This episode we welcome Simeon Siegel, the retail rockstar analyst from BMO for a provocative discussion on whether going direct-to-consumer is all it's cracked up to be. In a Masterclass on retail growth strategies, we first clean up some of the often confusing nomenclature, then discuss whether wholesale really is a dirty word and how everything old is often new again.
This episode we welcome Simeon Siegel, the retail rockstar analyst from BMO for a provocative discussion on whether going direct-to-consumer is all it's cracked up to be. In a Masterclass on retail growth strategies, we first clean up some of the often confusing nomenclature, then discuss whether wholesale really is a dirty word and how everything old is often new again.
Mostly we go beyond the clickbait headlines to dig into Simeon's report which countered the narrative that going direct automatically leads to an increase in revenues and profits. And we get his hot takes on Nike's strategy and how we should think about the right mix of wholesale and direct going forward. As an added bonus, Steve reminds us that DTC is hardly new and creates yet another term: "Analog Native Vertical Brands" or "ANVB's."
But first we take on the news of the week, including what to make of Amazon's closing 68 brick-and-mortar locations and Target's blockbuster earnings and continued doubling down on physical retail. We also wonder whether we are moving from the "Great Acceleration" to the "Great Rebalancing" given the tepid growth outlook revealed in earnings reports from Nordstrom, Best Buy and Kohl's.
To get a copy of Simeon's report email him at simeon.siegel@bmo.com
To record a question for us go to speakpipe.com/remarkableretail
Steve's recent Forbes articles related to our news segment:
Simeon Siegel, CFA
Simeon Siegel is a Managing Director and Senior Analyst at BMO Capital Markets specializing in Retail and E-commerce. Simeon started his career at Goldman Sachs and his since worked on the #1 ranked Retail franchise at JPMorgan and Nomura | Instinet.
Simeon has been named a Rising Star of Wall Street by Institutional Investor, a Rising Star of Equity Research by Business Insider, a Top Stock Picker by StarMine and a Top Earnings Estimator by Thomson Reuters and Refinitiv. He has worked on the Institutional Investor #1 ranked All America Research Team for Specialty Retail and the Wall Street Journal's "Best on the Street" list of top analysts. He is in constant dialogue with investors and C-Level Management across the industry, analyzing and advising on the ever-evolving retail landscape. He is a regular guest on CNBC and frequently quoted across the media including The Wall Street Journal, The New York Times, Women's Wear Daily, The Business of Fashion, Barron's and Bloomberg, among others.
Simeon received a BA in Economics and Philosophy from Columbia University and is a CFA charterholder. He serves on the Boards of Read Ahead and the Hebrew Free Loan Society and is Vice Chair of the UJA Luxury Division.
About Us
Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his website. The expanded and revised edition of his bestselling book Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a Forbes senior contributor and on Twitter and LinkedIn. You can also check out his speaker "sizzle" reel here.
Michael LeBlanc is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice. He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career. Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast, The Voice of Retail, plus Global E-Commerce Tech Talks , The Food Professor with Dr. Sylvain Charlebois and now in its second season, Conversations with CommerceNext! You can learn more about Michael here or on LinkedIn.
Be sure and check out Michael's latest venture for fun and influencer riches - Last Request Barbecue, his YouTube BBQ cooking channel!
Michael LeBlanc 00:05
Welcome to Remarkable Retail podcast, season four, episode eight. I'm Michael LeBlanc.
Steve Dennis 00:10
And I'm Steve Dennis.
Michael LeBlanc 00:12
Steve, we're back on the mic. We are back with a guest. We have a great guest, special guest return, actually, to our show, Simeon Siegel, from BMO, aka Bank of Montreal. And it's a fantastic discussion because we deep dive into a report that was actually issued in the fall of last year, late fall, "DTC's Not All It's Cracked Up to Be". So, it's a really super interesting report and, and really looking forward to the conversation.
Steve Dennis 00:38
Yeah, I really, you know, we, when we talk about different themes for, for episodes, one of the things that started to emerge for me is really this, this, kind of, great debate between the value of DTC versus wholesale. And there's been so much discussion, and, and this is something we unpack with Simeon and, and he gets into in his report about, kind of, this notion that direct-to-consumer has to always be better than wholesale.
Steve Dennis 01:05
And that wholesale in general is, is really struggling. And, you know, it turns out like many things, there's a little bit more, more nuance to that than just, kind of, the clickbait headlines.
Michael LeBlanc 01:15
For now, oh, I wanted to remind everyone, that, of our fun segment the "Ask Us" or "Ask a Question" segment. So, if you have a question you'd like us to answer live on air, so to speak, in our podcast, just go to speakpipe.com/remarkableretail, speakpipe.com/remarkableretail.
Michael LeBlanc 01:36
Leave us a 90-second remarkable question, and, and we will attempt to answer it on the next podcast episode. All right, let's jump into news of the week. I got to think top of the line is what's going on in Amazon. You and I have spoken about the Amazon retail stores in a number of different contexts.
Michael LeBlanc 01:53
But this sudden, fairly sudden announcement, it, kind of, took me off guard a little bit, that they were closing 68 stores, which is their 4-star, their bookstore, and their pop-ups, right. I think that's, that's the extent, right?
Steve Dennis 02:05
Yeah, exactly. You know, I, I think this is surprising, but at the same time not. In fact, we're recording this on Friday, and I just posted an article on Forbes about it. When you think about 68 stores for Amazon, it's really nothing, right. So, they've been at Amazon Books for, I think, about seven years, Amazon 4-star for three or four, and the pop-up thing’s really, really super tiny.
Steve Dennis 02:31
But, you know, none of these formats seem to be getting any real traction. And so, this idea that they would, and you know, we also know that Amazon just experiments with a lot of things—
Michael LeBlanc 02:44
Yeah.
Steve Dennis 02:44
So, the idea that they would stop an experiment, pivot from an experiment, or what have you, is really not surprising. But I think the broader point is that their brick-and-mortar aspirations, you know, the things that are going to move the dial from a revenue perspective, but I think even more importantly, spin the flywheel of, of the supply chain, and their overall offering, and the advertising business. You know, there's, there's much bigger ponds to fish in, so to speak.
Steve Dennis 03:13
Namely grocery, fashion apparel, convenience store sector. So, so I, I think it's a little bit, as they say in the article, it's a little bit Much Ado About Nothing. The real, the real surprise is, are those much bigger categories, and what they do there, and, you know, they're still quite early in on that strategy. But I think that's, that's really where they're committed. And that's really where the action is going to be over the next few years.
Michael LeBlanc 03:36
Yeah, I think it's a pretty astute observation. I mean, basically, I had the same, you know, so what. You know, even going back to our last episode, talked about innovation and what, what it takes for retailers to experiment. They're a classic case, they're very good at this kind of experimentation. And what I thought the defining area of what they were to leave open, both grocery and the Go stores, high frequency visit stores, right.
Steve Dennis 03:58
Exactly.
Michael LeBlanc 03:58
So, that's a lot of data. It's a lot of data, not a lot of profit. Nobody makes a lot of money in grocery, but it's a lot of transactions in both those formats. So, I think as you say that's, let's just say, the grease that gets the, the flywheel spinning for all those other things.
Michael LeBlanc 04:12
I think it's a pretty astute, I'll put a link into the show notes so folks can read your, your musings from, from that article, as well, on, on Forbes. What else should we talk about, Target. So, Target comes out with some pretty blockbuster earnings, but more importantly they seem to be, have, have a momentum behind them that perhaps took some by surprise. What did you think of the results?
Steve Dennis 04:35
Well, they just keep, keep on rocking, you know. They, they had very nice profits and very solid sales increase. But that has really been the case for several years now. I think, you know, we talked in the, I guess, was it last episode, "The Stores Strike Back Again, Again". I think they're, kind of, the poster child for this.
Steve Dennis 04:55
They really saw the value of their stores and began investing very heavily in them several years ago. But they also announced that they're going to be continuing to invest in their stores further, they're going to open 30 new stores, you know, and this is a brand that's very well penetrated—
Michael LeBlanc 05:11
Yeah, yeah.
Steve Dennis 05:12
They're going to do 200 remodels; they're going to add a bunch more Ulta shops-within-shop there. So, it, it really is pretty, pretty phenomenal how well they're doing. The other thing I thought was super interesting, particularly since it continues to both be at an elevated rate but also really speaks to the importance of stores, to the overall e-commerce business, is that 95% of their e-commerce orders were fulfilled from stores. So—
Michael LeBlanc 05:42
Wow.
Steve Dennis 05:42
Buy-online-pickup-in store, curbside pickup, ship from store, delivery from store, a lot, a lot of different ways. Leveraging, you know, leveraging their stores for same-day delivery, in many cases is, is an important, kind of, antidote, I guess to, to Amazon, in some respects.
Michael LeBlanc 05:59
What also jumped out at me was this talk about the $24 minimum wage in competitive labor markets. I mean, you know, the industry sometimes would explain away why employees, Costco, have an elevated wage rate. But this is putting a staple in the ground saying we're, you know, the, the, the war for talent is real. And we're here to play.
Steve Dennis 06:19
Yeah, I think we're going to continue to see a lot of this. I mean, even though the labor market is improving, with, with COVID, improving, I think we'll see some of the people that have been on the sidelines, or have issues with daycare, or whatever it might be, safety concerns, going to work.
Michael LeBlanc 06:32
Huge numbers that just came out, actually today, recording on Friday, like almost 700,000 new jobs in the US, right. Huge, huge number.
Steve Dennis 06:39
Right. So, so, you know, that, that cuts both ways. But I think this, this pressure to, to attract talent is going to be with us for a while. And ultimately, you know, I, I, I'd like to believe, I just had a conversation with a friend of mine, who's much more knowledgeable about this than I am, that, that one of the things about becoming an employer of choice, yes, it's more expensive in one way of looking at it.
Steve Dennis 07:04
But if you can have happier employees that makes for happier customers, generally, and your retention goes down. And I think a lot of companies have used this moment, perhaps to, to lean into that. So, some of it is just the reality of the, of the inflation broad, more broadly. But, but I, I think maybe there's something there more strategically to keep an eye on.
Michael LeBlanc 07:24
Well, let's talk about other earnings, a big earnings week, actually. And of course, we're not a current events podcast, but I see earnings from Nordstrom, Best Buy and Kohl's. Any, any threads that you want to pick up from that.
Steve Dennis 07:37
Yeah, I thought we'd hit this just really quickly, because I don't, I don't know that there's any big aha, but I think what we see in, in Nordstrom, Best Buy and Kohl's, is, also Costco reported this morning, kind of a similar pattern of what, you know, I've started to, kind of, refer to as the great rebalancing, or, kind of, this reversion to the mean.
Steve Dennis 07:57
In other words, we're starting to see those categories like higher-end apparel, that were hit very hard, by COVID performed better. So, that's, that's Nordstrom’s case. But also, flipside, kind of, the Best Buy situation, a lot of those categories that performed unusually well, a lot of the big-ticket purchases, you know, appliances, home electronics, office equipment, things that, that are high unit value for, for Best Buy, you know that that's starting to settle, settle down.
Steve Dennis 08:26
So, overall, I think the picture is starting to get back to a little bit more of a more common balance, I guess, between these different categories. The other thing that's interesting, continues to be interesting, is all these companies really reported very weak e-commerce sales.
Steve Dennis 08:43
So, you know, this idea of this massive acceleration, yeah, that happened. And, and the growth on a two year, or three-year basis is usually pretty significant. But Nordstrom's was down slightly, Best Buy was down 11%, I believe Kohl's was down a little bit, as well. So, again, kind of, getting back to more familiar patterns.
Michael LeBlanc 09:04
We should probably mention, you know, what many, many of us are thinking about, or on our thoughts today, is the war in the Ukraine. And not a political podcast, but of course, it has tremendous implications on the retail industry. I was reading this morning, Hermès being the latest retailer to cease operations in Russia, that fall with a long line, IKEA, a bunch of retailers—
Steve Dennis 09:11
Yeah.
Michael LeBlanc 09:11
And this, and the impact on the supply chain is going to be fairly dramatic, particularly in the food. Any, any thoughts at this very early stage? I mean, it's just, I don't know what we can think about it, but I just thought I'd, I'd bring it up because it is front of mind for all of us, both professionally—
Steve Dennis 09:42
Sure.
Michael LeBlanc 09:42
And I think personally.
Steve Dennis 09:43
Yeah, well, it's hard to imagine a more awful situation. But yeah, I think the supply chain impacts certainly come at a, at a challenging time for the industry. More broadly, I suspect that, I mean, this is still playing out, but we already know oil prices have been very high. And it looks like, if anything, they're going to go up more. And of course, for a lot of, a lot of consumers, particularly as people go back to work more, maybe do more travel, having to spend a lot more money on fuel.
Steve Dennis 10:13
If you're, you know, particularly if you're living closer to paycheck, paycheck to paycheck, it's going to have a ripple effect on spending in other places. So, hopefully, hopefully this will resolve itself peacefully, quickly. But I guess at the moment, at least, as we record this, it doesn't, doesn't look like that's the case, sadly.
Michael LeBlanc 10:30
Yeah, history is literally being written as we speak. I'm not wildly optimistic about the outcomes in the near term. So, we'll, we'll probably be talking about it and touch base with it again during the rest of our season. All that aside, let's jump into our conversation with Simeon Siegel, from BMO, and let's talk about this whole DTC thing.
Steve Dennis 10:52
Well, we are delighted to welcome Simeon Siegel back to the Remarkable Retail podcast. Simeon, thanks for, for joining us again. This time without the distraction of another guest. So, welcome back.
Simeon Siegel 11:05
Guys, I'm, I'm touched. I don't know what Ethan's going to say. But this is, to be invited back, I just, my world is complete.
Steve Dennis 11:12
Well, it is a very rare privilege. But we're, we're happy to have you. Why don't we just start out, I mean, it's probably difficult to believe that nobody knows who you are. But just in case they don't, perhaps you can just give us a quick snapshot of your professional journey and what you currently do at BMO, and, and what is BMO?
Simeon Siegel 11:30
Absolutely. So, BMO is much more important than me. BMO is an investment bank, a full-service global bank, I probably should actually look what the definition of BMO is. My area within BMO focuses on analyzing the ever-changing world within retail that you two, and all the listeners, know so well. So, we are on that side of the spectrum. I'm the Managing Director here, and it is a really fun seat.
Michael LeBlanc 11:55
Well, Simeon again, I echo Steve's welcome. It's great to have you on, on a solo episode, have you all to ourselves. So, you recently put out a report that is so aligned, you know, what brings us together today is a report to (inaudible) in episode we were going to do and what we've been thinking about around, around DTC.
Michael LeBlanc 12:13
And there's a lot of terms that fly around, even amongst and within the industry. So, we thought before we get to the discussion about the report, let's start by defining some terms. Steve and I know you have some strong opinions on this, we were just chatting offline about it.
Michael LeBlanc 12:27
So, you know, sometimes when we get into conversation about e-com, DTC and retail, there, there can be a bit of confusion. As you understand it, or as you articulate it, particularly in this report, talk about the difference between DTC and e-commerce. Just so we, kind of, chalk the field here and make sure everybody's on the same page.
Simeon Siegel 12:46
Absolutely. And I love that, because oftentimes, I start a conversation realizing I'm having a different conversation than I thought I was. So, DTC simply stands for direct-to-consumer. Direct-to-consumer means just that, whether it's your own store, whether it's e-com. It's not using a third party; it's not using wholesale. The flip side is wholesale.
Simeon Siegel 13:06
And so, at the end of the day, we'll have a lot of conversations around e-com versus stores. This specific focus was to look at when an entity sells directly to a consumer in whatever medium they choose, versus if they embrace a third party to help them do that.
Michael LeBlanc 13:20
Funny, I, I got into a conversation with someone, and it was a client that at the end of it said, well, I want to go DTC and go direct. I'm going to go through Amazon. But wait, so there's, there's even confusion that Amazon is, is a retailer. Which is not, totally under, which is not totally surprising, given the multiple ways you do business with them, right. That there's, you know, basically an FBA relationship, like a fulfillment relationship is, is still doing business with Amazon, but it's different, right.
Simeon Siegel 13:21
I think the beauty is we're just all stuck on this idea if there's a middle person involved, it must be bad. There's no single company in the world that's vertically integrated. Like that just, it just does not exist. And even if that means you're doing everything from soup to nuts, but someone else is running your advertising, people use other people for other things. And I think that's an important thing we need to keep in mind.
Steve Dennis 14:11
Yeah, I also wanted to bring up that sometimes I feel like on Twitter, particularly among some of the younger folks, not to be ageist just about it. There's almost like this idea that somehow DTC is this, is this new thing. And I'm just very amused by that. In fact, I've started to, you know, just like we talked about digitally native vertical brands.
Steve Dennis 14:32
I feel like I want to get us to talk about analog native vertical brands, because we've got, you know, Lands' End, L.L. Bean, J. Crew, Sur La Table, most of Williams-Sonoma have, Williams-Sonoma, I guess you could argue, a little bit, because they, they carry some brands that aren't their own.
Steve Dennis 14:48
But the, this idea of a mono-brand that goes direct-to-consumer, originally mail-order catalog, but, you know, many of these companies followed the same strategy that Allbirds and Warby Parker did of, they built their business through mail order catalog, then they started to open their, their own stores. So, that's, that's another thing, I think we just got to be clear that this DTC phenomenon is hardly, hardly something new.
Simeon Siegel 15:11
And I love when you bring those up, you get my high five emojis on the, the Twitterverse there, as well. But at, at the end of the day, it's so important because what retail is, what anything is, there are creators of content, whether it's physical, right, whether it's a sweater, or whether it's IP, whether it's a poem.
Simeon Siegel 15:27
And then there's a distributor of that content, that helps it get to the user of that content. That, it's as simple as that. That has existed since time immemorial. And at the end of the day, this notion that it's a brand-new revolutionary, no, someone's creating something, and someone's using it. And the question is, how do we bridge that gap in between? And so, I love every time you comment on that, because it's just so true.
Steve Dennis 15:47
You know, want to move on to talk about your report and some of the key findings in a second. But I think the other, the other lesson may be, is that kind of, everything old, is new again, right. Like a lot of these companies like, like the Allbirds, the Warby Parker's, etc., act like they just discovered something new. That, oh, well, when we opened a store, actually, our e-commerce business goes up.
Steve Dennis 16:08
But that's been actually something that's been pretty well known, I think, in the industry for probably 40 years. So, I just encourage people, I guess, to do a little bit of research about some things that, that perhaps are true. But anyway, let's, let's dig into your report.
Steve Dennis 16:20
So, the report you released is called "DTC's Not All It's Cracked Up to Be", I think, is the name. And a lot of great information in there, and probably give some contact information so people can get that report if they want. But can you give us just, kind of, the highlights and, and maybe in particular some of the more interesting, and, or controversial findings?
Simeon Siegel 16:42
Absolutely. And let's, let's set the record straight, just to start, I don't aim to be controversial, might, it might seem otherwise. The best reports are the ones that are hypotheses that have nothing to do with the conclusion whatsoever. And that is this. This report was a two-week report, turned into six month report. And the CliffNotes versions are we found that, despite rhetoric to the contrary, as big brands pivoted to direct, no big brand, or the big brands doing that, did not see an increase in four things.
Simeon Siegel 17:08
They did not see an increase in revenues, they did not see an increase in gross margin rate, they did not see an increase in EBIT rate, and they did not see an increase in EBIT dollars, right, profit dollars. And all four of those things I said quickly, they're all very important and very confusing, and they are not the conclusions we would have thought walking in. And so, that's what was so fascinating about this.
Simeon Siegel 17:27
And every time we stumbled on another one of these data driven conclusions, we had to pull the string a little bit more and bang our head against the wall. And so, we can dig into all of those. But I just think this notion, ultimately, where it came down to was it's this belief that by going direct, you elevate your brand, you have better consumer data, you're more close, like all of those things, I agree qualitatively.
Simeon Siegel 17:49
The problem was, you guys know me, well, I can be very opinionated, which means I can be very wrong. This report was actually very low on opinions and very high on empirical data. And that's, I think, the powerful part. If the qualitative data doesn't translate to higher revenues and/or profits, we should ask, what is that value?
Michael LeBlanc 18:07
You know, what, what struck me that was interesting was in all this narrative, and, and Steve, you and I talked about this before, that there's a kernel of truth in, in all of it. You know, it is now more important than ever before to get first party data than third party data, and all given what's going on.
Michael LeBlanc 18:23
And it's also true that the exceptions are sometimes seen as proof of the rule. So, in your report, and we would know brands like a Canada Goose or a Nike, right, become the big story of brands going direct and becoming successful. But they may be the exception that doesn't prove the rule, right.
Simeon Siegel 18:41
Yeah. So, the interesting part of this was, so listen, I generally look at public companies, so large public companies, because that's where the data is very real and available. So, this incorporates all of those. And so, that's what we found, we ran a scatterplot across companies everyone would recognize here, very big companies.
Simeon Siegel 18:59
The same way that I am saying don't run away from wholesale, I'm also not saying throw away direct. The beauty here, and I know you two agree with this, the beauty is you have to figure out your right mix. So, I'm not saying Nike shouldn't go direct. But I think this notion that we all have turned wholesale into an evil word. It's just not true.
Simeon Siegel 19:17
And I think what's important is if we think about who are the largest brands, or who are the brands that are running, or are telling us, right, changing the narrative to direct in favor of wholesale, somewhat by definition, they're the largest brands that actually became big and became healthy by being the best embracers of it in the first place.
Steve Dennis 19:34
So, one of the questions I have, I mean, it seems to me, and I realize this is perhaps a little bit hard to tell directly from your data. But it seems to me in the case of a brand like Nike, a very well-established brand, and a brand that has a tremendous amount of reach and scale already. The idea of pulling back on wholesale distribution to, number one, have that direct relationship with the customer, but be able to control your destiny more, seems to be very strategically sound.
Steve Dennis 20:10
On the other hand, if you are a relatively new brand, and you're seeking to build awareness, you know, one of the fundamental flaws, I think, in the premise of the original digitally native vertical brand hypothesis, was that it was going to be pretty easy and cheap to build a brand online without having stores, and without having wholesale distribution.
Steve Dennis 20:31
I think that wasn't even really on the radar screen originally. And as it turned out, it, over time, became very expensive to grow a brand online only. And then you have all the other issues of returns and things like that. But, but it seems like that's, that's a really big difference in terms of the starting point of a brand.
Steve Dennis 20:48
And, you know, now it seems like, particularly these newer brands, are really emphasizing their own stores, and potentially wholesale as a way to get more awareness, more cheaply. So, they're trading off the, the kind of, full margin that they thought was going to pay for a lot of things against the shorter margin, but a lot more awareness and savings of other operating costs. Does that make sense to you, or can you tell from your data?
Simeon Siegel 21:17
Oh, boy. Can we schedule a third follow up already? I mean, I get that, that is an act and a half. I love so much of what you just said, it's going to take me. So, listen, I think the second half, I could not agree with more. I think you see brands like VIORI that are doing, obviously gaining such tremendous response. This is a company that understands the value of wholesale, right. They obviously are, everyone would think of them as a digitally native, but they fully understand the value of having strong partnerships where it makes sense.
Simeon Siegel 21:45
So, there are very much, I think, like you run the risk if you're small, of not seeing that. We're watching a success story emerge, because of the full holistic view. So, so I totally agree with you there. What I will say on the Nike side, and I, I have a buy recommend on, a buy recommendation on Nike, which is, which is, kind of, my terminology, how we approach this. So, I very much like Nike, and I think that their scale allows them to do things that others simply can't catch up to.
Simeon Siegel 22:11
But I will say Nike's margin, until very recently, on a rate basis, has not gone up despite a continuing drive towards direct. I do wonder, so, so basically, if we, we go back to those four quick things that I brought up, I wouldn't have assumed those conclusions would have played, but ex post facto trying to hypothesize why? Well, why would revenues not go up better with direct. Well, maybe you're getting a higher dollar per unit, but you're giving up a certain scale at wholesale.
Simeon Siegel 22:39
You're giving up the units, the amount of units. And that ends up overwhelming that. As we continue to see, I mean, you, you and I have, we, we've all talked about this idea of the shrink to grow, and COVID allowed companies to sell less and charge more. So, I'm a huge proponent of elevating your brand. But I think we have to understand that when you elevate your brand there is, you do run the risk of giving up those units. And I think those units have become very important.
Simeon Siegel 23:01
So, I think even at the largest side, and this is where it ends up driving more of the controversy, the large brands that have been pivoting to direct over the last 10 years have not seen, like those conclusions apply to all of those big brands. And that's what's really interesting. And to get to what, we'll talk about a, kind of, the exception. The exception that we find is luxury brands, brands that have incredibly high margins mathematically already, end up countering this, but, but we'll get there.
Michael LeBlanc 23:29
Simeon, when you, when you look at the number of digitally native vertical brand types that are doing IPOs, and talking about that they're embracing stores, it makes me think that something has changed in the external environment, perhaps that factors or doesn't factor into the thinking. So, a number of years ago, it made a lot more sense for brands to go direct in one way because the platforms were there, social media platforms, the Facebooks and all these.
Michael LeBlanc 23:53
And you could do it at a very cost-effective manner and get some advantage by being very good at it. In other words, you could develop expertise that would give you an advantage. It feels to me, whether it's the cost, the platform, they become more like a, you know, a utility more than an advantage, that that's gone away. And that, therefore, has led to this embrace of stores. And this together makes it just much more difficult to, to parse off that wholesale versus direct profit, or, you know, that profit exchange.
Simeon Siegel 24:25
You know with a lot of, the digital natives are a lot of fun, right. They're, they're new, they give us new products, they're fun to talk about. At the end of the day, and I haven't done this math, feel like you guys probably have, if we were to group together all the digital natives, whether they succeeded or not in terms of revenues, would they equal Ralph Lauren?
Simeon Siegel 24:44
Like I just, it, it's this really fascinating thing and, and I was having a conversation with a very good mutual friend of our, of, of ours, about CMOs, and just complaining about iOS, and different conversations around Apple, and I'm thinking you know who never complains about the change in privacy, the large brands, right.
Steve Dennis 24:59
Right.
Simeon Siegel 24:59
The brands that supposedly have no first party data seem to have no problem selling a lot of units to their consumers. So, I, I think you're absolutely right. I think there was this ability to bypass the normal way we think about customer acquisition costs, which has never been a word brought up in retail, right. CAC was not a thing for the gap. Lifetime value is not a thing. We just talked about comps, customers continue to grow if you give them product.
Simeon Siegel 25:24
So, it's this really interesting dynamic where, yeah, I think, I think the opportunity was right for this ability to skip finding a customer. But at the end of the day, I wonder how much of that was more than microphone and the storytelling, rather than the actual revenue implication. I, I think, retail's the, the quiet joke is the dead retail, even before we've all finally awoken to the fact that retail did not die, thanks to Steve's many tweets to the, to this point.
Steve Dennis 25:51
It's all me, all those tweets, man, it's so powerful.
Simeon Siegel 25:54
They've been drumming along the whole time, right. Retail's been doing great, even, even as people have been talking about it dying. So, Victoria's Secret in, in its worst, in its death throes was still a $5 billion business. That's where I think the funny part is.
Steve Dennis 26:07
Yeah, I think, I often bring up with, with companies that, that most of the, and this is not to say they can't become much bigger brands and, but I think you mentioned this in, in your report, or maybe I heard you speak about it with someone else. But there's really very few of these brands that are larger, forget even the profit for now, but that are larger than $100 million, which, which is the size of one pretty good Neiman Marcus store, right.
Steve Dennis 26:32
It's not, you know, which is a fairly niche brand, right. So, they, they, they haven't gotten to, to much size. And I think some of that is that they're very focused on a very particular set of, of, of customers, and they were able to find the best customers, like the perfect fit customers, very early on. But what's really transpired over the last several years is they're having to go find customers.
Steve Dennis 26:58
And to do that they have to promote pricing much more aggressively, they have to spend more money on acquisition, which is hurting the profitability as we talked about, or they have to try stores because they do their research. I know several of these brands, they did their research and said, well, people are interested in our product, but they want to go see it and try it on. So, I think a lot of these dynamics were, were pretty obvious for a while.
Steve Dennis 27:21
It's just now I think we're really, particularly as some of these companies go public, we're getting to see a, kind of, a peek under the hood. I did want to talk to you about a, a broader issue of one of the things I said in my book, which I probably could have said better. I had a little section called the increasingly useless middleman. And I probably should have put a question mark on that. But the, but the point I was trying to make was that a lot of the traditional multi-line retailers, particularly in the department store space, but you can certainly look, look more broadly, continue to struggle, even if some of their numbers, kind of, have this dead cat bounce.
Steve Dennis 27:56
And so, my sense was, well, if you are a manufacturer that is used to getting a lot of your volume through these multi-line retailers, you know, that's likely to be a shrinking channel for you. And you're going to have to find, you know, those retailers are going to have to find new ways to compete, and grab market share, and the manufacturers might have to change their strategy. But one of the things I think were, so one, I was just, sort of your general comment and how to think about it in the context of this DTC wholesale debate.
Steve Dennis 28:25
But it also seems like Target, Nordstrom, others, are really starting to look at some of these smaller brands as a point of differentiation, right. You know that that's part of the strategy, both for the retailer to take on these brands, as well as for these newer brands to change their distribution strategy. So, any general comments about, kind of, the world of wholesale and how it's shifting, and how brand strategies might, might need to pivot?
Simeon Siegel 28:52
Yeah, so I think you have been, obviously so on point in this category. I think that the interesting dynamic we need to keep in mind is there's two sides of that question. There's what do we think about department stores, and what should brands think about department stores? I want to take the latter first, because I think this is really important. How many, how many, what, what number of billions of dollars over ten did Sears have before going out?
Simeon Siegel 29:12
Like at the end of the day, these are very important revenue channels. But more importantly than that, if they're not healthy, one of the reasons people knock department stores are because they have a very low gross margin. A very low gross margin simply means they're not that expensive to the brand selling into them. That, it's just, it's a very important point that I think that goes unnoticed. If you believe the presentation is good, it's actually a very cheap sales force.
Simeon Siegel 29:37
That's what a low gross margin means. It means they're COGs, their costs are very high. So, they're paying their vendors a lot. So, I think that that's really important. So, I think that that's why you're seeing some of these new, up and coming, exciting brands. Embrace a Nordstrom, because Nordstrom is a great presentation and it's not an expensive sales force.
Simeon Siegel 29:54
Whereas if you go roll out your own store fleet or you enter the ongoingly variable, never ending cost in e-com, you have to do it yourself. So, yeah, I, I totally agree with you. So, I think the second half of that conversation is to say, without assessing the validity, or without deciding on how exciting the story for department stores will be, they're not, they're, they're a good way for brands to sell without paying a lot. The first half is the tougher conversation.
Michael LeBlanc 30:00
And, you know, one of the things that also struck me about the report is, is I thought, in my own experiences, qualitatively, talking to brands, who are wholesale brands, and decided that they were suddenly going to go direct-to-consumer in a meaningful way. And I found the cultures so different, not just even withstanding the, the capabilities in the organization.
Michael LeBlanc 30:40
I think a lot of folks underestimate the cultural and organizational difference of being a wholesaler brand versus a direct-to-consumer brand. And, you know, everything from taking returns, as Steve said, to loss prevention, they're like, what is this loss prevention you speak of? Do you, have you, have you run into some of those conversations where people go, oh yeah, this is actually harder than I, or, we're just, it's just not us, we're just not good at this yet.
Simeon Siegel 31:07
What, is there a shiny new object over here I can try out? No, I think the irony of this, and we weren't friends back then. But about ten years ago, my team did a very similar report about e-commerce versus stores. So, it was the same idea. And, and the beauty of this is that the, the most fun reports start with people saying, oh, it's obvious, right. It was obvious that e-com was going to be margin accretive, more profitable. Why? Because there's no rent, and there's no, no labor, it's obvious. Well, it turns out, it was obviously not true, right. We, we had variable expense, we had another way of looking at the business.
Michael LeBlanc 31:38
Yeah.
Simeon Siegel 31:38
So, it's the same thing. And so, we did this report, then. And, and it was the same conversation. It was listening to very traditional stores, embrace this beautiful new thing that wasn't going to have rent, and you're like, well, there's going to be a lot more other costs. Your, your pick, pack, ship, return, reverse logistics, et cetera. You know what I mean, like, all of a sudden, everyone embraced that. And I feel like that's where we are right now.
Simeon Siegel 31:56
So, it's this notion of, well, of course, I want to go to direct, it's obvious. Why is it obvious, because if I make a pair of shoes, or a sweater, and I sell it on my own channel versus giving it to a department store, I get the full markup, and the cog doesn't change. So, it's obviously going to be better for me. Then I, and I throw in the fact that I get first party data, it's obvious. Well, I just think it's the same notion, nothing's ever obvious. That's, that's my rule, right. Anytime someone says it's obvious is a, is a time to dig in. I think that's where we are.
Steve Dennis 32:25
So, I was going to ask you, and it's probably a bit of an unfair question, but, you know, it's our podcast you agreed to come on. So, you know, you assumed the risk. But when I was reading your report, one of the things I was wondering about, or two things I was wondering about, I guess, one was, well, some of, you know, we have very limited data, public data about these digitally native vertical brands. Arguably, brands like Nike, are still a bit early in their strategy.
Steve Dennis 32:53
So, to see the margin impact, you know, perhaps, we're not quite there yet. But then the second thing is when you layer on top, the dynamic, the dynamics that went on in COVID, which, you know, in some cases caused more liquidation, in other cases, it caused great margin, because there was a shortage of supply, you know. Can, can we really tell how this is likely to play out?
Steve Dennis 33:15
Can we really take some of your conclusions or hypotheses and, and run with them? So, one, what, how do you, how do you think about, and, I guess, more importantly, what should we, assuming we're starting to really get, get beyond COVID in a significant way, what, what should people be foc-, most focused on and, and most digging into to understand where this is all headed, and what they might want to do about it?
Simeon Siegel 33:36
Steve, come on, that was way too polite. Throw, throw the real question out there. So, so, no, listen, I think, I think it's a, it's a, what, what should be said, I should have said this before, because it's a great point. So, this report actually stops in 2019. Like, we'll reference 2020. But we, all the numbers stopped in 2019. Because the 2020 numbers, effectively, we're useless relative to this analysis. I, I totally agree with that.
Simeon Siegel 33:57
So, I think that that's one point that is worth flagging. So, so any of the conclusions here, stop there. In terms of the go forward, and, and what I want to be really clear about, this is not a normative decision to say, by the way, Nike stopped going direct. This is a flag to explain, I do not believe you're going to get margin from it. So, the interesting dynamic here is just because it's not good, or it's not going to get what it, what you think it should be, doesn't mean you shouldn't do it.
Simeon Siegel 34:25
Because if you believe you're tapped out at wholesale, if you believe that your brands are no longer representing you in the right way, of course, you should call them. But you, let's be clear about what that's doing. Is that offensive or defensive? And I'm not talking about Nike, specifically, just in general. So, like I actually increasingly wonder, as we're thinking about people listening and what, what I would want them to take away from this. The idea here is to be holistic. The idea here is to understand why you do what you do.
Simeon Siegel 34:48
And sometimes decisions are offensive, hopefully they are. Sometimes they're defensive if they need to be. And so, at the end of the day, I think that's a very important perspective. There are some brands, the brands, I wonder if brands signaling the, the pivot away from wholesale, are more likely signaling that they are tapped out in wholesale, than they are about how excited they are about direct. They can't say that, right.
Simeon Siegel 35:09
We have to be optimistically delusional in our field. Like that's a very important characteristic. But I think that, I, I wonder about that. So, that's, kind of, something that I want to throw in there in terms of where we go. In terms of your last or your first point. Listen, the future can hold what it'll hold. But I think it's important to stress that we have been growing direct for a long, like to your point, we have been pushing from wholesale to direct for a while.
Simeon Siegel 35:31
So, are there new technological advancements that will drastically improve the cost of e-com, and maybe that changes the conversation? Perhaps. Are there other ways that will change the dynamic between store labor, can you share more partnerships? Do you know, all of a sudden Nordstrom is talking about GMV rather than talking about revenues? So, I, I think where technology takes the future may well have an impact on this. But everything we have seen thus far would not suggest it has happened yet.
Michael LeBlanc 35:55
Well, our guest is Simeon Siegel, and the report is available from BMO, " DTC’s Not All It's Cracked Up to Be". Great conversation. Thanks so much for joining us. It's a, a topic that Steve and I, and clearly you, share an interest and passion on, and, and it's a great way to wrap the conversation, this holistic treatment of, doesn't need to be one or the other. Sometimes it can be both.
Michael LeBlanc 36:19
So, Simeon, thanks again so much for joining us on the Remarkable Retail podcast. And I wish you a great rest of your week and look forward to seeing you soon. I think it's Shoptalk. So, we're, we're all pretty excited about that.
Simeon Siegel 36:30
Amen to that. And it's exciting, I now get to say always great to be here. It's fun to be back.
Michael LeBlanc 36:39
If you like what you heard, please follow us on Apple, Spotify, or your favorite podcast platform, so you can catch up with all our great interviews and insights, and new episodes will show up each and every week. Be sure to check out our YouTube channel. And last but not least, tell your friends and colleagues in the retail industry, all about us.
Steve Dennis 36:55
And I'm Steve Dennis, author of the best-selling book "Remarkable Retail: How to Win & Keep Customers in the Age of Disruption". You can learn more about me, my consulting, and keynote speaking at stevenpdennis.com.
Michael LeBlanc 37:08
And I'm Michael LeBlanc, producer and co-host of the Conversations with CommerceNext podcast, The Voice of Retail podcast, keynote speaker and host of the all new Last Request Barbecue cooking show on YouTube. And you can learn even more about me on LinkedIn, or meleblanc.co.
Have a safe week everyone.
SUMMARY KEYWORDS
brands, stores, dtc, report, direct, conversation, wholesale, simeon, retail, revenues, department stores, important, steve, nike, podcast, nordstrom, bmo, margin, companies, thought