On Holding told investors it expects direct-to-consumer sales to drive gross margin expansion through 2026, according to The Motley Fool. The Swiss performance footwear brand is deliberately rebalancing away from wholesale distribution—the traditional retail channel that clips 30-50% of wholesale price—toward owned stores and its own site, where it keeps the full retail dollar.
The mechanism is elementary retail economics. When On sells a $170 Cloudmonster through Nordstrom, it invoices the retailer around $85 wholesale. When it sells the same shoe on its own site, it collects $170 minus fulfillment and transaction cost, typically $12-18 per pair. The delta—roughly $70 per unit—flows directly to gross margin. On is not inventing this playbook; it is executing the same channel migration Nike, Lululemon, and Allbirds ran before it. The difference is timing and control: On is making the shift while it still has pricing power and before wholesale partners erode brand equity with discounting.
On's DTC penetration sat at 39% of net sales in Q3 2024, per the company's earnings release. Management projects that figure will climb past 45% by end of 2026, with owned retail and e-commerce each contributing roughly half of DTC volume. The brand operates 60 retail locations globally and plans to open 15-20 stores annually through 2026, concentrating in high-foot-traffic metros where unit economics clear a $2 million annual revenue threshold per door. Online, On is adding localized checkouts in 12 new markets and testing same-day delivery in six U.S. cities, reducing friction at the point of purchase.
The margin lift is already visible. On reported consolidated gross margin of 60.1% in Q3 2024, up 210 basis points year-over-year, with DTC contributing the majority of the gain. For a brand doing $2.2 billion in trailing twelve-month revenue, every percentage point of margin expansion unlocks roughly $22 million in incremental gross profit before operating expense. On is reinvesting that margin in product development and retail buildout rather than price cuts, keeping average selling price stable while improving unit contribution.
The steal for a small physical-product brand is to carve one owned revenue channel and feed it deliberately. You do not need 60 stores; you need one direct line where you keep the retail dollar. Start with your own Shopify site or a single pop-up retail test in a neighborhood with target-demo density. Price the product at full retail—no wholesale discount. Drive traffic with owned content: post job behind-the-scenes build content on Instagram, send a weekly plain-text email to your list with new arrivals and a single call-to-action link, run a $500/month Meta ad budget targeting a 5-mile radius around your retail test or a lookalike audience seeded from prior purchasers. Measure contribution margin per channel monthly: wholesale revenue minus cost of goods and invoice discount, DTC revenue minus COGS and fulfillment. When DTC contribution per unit exceeds wholesale by $20+, shift inventory allocation toward the owned channel. Do not abandon wholesale immediately—use it to acquire customers in new regions—but once a geography proves demand, open your own channel there and reclaim the margin. Track repeat purchase rate in each channel; DTC typically converts 2-3x higher on second purchase because you own the customer file and the post-purchase communication.
On is not betting against wholesale; it is betting on margin. The play works when brand heat is high enough that customers will seek you out in your own channel instead of waiting for a retailer's discount rack. If you are still building awareness, wholesale feeds the funnel. Once awareness exists, owned channels capture the value.