When brands sell direct, how do retail partners respond?

In the Harvard Business Review article "Research: How Retailers Respond When Brands Start Selling Direct", Michiel Van Crombrugge, together with KU Leuven Professors Kathleen Cleeren and Els Breugelmans, summarise their stream of research that delves into this dynamic, examining how retailers react when brands initiate DTC channels. 

In response to dominant aggregator platforms like Amazon and Tmall, many brands establish their own direct channels - such as their own webshops, apps, and/or subscription services - to enhance customer relationships and boost revenues. In response to brands like Dyson, Nike or Microsoft developing their own channels, multi-brand retailers such as MediaMarkt, Footlocker or GameStop, that have historically played a vital role in brand growth, may feel sidelined, potentially leading to damaged partnerships and reduced business. Given that few brands can sustain themselves on direct channels alone, understanding and mitigating such retailer pushback is crucial.

Substantial decreases in retailers’ product orders after launch of a direct channel

In a study that was published in the Journal of Marketing, Van Crombrugge and his co-authors analysed nearly 2,000 multi-brand retailers in the UK and France before and after a partner brand launched a direct channel. Their study found that the launch of a direct channel leads to substantial decreases in retailers’ product orders. On average, retailers reduce their orders by 19%, and wholesale prices increase by 21%. In their setting, this caused the brand to lose about 12% in retail order revenue; approximately €785,000. 

Yet that’s not all. The detachment of retail partners due to direct sales efforts also opens up retailer shelf space for other competitive brands. In a follow-up study in the Journal of the Academy of Marketing Science, Van Crombrugge and his co-authors confirmed that retailers also reduce an encroaching brand’s presence on their shelves and raise its prices, relegating it to the role of ‘cash cow’ and further diminishing its competitiveness in multi-brand stores.

The need for a segmented approach

Importantly, however, the research highlights that retailer responses vary, especially depending on retailers’ size and power position. Large retailers, which have greater bargaining power and confidence in continued brand collaboration, react much less negatively. Smaller, specialist retailers, however, see direct channels as a direct threat to their business and are more likely to disengage.

These insights allow brands to target at-risk retailers with segmented relationship-building strategies. For instance, for smaller independent retailers, financial incentives—such as lower wholesale prices or revenue-sharing—or non-monetary support—such as offering exclusive product lines, or hosting in-store events—can convince retailers that the brand will continue to collaborate after the introduction of a direct channel. 

Much like not all retailers respond to direct channels in the same way, not all brands will experience the same degree of retailer resistance either. In another study in the International Journal of Research in Marketing, Van Crombrugge and co-researchers argue that high-equity brands in low-expandability categories - where consumers make infrequent purchases - experience the most severe backlash from retailers. These brands have the potential to divert significant traffic to their own channels, reducing retailers' future sales opportunities. Conversely, lower-equity brands in categories where customers make repeated or complementary purchases may encounter less resistance. For such brands, customers that discover them via the direct web shop are much more likely to repurchase them as part of their routine shopping at multi-brand retailer stores, allowing for more synergetic effects to occur.

In summary, across all their studies,  Van Crombrugge and co-researchers find that the detachment of retail partners following brands’ direct channels substantially endangers brand value. Brands therefore must adopt a segmented approach to avoid such retailer backlash. By recognising the different concerns of various retail partners and addressing them strategically, brands can successfully expand their direct channels while preserving essential retailer relationships.

About Michiel van Crombrugge

Michiel Van Crombrugge is an associate professor in the section of Marketing at the Department of Business Economics of Erasmus School of Economics. His research lies at the intersection of marketing, innovation, and economics. Van Crombrugge focuses on strategic marketing issues surrounding new business models in multichannel retail and platform markets. His research has been published in leading business journals such as the Journal of Marketing, the Journal of the Academy of Marketing Science, the International Journal of Research in Marketing, and Harvard Business Review.