The Importance of Omni Channel

If you are a modern day brand owner, one thing has become exceedingly clear to you in the last couple of years: retail is critical to scale and to thrive.

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During the ‘golden era’ of DTC, the whole point was to cut out the middleman and never have to get into retail. The whole plan was to keep the margin for ourselves and scale to the moon given Zuck’s good graces.

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Eventually, that didn’t really pan out. The rise of DTC gave birth to middlemen that were 10x more powerful than any one we had seen previously, and retail actually ends up becoming extremely important for almost any brand. Why is it extremely important?

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In short, retail - which was always supposed to be dilutive to margins - actually ended up being accretive. Let’s take a quick look at a basic model that demonstrates how even when gross margin compresses drastically, we can still generate improvements in contribution margin, and EBITDA, as a result of lower marketing expenses. The fact is, the delta between the gross margin in DTC and retail is lower than the delta of marketing spend in store and online CACs:

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Back in the day, why would you sell to a retailer for a 45% gross margin when you could sell directly to the customer for 75% gross margin - while also earning the ability to do direct remarketing. It was an obvious choice when your customer acquisition cost was a nominal amount of your average order value.

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Fast forward some 5 or 10 years later, and those new digital middlemen are charging prices that have proven untenable for many participants in the DTC ecosystem. All of a sudden, that 45% gross margin Walmart was offering sounds pretty good when I think about my contribution margin from channel to channel.

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This is why understanding your P&L on a channel level is extremely important. I have always been a fan of the mantra ‘build your brand online, build your business offline.’ After all, over 80% of commerce still happens in-store, which is wild to think about. 

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The reality is, because so much of commerce still happens offline - these retailers have already paid their dues and earned the demand that they gatekeep. Their primary method for monetizing this demand / foot traffic is to buy your products at a cheaper price and then sell it for more - business 101. 

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However - they already have the demand. The customer acquisition costs are considerably lower. Sure, does Walmart require that you spend a certain amount of money with them to market your products, yes - but it is generally insignificant compared to what you might be paying in CAC.

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Retail growth as a percentage of total sales will drag your gross margin down, as pictured in our model:

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However, as discussed, at the same time marketing as a percentage of revenue will decrease, and the gap between your revenue and expenses (profits) will widen.

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Of course, this incremental retail distribution is not all sunshine and rainbows. Retail competition is cut throat - and you only get one shot. You have to nail everything, from demand planning to supportive marketing to hiring. The supply chain gets more complicated, a whole new messaging layer gets added to your marketing teams plate, creative needs a whole new angle. You might even have to completely overhaul your packaging ahead of your retail launch. I believe that retail is actually a significantly more complicated task from an operational perspective as there is a lower margin for error along with more variables that are outside of your control.

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Additionally, getting into retail is probably around 30% of the battle. Once you do manage to get in, it's all about velocity and meeting or exceeding expectations. Your retail partner will set goals for you based on a units per store per week metric, or U/S/W. For example, you might have 1 SKU in 1,000 doors - at 1 U/S/W, this means you would be selling about 4,000 units per month through their doors. It sounds low, but in general the U is not very high, and can even be under 1 - the biggest leverage in retail is the ‘S’ multiplier in that equation.

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For example, if you are crushing velocity and are doing 2 units per store per week in 1,000 doors, there probably isn't much upside with regards to driving sales via velocity - if you want retail to unlock sweet sweet profits for you, you need incremental distribution. This is why the classic strategy of retail is to get into some doors, move, and then get into more doors. Scaled retail brands can easily exceed 20,000 doors. With 1 U/S/W. You are now at 80,000 units a month with just one unit per store per week. 

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In conclusion, retail is not easy - but if you can crack it in a large category with a product that moves quickly, it is critical to unlocking massive scale and profits.

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