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Optimizing the DTC Channel for Maximum Profits

When it comes to winning at DTC, market share and branding are important, but it all comes down to supply chain agility.

With distribution channels shifting, shipping costs skyrocketing and consumer acquisition costs so competitive today, brands and retailers need to construct more nimble supply chains that work more efficiently. Even brands that aren’t digitally native are following the direct-to-consumer playbook to boost speed and agility from the first click to the last mile.

But DTC is not without its challenges, especially as low barriers to entry have commoditized product and created a glut of competition.

To address these issues in Sourcing Journal’s Sept. 14 webinar, president and founder Edward Hertzman chatted with experts from all sides of the fashion industry—Vincent Iacopella, EVP growth and strategy of freight forwarder Alba Wheels Up, Stanley Szeto, executive chairman of fashion apparel sourcing and manufacturing company Lever Style, and Yossi Nasser, CEO of ladies’ intimates manufacturer Gelmart International and founding partner of brand incubator FullStride Ventures.

They explained why a flexible supply chain is so essential as a point of differentiation in the DTC channel and in achieving speed to market. Companies also must assess the whole picture, evaluating the up-front costs of smaller work runs and quicker speed to market with savings at the consumer end.

“DTC brands recognize the flexibility that their inherent business model gives them, and they’ve paired it up with a supply chain that is maybe more expensive on an FOB basis,” Szeto said, pointing out that almost half of Lever Style’s business is with digitally native companies. “But more flexibility results in much less discounting, which ultimately goes to making much more in margins.”

Plus, even though capacity shortcomings continue to plague timetables, brands and retailers must exercise restraint in light of high consumer demand, as no one has a crystal ball. “When you’re ordering way into 2023, you’re asking for trouble,” Szeto cautioned. “The pendulum will always swing, and a responsive supply chain is the best way to react to what’s happening to demand in a shorter time as possible.”

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Alba Wheels Up’s Iacopella delved into the opportunities of setting up a warehouse in Mexico to take advantage of duty free Section 321 de minimus on certain items as a way to boost margins. “I just spoke with the CEO of a DTC brand and he told me the investment of putting up a warehouse in Mexico was paid back in a month and a half,” he said.

He also questioned why some brands still pay duty on eligible duty-free goods: either they deem it worth the cost of shaving a few days off shipping times or they just don’t know enough about de minimis.

Another way to maximize margins in the DTC channel is to get inventory costs under control, especially on the production and supply chain side. Szeto outlined workarounds like digital design, sampling and printing, plus building fabric platforms instead of garment platforms, all which offer cost-effective hedges against shifting fashion trends and future uncertainties.

Gelmart’s Nasser highlighted the differences of selling DTC today versus five years ago, and why his company is still backing startups amid oversaturation and higher acquisition costs. “The lack of barriers to entry has itself sort of become a barrier to entry,” he said, noting brands really need a point of differentiation amid today’s extremely crowded market.

And while more traditional legacy brands have been attempting to buy their way into a more nimble model by acquiring digitally savvy and digitally native brands, culture clashes often grind the gears, with legacy brands focusing on profitability and maximizing initial markup (IMU).

“[Smaller DTC brands] haven’t taken a look at finding other ways to capture more margin within their supply chain,” said Nasser. “They’d rather spend the time and energy of attaining those growth numbers and more market share because that’s really what they’re sort of motivated and encouraged to do by people in their team investors.”

Even so, while digitally native companies are often the envy of many slower, larger legacy brands with large wholesale operations, the truth is, the two have a lot teach each other about bringing their respective expertise to scale.

DTC webinar

To hear more from this lively discussion, watch “Maximizing Margins: Making DTC a More Profitable Channel” on demand now.