Adidas: brands that sell direct can make more profit
Adidas have just announced (ref) that their direct ecommerce sales grew 59% to over €1bn. Most importantly, these €1bn in sales commanded a much higher profit margin than those earned selling through traditional channels. Is this a one-off or are there generic lessons to be learned that might help the business performance of other ‘brands’?
Most brand owner / manufacturers don’t sell direct. Instead they operate a network of importers, exporters, wholesalers, consolidators and retailers who take responsibility for the distribution and selling. When we ask, the main reasons given about why this persists are:
- Direct selling won’t work.
- It’s a legacy issue and it’s a lot of hard work to change things, or
- There’s a fear that the existing wholesalers and retailers will get upset and sales might reduce.
Let’s look at these three in more detail.
- Direct Doesn’t work
It’s absolutely true that not every brand owner / manufacturer will be able to sell online in sufficient volume to make it worthwhile. The most common reasons why products might not sell well are:
- The basket size is too small to cover all the business costs and overheads.
- The product is difficult for direct fulfilment (e.g. fresh fish).
- The type of product is one more generally purchased through consolidators. For example, people would be more likely to buy from a weekly-shop consolidator such as www.tesco.com than www.tetley.com if they wanted a small box of teabags.
While there may be good logic to some of these points, we have often been surprised by things that can sell well. If you go back ten years, a prevailing view at that time was that you would not be able to sell women’s shoes or dresses online. Then along came Zappos and ASOS to prove the skeptics wrong. People said that you could not sell Pizza online yet today over 77% of Dominos UK sales are via ecommerce (ref). History suggests there are few things that can’t be sold online. What’s important is to engineer both the product and the ecommerce itself to make this happen. For example, if you can’t sell long ladders online because they don’t fit inside the delivery vehicle then engineer a ladder that does (ref). The issue about basket size being too small could be true if you only sell B2C online. It’s worth noting that the UK ONS estimates that well over two thirds of all ecommerce is B2B — the margins may be lower but the total basket size will help make it commercially viable.
2. Legacy Mechanism
Whether a company likes it or not, the world of trade and commerce is rapidly moving to one of ecommerce. Businesses need to innovate in order to survive and grow. Ecommerce lies at the heart of a trading business whose objective is to scale and improve productivity through automation. In the UK alone, ecommerce is worth over half a trillion Pounds (ref) i.e. it’s too big to ignore. The slow-adoption problem is invariably an issue of culture, lack of skills or both. A successful manufacturer does what it says on the tin; they manufacture things — often leaving it to others to do all the selling work. In Scotland, many of our niche manufactured products are based around heritage and tradition. This in turn may impact the business culture and attitude towards high-tech solutions. The argument needed to address this is that with Adidas it’s not just that ecommerce is creating over €1bn in sales but that their margins will have multiplied several times.
3. Fear of channel loss
For brands that don’t sell direct, my experience has been that the most common reason is that there is a fear that adding B2C ecommerce will undermine their existing traditional routes to market. The argument might be that a major wholesaler might get upset and so might stop selling those products. Looking back over the past 20 years I have heard this an an excuse many times but am yet to see a single example of this happening. In practice, the wholesaler may complain but, providing what they sell still makes money, they are not going to stop what for them is profitable business.
The Adidas case study provides good evidence that if a brand owner/ manufacturer wants to improve the productivity and profits of their business then the case for using ecommerce to repatriate margin back to the brand is overwhelming.