Dive Brief:

• The share of Yeti's sales coming from direct-to-consumer (DTC) orders has increased more than 412% since 2015, according to numbers released by the company in a recent earnings presentation.
• The company credits this shift for helping to increase its margins.​ "Higher adjusted operating margin continues to be supported by gross margin expansion, largely driven by lower product costs and the favorable shift in channel mix to our direct-to-consumer business," Yeti CFO Paul Carbone said last week on the company's third-quarter earnings call.
• While wholesale and DTC continue to grow for Yeti, the latter is outpacing the former. DTC sales posted 31% growth last quarter while wholesale was up 9%.

Dive Insight:

Companies making the transition from wholesale to DTC can see it pay off in improved margins, according to Mark Cohen, the director of retail studies and an adjunct professor of business at Columbia University.

"When a manufacturer sells through a wholesale pipeline, they share the margin on the product," Cohen said. "When they sell directly to the consumer they keep the entire margin themselves because they don't have to provide intermediary​, like a retailer, with a margin, which is a carve out between the wholesale cost and the retail price."

In its earnings release, Yeti said a 270 basis point year-over-year gross margin gain was partially driven by its switch to DTC. The company did not respond to multiple requests to comment on this transition.

When a company sells its products wholesale to another retailer, the brand might not get information on what sells and when. But if it sells directly to the customer, it knows what's popular and can better manage inventory based on these observations, according to Nicole DeHoratius, an adjunct professor of operations management at the University of Chicago Booth School of Business.

"The information they can get from that direct relationship with the consumer can feed back into their own planning which makes their product design, their inventory assortments, their inventory quantity decisions much more effective and more likely to be right," DeHoratius said in an interview with Supply Chain Dive.

A company bases its inventory levels on a forecast, which is typically based on demand, demand uncertainty, lead time and lead time uncertainty. "If you can reduce your demand uncertainty then you're getting a better forecast and you're more likely to produce what's going to sell," DeHoratius said.

Making the DTC transition will require changes in distribution center management and purchase orders, DeHoratius said. "You need different skills in your distribution center," she said.

A wholesale warehouse will typically see periodic orders with large pallets and large quantities in case pack sizes. DTC will see more small, individual picks in the warehouse with packaging for individual consumer items.

Moving into DTC will also require the business to consider whether it wants to compile individual orders at a distribution center, implement a cross-docking system or set up dropshipping with the manufacturer, DeHoratius said.

But many of the companies doing this work aren't going it alone. "Typically, they're going to be using third-party logistics providers to give them the flexibility to change the structure of their network particularly as there's not 'a winning design' as of yet," she said. "They're learning, they're experimenting, they need flexibility and that flexibility can come with very close, tightly coupled relationships with third-party providers."

Third-party providers have increasingly begun providing this kind of service to companies due to the rise in e-commerce, Cohen said.

"These are specialists to accept the manufacturer's inventory, put it on the shelf then fulfill customer orders which are transmitted to them from the manufacturer," he said.

This shift is becoming more important for companies as fewer retail options exist for selling their product, but the demand in the online marketplace remains. The downside is the company is now entirely responsible for selling the product instead of partially passing that responsibility along to a retailer, Cohen said.

"But the good news," he said, "is you control your destiny, control your pricing, control your success or failure without regard to the behavior of an intermediary."