New Economic Realities   //   July 9, 2024

Why some brands are being more cautious about wholesale expansion

Some brands are temporarily pressing pause on wholesale expansion.

In 2022, as it became more expensive to acquire customers digitally, wholesale started to be presented as a sort of panacea. The costs of wholesale were more reliable, at least in contrast to Facebook, where CPMs could change by the day. Brands like Parade started to tout their expansion into wholesale as an example of how they were prioritizing profitability. For some brands, the foray into wholesale worked. Children’s clothing brand Monica + Andy, said for example, that launching into Walmart helped it turn a profit. But wholesale deals haven’t proven to be a reliable predictor of which consumer startups succeed and which flame out. Parade, for example, was sold in a fire sale just six months after launching in Target.

While entering wholesale can help a brand reach more customers, it also comes with many challenges, such as navigating unknown brick-and-mortar distribution, incurring costs from partnering with brokers and pressure to drive sales through retailers’ ad networks. Now, as capital is harder to come by, founders of smaller self-funded businesses are taking a more cautious approach to wholesale expansion. Multiple founders interviewed by Modern Retail said they aren’t looking to take on new wholesale partnerships right now. Instead, they are prioritizing more familiar, low-lift channels such as Amazon, online marketplaces, or even their own direct-to-consumer sites in order to extend their runways.

What that means in practice is that more founders are temporarily saying no to their dream retailers.

As one founder of a wellness brand who requested anonymity put it, getting back to growing owned or digital channels such as DTC and marketplaces feels like a “safer bet” right now.

“It’s more of a ‘not right now’ thinking,” the founder said, whose wellness brand sells at chains like CVS and Target. For the time being, the wellness brand is holding off on striking new partnerships with other major retailers and driving customers to existing wholesale partners through digital marketing.

The move theoretically extends the company’s runway for the next six to 12 months and slows down cash burn. “It’s a way to at least continue building the brand in a more profitable way, at least for the time being,” the founder said.

Cameron McCarthy, co-founder and CEO at WeStock, a platform that helps CPG startups and national brands acquire customers in stores, said some startups have shifted back to direct-to-consumer “out of necessity” to conserve cash.

At the heart of the issue is the fact that launching into a new retailer is expensive. It requires brands to produce more inventory, potentially hire more field reps and do more marketing to promote the wholesale launch. And right now, brands don’t have as many options to fund wholesale launches compared to, say, three years ago. Venture capitalists are still being picky about which startups they back, while some funders like Ampla have cut back on lending.

From a retail vendor point of view, McCarthy said seeing a brand contract from wholesale and refocus on DTC or smaller digital channels isn’t a great sign of growth. “That seems like an early signal of trying to keep the lights on for a couple more months,” he said. Some of these brands are choosing to pour the money they have in online marketing to boost sales where they have more control. “That’s one way to break even and maybe refocus on retail again in the future.” 

But McCarthy said instead of doing a 180 and pulling out of retail completely, WeStock client brands are being advised to drive velocity at just a few key retailers that generate good margins, rather than adding as many wholesale partners as they can. “That doesn’t mean they [brands] need to apply it to every single national chain,” he said. “They can just make sure to have enough funding and marketing dollars to support one big retailer.” 

Still, wholesale distribution is growing by volume in general and continues to be a top priority for consumer brands. According to a May 2024 brands survey by NuOrder by Lightspeed, wholesale continues to be the most profitable investment channel for brands. These partnerships account for an average of 60% of total company sales. However, the survey also shows that promotion costs for wholesale distribution are also increasing. Marketing outreach by brands has seen a 7% increase from last year, the survey found.  

In search of “predictably fruitful” channels

One founder of a better-for-you grocery brand, which sells at natural chains like Whole Foods and online marketplaces like Amazon, said that right now she’s focused on trying to grow digital sales until she’s more confident in partnering with a new major retailer. “At least for me personally, the perks of online are so much more attractive,” she said. “We see where our money goes, we can connect with the exact customer we want and the right moment, and the investment just seems more predictably fruitful.” 

That being said, the company is “currently exploring Walmart,” she said. But whether or not the brand is able to ink a deal with Walmart is also dependent upon lining up the buyer’s reset schedule with the brand’s ability to find the launch. Annual line reviews happen in between the seasons when demand is high in this brand’s particular category. “Our buyers don’t have a lot of appetite for innovation between the seasonal stuff,” she said.

Overall, the founder said that right now, “we are much more risk averse; it’s been very cautious versus ‘hell yeah!'” when it comes to wholesale. Instead, she said the brand will continue acquiring customers by investing in more controllable channels, like Amazon, or generating consistent sales organically on marketplaces like Thrive Market. This can keep growth momentum up and costs relatively stable until a deal with a big-box retailer like Walmart can be closed.

“Online platforms are good at helping you figure out how things work, then to some extent letting you hold the reins,” the founder of the food brand said.

For the companies that can support it, there is a focus on securing national distribution at major retailers like Walmart, Target or Costco, when possible. Even though wholesale is an expensive endeavor, the thinking goes that it’s better for brands to spend their time and money focused on bigger accounts whenever possible.

Still, it’s an ongoing question of how much is too much when it comes to wholesale. “The thinking of nailing one key market at a time is outdated from what we’re seeing,” McCarthy said. “But it takes raising more money to support those accounts.” 

And of course, the decision around when to enter a new wholesale channel is not always up to brands. The founder of the food brand said that buyers in her particular category “are also incredibly risk averse too” — especially in a more conservative economic climate. Some of the buyers the founder of the food brand meets with, she said, “have zero interest in online sales data,” which is often touted as a great tool to leverage when negotiating wholesale deals.

“We will still do big launches if they’re a dream account or a great fit, particularly with a buyer we know will give us more than one shot to find and nurture our audience there,” the food founder said. “But it’s just a really conservative growth moment.”