Direct to consumer retailing is in vogue but is it a viable strategy for your business?
Direct to consumer (DTC) retailing is having its moment in the spotlight. Whilst the trend had been gaining momentum over the past few years, interest in D2C retailing has shifted gears due to COVID driving consumers further online. As a result, brands are seeking to build data assets to derive insights and deepen relationships with the end consumer.
In the US alone it is anticipated that D2C ecommerce sales will reach $20b by the end of 2021, and is set to grow to $30b over the next 3 years. However, it isn’t just lockdowns driving the trend – attitudes towards buying direct are changing. According to the Drum new research shows that 55% of consumers prefer to buy from brands directly, while a further 40% of shoppers say they will purchase from a D2C brand in the next five years.
The growth in eCommerce locally is hard to also deny, which makes D2C retailing a far more compelling proposition for brands in the local market. Accelerated by the pandemic, a third of consumers now prefer to shop online more than they did before the pandemic In Australia - and eCommerce sales have increased rapidly to reach $50.46b in 2020 (up 57% YOY).
Exploiting eCommerce should and does look different for every brand
D2C selling isn’t a one sized fits all strategy. Brands are utilising various models and entry points to build capability and test the market. According to Deloitte, 57% of FMCG brands claim they are exploring DTC capabilities. Some are experimenting with new business models (like subscriptions), others are acquiring DTC brands to gain a strong foothold in the market (as we have seen with Unilever and Dollar Shave Club, and P&G and Native deodorant), and others still are building eCommerce stores to retail their full range of products to the market.
Nike, an early adopter of D2C online retailing, now generates a whopping 33.1% of its revenue through its eCommerce channel. But Nike’s success isn’t likely to be replicated by others overnight. Nike’s eCommerce revenue has steadily grown from 13.5% in 2010, testament to its focus and emphasis on building D2C capability. It is in part propelled by consumer comfort, and the adoption of buying clothing and shoes online.
Newer to the scene, Kraft Heinz saw its e-commerce sales double last year, which now represent more than 5 per cent of its global sales - but its Heinz to Home eCommerce offering isn’t the only way the brand is building direct to consumer channels. In August 2021 Heinz partnered with Deliveroo to offer a menu consisting of five different Beanz burgers and several sides for delivery across London, as a new distribution channel to gain a slice of the fast growing rapid food delivery market.
Closer to home, last year during the pandemic Brownes Dairy began to build out its own D2C capability by launching Milko. Once again, in a world where rapid food delivery is becoming the new norm and consumers seek a direct relationship with brands, Brownes re-introduced a traditional milk delivery service which CEO Natalie Sarich Dayton describes as “now a core a profitable part of our business.”
Key considerations to build an effective DTC strategy
Whilst the allure of a D2C model is becoming increasingly compelling – it represents a sizeable shift for organisations and brands who have historically operated through intermediaries.
So what are some of the fundamental considerations brands need to make if they are seeking to build D2C capability?
Create clarity around the role of DTC within your strategy Start by defining why DTC is an important part of your strategy moving ahead and what you seek to achieve. Does the company aspire mainly to generate incremental sales? Is it about developing a direct relationship with customers to aid data capture and insight? Is it to enter a new market? Or is it a combination? Often organisations will jump straight to the how, but your strategy and approach should align with the core objectives you seek to achieve strategically.
Identify the best ways to enter the market Consumer behaviour online differs demonstrably by category, so understanding how consumers procure products within your category is vital to determine the best market entry approach. Launching a subscription-based offering as part of your D2C play, for example, is most effective in markets where the product is a replenishment item that is consumed regularly. Replenishment items like toilet paper, milk and others are less likely to experience high rates of churn.
Put yourself in the customers shoes Reuters recently undertook a review of the PepsiCo pricing strategy on retail sites and its own D2C site PantryShop. It highlighted the danger of brands building a D2C strategy that is disconnected to other channel strategies. The review found PepsiCo had higher prices on its D2C site than those on Walmart or Amazon. For example, on Walmart, a 10oz pack of Doritos Nacho Cheese was on sale for $2.50 compared to $4.29 on PepsiCo’s website. A lack of price parity erodes trust and will impact consumers decision to buy direct. It is therefore it is an important consideration as part of your broader strategy.
Be prepared to stick it out and learn and evolve as you go As we have seen with Nike, it took 10 years to build an eCommerce offering that now represents a third of all sales. Too often, organisations will expect quick returns and don’t realise what it takes to build capability. To be successful, a D2C strategy requires organisations to be able to build for the long term, while building capability over time and continuously learning and evolving your strategy in the process.
Think about the opportunity beyond your owned assets When it comes to building an online D2C strategy, organisations often think the focus should be on building your owned assets - but often, in cases when you are building an eCommerce offering to retail products direct, marketplaces provide a viable alternative channel with vast audiences to further augment your direct distribution platforms. In some cases, these platforms also serve as brilliant test beds to understand demand for eCommerce retailing of individual products, bundles and exclusive ranges.
If you are looking to drive digital transformation within your organisation, get in touch to chat about how we can work together. At Arktic Fox, we partner with marketing and business leaders to build and implement digital transformation strategies that help to drive real growth.