marketing costs hurting their profitability”.
Last year flood of startups and online only stores that were all buying Facebook ads and other digital marketing initially pushed up costs.
Advertising online got more expensive after privacy changes by tech companies restricted how people are tracked as they move around the web.
“Beating customers over the head with marketing is far less efficient than shipping a crate of shoes to a retailer,” said Tom Nikic, an analyst with Wedbush Securities.
“The cost of acquiring customers has been the big whoops,” Nikic added. “All these big brands kept selling more stuff and losing more money.”
And with interest rates rising, investors have become less forgiving, the investors and executives said.
Some big brands such as Sony and Dyson though the solution was to open physical stores but that is proving expensive especially as those stores such as the Dyson store in George Street Sydney are facing reduced traffic as consumers work from home and shop locally.
Those brands and others are now turning back to an even more old-school way of selling—displaying their wares in department stores and other traditional retailers—which executives say carries fewer costs and instantly exposes the brands to thousands of new potential customers.
“We get maybe 20,000 eyeballs on a product in stores of a day across our network of stores” claims a Bunnings executive “This is hard to get in a single Company owned store”.
Another problem facing online sellers who are also in retail stores is that they are often selling a product at full retail, but as recession discounting kicks in retailers are discounting products out in an effort to shift volume and this is creating problems for big brand online sellers.
One observer said that stores that discount brands, can make it harder for the brands to sell items at full price through their own stores and websites. Moreover, brands can lose control of how their products are displayed when they are sold by other retailers, which often buy only a few items, not the whole collection.
Still, some executives at digital startups said their assumption that brands could make more money without the traditional retailers doesn’t always prove true.
Let’s say it costs a brand $25 to produce a product that it sells to a retail store for $50, netting it a $25 profit.
The department store will mark up the product and sell it for $100.
Digital brands figured that if they could sell the shirt directly to consumers for $100, or even a little less, they would make more money.
But once marketing, shipping and other costs were factored in, many brands wound up losing money, or making less than they expected, an online retailer told the Wall Street Journal recently.
“To scale a business, you have to meet customers where they want to shop,”
“In a lot of cases, customers still want to shop at stores that carry multiple brands.” said one observer.
