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Why Direct-to-Consumer is taking on new importance
In JCPenny’s recent bankruptcy filing, it listed a combined $39 million in debts to vendors Nike and Adidas. The totals show the retailer’s reliance on marquee brands, not the other way around, but nevertheless, it made us think about the chain reactions caused by another retail bankruptcy, Toys ‘R Us. For several quarters following the toy retailer’s demise, key vendors were blaming slowed sales growth on the collapse of such a critical distributor. As the proverbial “Retail Apocalypse” reaches its apex, the danger of key distributor collapse is becoming a new motivator for brands to formulate Direct-to-Consumer strategies.
Direct-to-Consumer brings to mind the frenzy of Warby Parker or Dollar Shave Club in the early aughts, when new brands were born with the idea that cutting out the middleman from the start was the quickest path to growth. But that was really a culmination of the shift away from wholesale that began in the 2000s. Even in the same industry, like luxury goods, different businesses had different motivators: luxury watchmakers wanted to stop wholesalers from supplying the grey market; fashion brands wanted to reign in discounting and control how their products were displayed. So brands began investing in their own retail stores. For brands in the CPG space, long at the mercy of Walmart or a regional supermarket chain, social media and (lots of) invested capital allowed them to bypass traditional gatekeepers.
Going direct can result in better unit margins, but typically logistics and “space” (brick and mortar, online advertising) costs balloon. If those are the only dimensions a company is looking at, direct selling may not seem like a slam dunk. But the benefits can be massive: a direct customer touchpoint allows for sophisticated CRM and, hopefully, reduced customer acquisition costs as existing customers repeat their buys. It’s easier to impact customer satisfaction when you’re controlling the support staff, and data around customer preferences can be a goldmine for future developments. That latter point is why some food brands are selling direct online, despite direct sales amounting to little more than a rounding error in their annual results.
Nike is one of the boldest legacy brands in committing to a Direct-to-Consumer strategy, which they’ve termed the Consumer Direct Offense. As Hilary George-Parkin writes about the move:
The approach has meant that Nike has intentionally choked off its business with what it calls “undifferentiated multi-brand wholesale” partners while doubling down on direct retail and key accounts such as Foot Locker, JD.com, Amazon and Zalando in what Parker called “a tale of two cities.”
By “undifferentiated,” they mean the likes of JCPenny. Because in addition to all the other things weighing them down — the private equity debt loads, old stores, under-investment in sales associates — they also suffer from vendors who don’t need them, and are leaving them in the dust. How long will those brands clinging to a legacy wholesale strategy be able to hold out? Of all the motivators for investing in a Direct-to-Consumer strategy, a new one is on the horizon: their best distributors might cease to exist.
Word on the Street
Apple has signed on to the newest Martin Scorsese film, a $180 million production that it will co-produce with Paramount Pictures. Apple has plenty of cash, but they appear to be using it in a curatorial-HBO sort of way, rather than a Netflix-style shopping spree. It’s not clear how long Apple can hide behind its claim that bundling to enhance its eco-system is really the strategy here.
G.E. has sold its lighting business. It’s not CEO H. Lawrence Culp Jr.’s first divestment as he pursues a leaner G.E., but it is a symbolic one, severing the firms link to famed co-founder Thomas Edison.
In a stunning blow to its goal of taking on Amazon, Walmart will shutter Jet, the digital-native retail brand it bought for $3 billion in 2016.
Lufthansa will receive a €9 billion bailout from the German government, pending EU approval, and in turn, the German government will take a 20% stake with a 5% option, plus two seats on the supervisory board.
Twitter took steps against disinformation and inflammatory speech by President Trump this week by fact-checking a couple false tweets, and later censoring another for inciting violence. This is long overdue, and we can’t stop imagining that every time Jack Dorsey takes an action like this, Mark Zuckerberg loses his absolute mind. Cleaning up any social media platform is a factor of its size, leaving Zuck with the bigger headache, and Dorsey with the wider swath of options.
President Trump signed an executive order aimed at altering Section 230, the legal shield that protects websites from being held liable for published content. This thing is headed for court, but even if it was upheld, such a move would likely result in the removal or censoring of more Trump content, so this looks more like a checkers vs. chess move. Trump spent years suing people for libel and defamation when they claimed he wasn’t as rich as he said he was, so this is likely more about his desire to fire up the ol’ litigation machine than anything else.
$HTZ - Hertz Global Holdings, Inc.
Hertz, the rental car company whose ubiquitous yellow branding peppered the periphery of countless airports around the US, filed for bankruptcy this week. It wasn’t terribly surprising, as their debt load was considerable and the sudden dive in travel demand made that debt unmanageable.
We imagine this must be what Carl Icahn is doing right now, having lost $2 billion on Hertz
There are some questions as to the fate of its massive fleet, which is tied to many of its loan agreements, as well as what impact the filing will have on the wider car industry. But perhaps the biggest question looming is how many more filings are on their way, as the pandemic upends notions about corporate debt structures and unravels old debt servicing plans?
Earworm
An insidious constant in technology-related strategy plays is the role of unintended consequences. A video streamer wants to increase the amount of time its users spend on the site, and inadvertently begins recommending increasingly extreme content. That was the premise of Kevin Roose’s very good 2019 piece “The Making of a YouTube Radical.” Now, Roose and a team from the New York Times have taken the subject of that piece and expanded upon it to create the “Rabbit Hole” podcast.
In its six concise episodes, it builds on the story of YouTube super-user Caleb Cain, weaving his story with those of the AI PhD building the platform’s recommendations algorithm, and the alt-right (and anti-alt-right) content creators who rode the algorithm to notoriety. It’s a lot to take in, and when the narrative arrives at its denouement, with YouTube’s biggest star, it’s shocking to see how casual racism seeped into all corners of the video platform.
Beyond the compelling subject matter, the sound editing is absolutely amazing, mixing soundbites from the past decade into an auditory memento unlike anything we’ve ever heard before.
She Said It Best
“The price of inaction is far greater than the cost of a mistake.”
— Meg Whitman, CEO of Quibi
That’s all for now.
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