Everything Everywhere All at Once: The Direct-to-Consumer Landscape & Impact of Supply Chain Challenges
As the retail sector continues to endure the severe economic disruptions of 2022, Andrew Barone and Megan Flaherty of Rosenthal & Rosenthal explain how brands must work with experienced financing partners while diversifying distribution channels through wholesale partnerships and their own direct-to-consumer channels.
BY ANDREW BARONE AND MEGAN FLAHERTY
Inflation concerns, rising interest rates, supply chain disruptions and overall economic instability are topping headlines daily and impacting nearly every aspect of the retail sector. Consumers have become hyperaware of these challenges and have consciously shifted their spending habits, cutting back in certain areas and opting to spend their dollars differently than they did during the height of the COVID-19 pandemic. This shift has resulted in backlogged warehouses, large quantities of unwanted inventory and cancelled orders. Even the biggest retailers, like Target, Walmart, Best Buy and others, have taken a short-term hit to their bottom lines as they seek to right size inventories by slashing prices to make room for higher-demand goods like back-to-school and holiday products.
Now that the world has returned to relative normalcy, consumers have diversified their spending habits, with most no longer shopping exclusively online the way they did in the early days of the pandemic. McKinsey recently reported that 75% of U.S. consumers say they’re researching and purchasing in-store and online these days, with 45% saying that social media influences their purchases. To attract these customers and their ever-shifting dollars, brands must work in overdrive to enhance their omnichannel presence by adding direct-to-consumer channels to complement brick-and-mortar locations, or vice versa for those that are digitally native.
The Need to Be Everywhere
It’s not the prettiest picture, especially for emerging direct-to-consumer brands, most of which have historically been funded largely by venture capital to support revenue growth. These companies, especially those burning through cash and seeing significant bottom line losses year over year, are beginning to realize that raising their next round of capital will be increasingly difficult as the overall landscape of venture dollars shrinks and slows down.
As a result, brands are beginning to focus more on finding ways to run their businesses more profitably day to day, rather than chasing that next revenue milestone that they might never reach by dumping cash into advertising and marketing efforts. Direct-to-consumer companies seem to be more interested in reducing employee overhead, increasing operating efficiencies and maximizing relationships with key suppliers to cut down on lead times or extend payment terms. In fact, digitally native brands — some of which had never considered wholesale to be a viable part of their revenue mix — are now welcoming opportunities with select retail partners to help weather this rough period.
The results have been encouraging, and direct-to-consumer brands are learning that wholesale has its benefits. For those brands that are not yet established enough to have their own retail store presence, wholesale partnerships allow consumers to see and experience products in person, oftentimes leading to stronger brand affinity. Because large retailers like Target, REI and Nordstrom have embraced this universe of emerging direct-to-consumer brands, there seem to be more and more opportunities for brands to explore these partnerships in earnest. Wholesale is not without its challenges, however. Brands that are new to wholesale must learn to manage inventory more effectively and be attuned to shipping deadlines, buyer demands and retailer discounts and chargebacks.
Supply Chain Impacts
The supply chain slowdown continues to plague the retail sector in every possible way. While COVID-19 has taken somewhat of a backseat to inflation concerns, the pandemic is still impacting the supply chain in terms of labor and raw material shortages and overall delays. Ongoing shutdowns at ports in Asia have spurred many of these delays in addition to uncertainty for all importers.
In addition, the West Coast labor disputes have created an incredible amount of port congestion, which has the potential to lead to a major ripple effect across the globe. This congestion will continue to impact container availability because of delays in vessel offloading and deliveries and unloading at the ports. While the queue of vessels waiting to unload goods at the Port of Los Angeles has decreased sharply since the start of the year, there is still an estimated $1.5 billion in trade landlocked at Los Angeles and Long Beach, CA, now waiting for rail service.
To combat these delays, many importers are avoiding West Coast ports entirely, which in turn is driving up costs and clogging ports in New York, New Jersey, Houston and across the Southeast. And with bottlenecks now developing at those East Coast ports, there are few remaining options for importers. Savvy importers are building in an extra three to four weeks into transit time to manage against these delays. Thankfully, shipping and freight costs seem to have stabilized somewhat, which has also helped to alleviate the cash crunch for many brands.
Though the West Coast ports are still operational as the labor negotiations drag on, if talks break down this fall, there will be serious consequences to the global supply chain. With holiday products arriving soon from overseas suppliers, stalled negotiations or a labor strike would be disastrous for importers trying to get products directly to consumers or to their retail partners.
Brands should closely monitor the ongoing labor negotiations and only work with shippers who are creatively managing around the myriad of delays and disruptions. To combat the inevitable supply chain slowdowns, brands should seek out financial partners that work with bigger brands and retailers and regularly deal in high-volume orders. These financial partners can help to vet suppliers to ensure that importers are working with high-quality, experienced suppliers and freight forwarders who know how to navigate in this tricky supply chain environment. With reliable suppliers and the right financing structure in place, many brands have been able to secure raw materials and products more quickly, oftentimes without interruption. Some of the most experienced financial partners are even able to manage and accommodate clients’ longer transaction cycles that have been stretched because of raw material shortages or logistics delays.
Despite any early hope that the supply chain would normalize in 2022, we are not expecting to see any significant corrections until at least the middle of 2023. Brands must be vigilant about finding the right balance between innovating and delivering value while also diversifying distribution channels through wholesale partnerships and their own direct-to-consumer channels. Watching inflation trends, pricing products appropriately and managing the increased costs of doing business in this volatile market are proving to be mission critical.
Andrew Barone is the senior vice president of business development for Pipeline at Rosenthal & Rosenthal. Megan Flaherty is the senior vice president and underwriting manager for Rosenthal Trade Capital.