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Big Brands Carry on Old-Fashioned Values in the Direct-To-Consumer Revolution

Big Brands Carry on Old-Fashioned Values in the Direct-To-Consumer Revolution

Harley Finkelstein started from the ground up. To put himself through law school, he sold t-shirts using Shopify—an e-commerce platform that was relatively unknown at the time. That decision in 2005 ultimately led him to become Shopify’s Chief Operating Officer, where he helped transform the company into a global industry leader. Dubbed “Newsmaker of the Year” in 2013 for his success as an entrepreneur, and named in 2015 as a new “Dragon” for CBC’s Next Gen Den, Harley lives by his personal entrepreneurial philosophy of “the hustle”: go hard, go fast, build the best, and execute. In this column for The Globe and Mail, Harley looks at the success direct-to-consumer brands are having:

More than a half-century ago, my grandfather was on the cutting edge of Internet shopping.

He wasn’t an engineer or visionary. He ran an egg stand at the Jean-Talon farmer’s market near downtown Montreal. Back then, merchants didn’t even have debit machines. But they knew their customers’ names and personal tastes, and were able to cater to those preferences. Without knowing it, his sales methods 50 years ago would foreshadow the way so many successful online retailers operate in 2017.

Fast-forward to today. As big-box stores struggle to keep up with shifting shopping habits, brands such as Nike, Michael Kors, Tide and even Oreo are suddenly doing something decidedly old-fashioned: sidestepping the middleman to sell directly to consumers. This old-school approach is increasingly translating into real-world profits. Nike tallied $6.6-billion (U.S.) in direct-to-consumer sales in fiscal 2015. For brands such as Vans, Timberland and Wrangler, direct sales account for more than a quarter of all revenue.

The direct-to-consumer revolution is poised to eat the world of retail – and it’s only getting started.

The benefits of going right to the source

We’ve all had the experience of trying to get help at a big-box or department store. If you manage to find an employee, the chances of them having detailed information about any one product are slim.

Personally, I’m a stickler for T-shirts. (One of my first businesses, in fact, was selling them.) When I walk into some big department store’s men’s section to ask about thread count, seams and cotton types, I generally get a blank stare.

Selling straight to consumers reignites that relationship and often translates to more selection, more product know-how and a better all-around experience. Kanye West, for example, bypassed traditional outlets such as Hot Topic when he launched his album swag for The Life of Pablo, instead opting for an online store and pop-up shops in 21 cities. That kind of tangible link with the maker is why, for example, I now get all my T-shirts from James Perse. Whether I’m shopping at one of its boutiques or online, I get can detailed information about the fabric, quality and fit, every time.

For sellers, a real-time feedback loop

A major pitfall of selling through third-party retailers is that makers lose an important window into what works – or doesn’t – for their customers. Selling through department stores requires brands to produce large runs of product up front, only to find months or years later that they don’t sell well. Cutting out the middleman restores a treasure trove of instant feedback and data that’s crucial to creating the best product possible.

Online retailer DSTLD Jeans, for example, used its sales data to learn that black skinny jeans sell better in smaller sizes while straight-legged styles appeal to larger sizes, and adjusted production accordingly. Meanwhile, online clothing brands AYR and Bonobos operate select shops that function as “test kitchens,” where customers can give direct feedback on new products that goes right back to the designer. That critical link is often missing in the traditional retail model.

Bottom-line benefits

Among the clearest edges of direct-to-consumer sales – and the one that has traditional retailers perhaps most worried – is price. By the time you buy a jacket at your local department store, the markup can be as much as 10 to 12 times the cost of production. It’s no wonder shoppers have been trained to wait for sales or sift through discount bins. At the same time, selling through a department store is all about volume; makers settle for paltry wholesale prices just to have a chance to appear in-store, cutting deeply into their margins.

Increasingly, brands are questioning if they need to pay this premium for shelf space. After digging herself out of bankruptcy when her brand fell victim to slumping sales in the traditional department store model, Tamara Mellon, formerly of Jimmy Choo, re-launched with a different approach. She vowed to sell straight to customers so she could offer better prices and keep a greater portion of the profits, and she has been a runaway success.

Of course, the new direct-to-consumer reality comes with some distinct challenges. When everyone can be a seller, how do you distinguish yourself? In the past, if you had a physical location in the right part of town, that was sufficient for success. Now, we have a virtually unlimited pool to choose from online, which puts exceptional pressure on designers to stand out.

But what’s encouraging is that in the new retail paradigm, creativity can trump capital. When it comes to spreading the word about great products, word of mouth and exceptional service can and do outrun huge marketing budgets, as we’ve seen from success stories such as Dollar Shave Club. A personal example: recently the team at underwear specialists MeUndies threw in a bonus pair of boxers with my 10-pack so I could try out a new style. It was a small touch, but one I can’t remember getting elsewhere – which is part of the reason why I’m a repeat customer.

As much as the direct-to-consumer revolution is a product of our brave new world, merchants who succeed in this arena are really ascribing to old-fashioned values and thinking outside the box to put customers first. My grandfather would be proud.

Harley Finkelstein/Globe and Mail/April, 2017