Direct-to-Consumer (DTC/D2C) sales took off when e-commerce became a reality. As consumers increasingly use the digital path to purchase, DTC sales become an important channel for many brands. The pandemic accelerated this trend. Karl Lauri, Managing Team Member at MRPeasy, explains, “The disabling of many conventional wholesale/retail market channels during the Covid lockdown has prompted many brand-owning manufacturers to bring forward plans to build Direct-to-Consumer channels.”[1] He goes on to note, “This trend was already in evidence as manufacturers try to assert greater control over their relationship with consumers, and to capture a greater share of gross margin.” Lauri cautions, however, that consumer relationships are not the only relationships with which manufacturers need to concern themselves. He explains, “D2C is not a panacea and potential downsides include the risk of impairing relationships in the established retail chain, which remains important.”
The pandemic made D2C a mainstream channel
“Consumer packaged goods (CPG) brands and their merchant partners held eCommerce at somewhat of a distance for years,” assert Analysts from PYMNTS.com, “even as they steadily increased their investments in digital. Because brick-and-mortar stores did the big numbers, the old rules favored physical retail. COVID-19 swept that away, as is now clear across most industries and verticals. Direct-to-consumer engagement took over almost organically as lockdowns kept stores off-limits. And like other digital shifts observed in 2020, the move to D2C looks to be enduring.”[2] Andy McCaul (@The_Scott_Chegg), co-founder and Director of The Bigger Boat, observes that the brands already in the D2C space fared better than those that weren’t. He explains, “If a company had embraced digital methods and was set up pre-COVID-19 to handle online sales effectively — and was lucky enough to be in a sector where demand for products remained high — then there has been a golden opportunity for sales figures to achieve mind-blowing results.”[3] He notes that brands using physical retail outlets exclusively did not fare well. He concludes, “If there’s one take home from this whole moment in history, it’s that organizations need their own ecommerce offering — they must be in control of their own destiny.”
Chad Summe, chief strategy officer at Quotient, agrees that the impacts of the pandemic on consumer behavior may be enduring. He writes, “As the pandemic progresses, more changes are likely to follow. It’s possible that the way people shop will never completely return to our previous version of ‘normal,’ which opens up new challenges and opportunities. In this new mixed mode of shopping — in which consumers shop in person at physical retailers and at home via e-commerce — consumer goods companies are looking for ways to innovate.”[4] Direct-to-Consumer is one of the ways CPG firms are looking to innovate. According to Summe, it’s a channel they can no longer ignore. He explains, “E-commerce has proven to be a driving force behind consumer goods, accounting for 82% of all growth within the sector. Major brands are starting to take notice.”
Pros and Cons of D2C
The most serious con argument against D2C sales was mentioned previously — harming brand/retailer relationships. McCaul notes, D2C is “not an ‘all or nothing’ situation.” He believes the brand/retailer relationship should continue and bonds strengthened through initiatives like retailer exclusives. “Keeping those key partnerships going whilst running a DTC offering can be a difficult balance to strike,” he writes, “but there must always be an element of flexibility if a brand is going to survive — especially during a crisis.” Caroline Jansen (@jansen_caroline), Associate Editor of Retail Dive, shines a light on other D2C challenges related to shipping. She writes, “On top of high costs, fast and free delivery expectations, and returns, brands also put customer retention at risk by forfeiting control over the last mile.”[5] This was never more evident than during this past holiday season when an overstressed logistics system couldn’t keep up with demand. Santiago Gallino, a professor of operations, information and decisions at University of Pennsylvania’s Wharton School of Business, told Jansen, “I know for a fact that some [brands] have regret. [Some direct-to-consumer brands have been] starting with some very generous policies in terms of delivery and returns because it’s a great tool to acquire a customer. But then as you grow, it can become very costly to maintain and to keep that promise.” There are also costs involved in setting up and maintaining an ecommerce website.
On the pro side, McCaul notes, “Having a Direct-to-Consumer channel provides an improvement in product margin and it can also sell the entire range, not just part of it.” Being able to offer all of a brand’s products on a single site turns out to be a big deal. PYMNTS.com analysts note, “Our research strongly suggests that CPG brands face a unique opportunity to capture customer loyalty and drive engagement. … The current shift’s durability will depend on brands’ abilities to deliver product availability, offer seamless eCommerce experiences and leverage digital tools to forge long-term personalized relationships with customers. … Product availability turns out to be decisive, [a PYMNTS.com survey found] with almost 45 percent citing this when purchasing retail products over other factors, including affordability. D2C users’ second-most cited reason for using brand-based channels is related to the first: the ability to find the specific products, cited by 23 percent of those who purchased retail products. The ability to find a full range of products was also the reason cited by the greatest proportion of marketplace channel users.” Summe insists brands can’t expect consumers to come to them. Brands must find out where the shoppers are and go there. He writes, “This might seem like a major shift to CGs, but selling their products through many channels such as physical and online grocery retailers alongside DTC can actually bring them closer to consumers by offering purchasing alternatives — such as a monthly subscription model that frequently replenishes consumables while generating recurring revenue. Better still, it will give brands the chance to reach customers who may be less aware of their products.”
Concluding thoughts
Summe concludes, “The pandemic has given brands the opportunity to rethink their strategies and consider new ways to connect with consumers, and DTC is a fascinating avenue to explore. By going directly to shoppers with an e-commerce offering, brands can target new customers, offer a subscription model that delivers recurring revenue and avoid competing with others for physical or digital shelf space.” Brands need to remember, however, that D2C is simply one channel — certainly a channel growing in importance — but it’s not the only channel brands should focus on. Most people still like shopping in stores and, when the pandemic is over, they are likely to long for the in-store experience once again. Even consumers who have turned to online commerce may, in the future, prefer to buy online and pick-up their purchase curbside or in the store. Flexibility is what brands need to focus on; and, D2C provides them with additional flexibility.
Footnotes
[1] Karl Lauri, “Realising the benefits of Direct to Consumer,” Manufacturing & Logistics IT, 17 November 2020.
[2] Staff, “Direct-to-Consumer CPG Sales Are Going Mainstream,” PYMNTS.com, 18 August 2020.
[3] Andy McCaul, “Why brands & manufacturers shouldn’t ignore Direct-to-Consumer ecommerce,” IT in the Supply Chain, 7 August 2020.
[4] Chad Summe, “Evolving Your Direct-to-Consumer (DTC) Offering,” Consumer Goods Technology,” 3 December 2020.
[5] Caroline Jansen, “The implications of shipping direct to consumer,” Retail Dive, 16 November 2020.
