NEW YORK: National brands that move into direct-to-consumer online sales face an often unacknowledged challenge to profit margins, according to a paper in the Journal of Advertising Research (JAR).

Gian M. Fulgoni, co-founder/chairman emeritus of research firm comScore, discussed this subject in an article entitled, Will digital commerce and analytics be the death of traditional brands?

And he pointed to research by the Interactive Advertising Bureau (IAB) that highlighted the rise of direct-to-consumer online sales, a tactic encouraging brands, new and old, to sell their products without a middleman.

The advance of numerous small, and disruptive, direct-to-consumer enterprises poses a “threat to any national brand”.

But many studies looking into the prospects for national brands that tap the same strategy frequently ignore an underlying issue.

What they do “not examine directly is the cost of the new model”, Fulgoni proposed in an article published as part of a special “What We Know About In-Store Marketing” section of JAR.

“Someone has to absorb the shipping costs, and in a direct-to-consumer world that ‘someone’ might be the brand itself. It’s possible that the result will be reduced brand profit margins.”

The increasing dominance of Amazon in the e-commerce space raises another obstacle, both as the company is rolling out a swathe of own-label brands, and as its voice-enabled speaker points towards the next generation of commerce.

“The stark reality is that digital commerce now accounts for $1 in every $5 of consumers’ discretionary spending. That number is growing at 20% annually – about four times faster than overall retail sales,” Fulgoni wrote.

“In-store retailers,” he continued, “pressured by the channel shift to digital commerce, are closing stores at a record pace. In 2017, 6,985 US stores closed, 229% more than in 2016.”

Taken together, the profound shifts in the retail environment constitute a fundamental challenge to the profitability of many established brands.

“In that sense, what remains to be seen is the impact that technological changes will have on the future economics of brands. National brands historically could be relied on to produce higher profit margins,” argued Fulgoni.

“It’s unclear whether the cost of the distribution platforms required for a brand to stay relevant in the future will produce the profits of yesterday,” he said.

Sourced from Journal of Advertising Research; additional content by WARC staff