With the rise of e-commerce, many brands have gained an increased ability to sell directly to the consumers who buy their products without the need for retail intermediaries. This sales model, called direct-to-consumer selling, is an emerging trend that is rapidly gaining traction among manufacturers. Two notable companies that have followed this trend are the popular shoe manufacturers Nike and Adidas, both of which have turned to direct-to-consumer selling as a way to combat a general decline in their traditional retail businesses.
What is changing
The shift toward increased focus on direct-to-consumer sales has been a relatively recent development for both Nike and Adidas. In October of 2017, Nike announced that its business model would change to reflect a greater focus on online sales channels, as opposed to traditional retail sportswear stores. Though Nike still planned to offer its shoes to third-party retailers, the company announced at the time that it would be thinning the ranks of its roughly 30,000 retail partners to focus intensely on only about 40 of those partners going forward.
In April of 2018, Adidas announced that it was on a very similar track. By 2020, Adidas plans to double its online sales and close 50 percent of its stores in the United States. The company has also been investing in the technology and digital infrastructure needed to support these ambitious goals, including developing a proprietary mobile app that customers can use to shop its online store. Adidas CEO Kasper Rørsted said at the time that the company’s website was its most important store and main priority in terms of asset allocation.
Moving toward direct-to-consumer e-commerce
Both Adidas and Nike are shifting toward online sales in response to a more general decline in traditional retail sales. By the third quarter of 2017, Nike’s sales growth had effectively fallen off to nothing, while its profits dropped an alarming 24 percent. Adidas fared better during the same period, seeing a 20 percent annualized growth in the second quarter of the same year. The fact that Adidas was able to generate this kind of growth is likely linked to the fact that it was already much more deeply invested in the direct-to-consumer sales model than Nike.
Advantages of the direct-to-consumer e-commerce model
The direct-to-consumer e-commerce business model has been gaining popularity across industries in recent years. In large part, this is a result of technological gains, as brands now have the ability to reach consumers more directly than they have at any time in the past. The decision among major manufacturers to pursue this business model is also partly built on the new data-driven marketing techniques that currently dominate the advertising world. By gathering data on their own, companies can now build direct relationships with customers and personalize their shopping experiences.
From a brand’s perspective, these unique facets of the direct-to-consumer model are massively beneficial. Companies can now sell their products more cheaply and at higher profits because of the elimination of retail middlemen. The direct-to-consumer model also gives manufacturers total control of everything from production to distribution, leaving them less vulnerable to the effects of external business decisions made by their retail partners.
Results for Nike and Adidas
Since adjusting its focus to online sales, Nike has seen some considerable benefits. In January, the announcement of a planned expansion of the company’s direct-to-consumer sales drove shares of Nike to their highest price in two years. Nike’s digital business also produced an impressive growth rate of 18 percent between the fourth quarter of 2016 and the fourth quarter of 2017. Meanwhile, Adidas’ continued investment in its direct e-commerce business contributed to a 21 percent annualized growth rate in the first quarter of 2018. As these results clearly show, the direct-to-consumer model has the potential to accelerate business growth in a rapidly-changing marketplace.
As more and more CPG companies become retailers, they will need to re-evaluate their supply chain processes and supporting technologies. Investing in next-generation S&OP platforms, like Vanguard Software, is an option many industry leaders are selecting. The need for more advanced supply chain planning solutions is never more prevalent than when a CPG company becomes a retailer in parallel.
About Vanguard Software
Vanguard Software introduced its first product for decision support analysis in 1995. Today, companies across every major industry and more than 60 countries rely on Vanguard Software’s Integrated Business Planning (IBP), forecasting and advanced analytic cloud platform. Vanguard Software is based in Cary, North Carolina.