When Dollar Shave Club launched in 2011, it set in motion the direct-to-consumer movement which forms of many CPGs strategy today. So successful and disruptive was the concept, that Unilever acquired the business for $1bn in 2016, but in its Q4 2022 results Unilever stated that Dollar Shave Club, “while marginally profitable, continued to decline in a fiercely competitive market,” adding ”the performance of Dollar Shave Club has not met our expectations.” It has since taken an impairment charge on the brand. But it wasn’t the only DTC brand Unilever had its eyes set on. As the DTC movement took hold, it purchased 29 DTC players by 2015, including Graze for £150m.
So is the DTC model all it is cracked up to be or are the cracks appearing?
In this article we take a closer look at;
Which brands have crafted a clear and sustainable path in DTC
How consumer demand is softening and brands appetites are waning
What makes for a successful DTC strategy
Which brands have crafted a clear and sustainable path in DTC?
According to eMarketer’s forecast, US direct-to-consumer (D2C) eCommerce sales would reach $151.20 billion in 2022, an increase of 16.9% and represent a total of 2.5% of retail sales (and a much higher portion of eCommerce sales). But the share of DTC sales is not spread evenly. According to a study by Retail Dive / PipeCandy in 2022, about 75% of direct-to-consumer brands in the U.S. generate less than $1 million in online sales. The report found that less than 1% of U.S. DTC brands have brought in more than $500 million in online sales.
So which legacy brands are raking in the dough and have been able to make the economics work?
// Nike: the poster child of DTC
An early adopter of DTC, has seen Nike shift the portion of sales from DTC from 15% in 2010 to approximately 43.7% of Nike's total revenue in FY23. With over 1,000 stores worldwide, 170m loyalty members and a website audience of over 200m visits a month, Nike is the envy of many brands with strong aspirations in the DTC space. In May 2023, Daniel Heaf (VP of Nike Direct) spoke to Modern Retail on the success of its DTC strategy and he explained that success boiled down to a few key things;
Their membership strategy: According to Heaf, the heart of digital growth has been membership. He explained “this went from a very small initiative to something that we now think about as the company end-to-end”.
Focus and pursuit of scale: Heaf stated ”we have spent a great deal of time in both thoughtfully rolling out the Nike app and the Nike website across as many countries as we believe possible. We recently launched the Nike app in about 15 different markets in Europe. We launched last month the Nike app in Korea, soon to be followed by the SNKRS app. These are huge markets where we have yet to roll out… so scale and building that scale across the world has been a second major component of the growth”.
The experience; Consumers have discovered the Nike app and the Nike website, they have discovered the great service and the assortment and the storytelling. They like it, and they come back.
// Mars’ Ever-evolving DTC Strategy, Digital Innovation & Leadership
As the pet landscape evolves rapidly, brands like Mars have stepped up their DTC game and to maintain and grow their share in market. The latest report on the Direct-To-Consumer (DTC) Pet Food Market, 2023-2032 estimated that DTC would register an incremental growth of USD 18.6 Billion by 2032, accelerating at a CAGR of 25.1% during the forecast period 2023-2032 – demonstrating the uptake of online accelerating.
In 2019, Mars Petcare has $100m set aside to invest in direct-to-consumer and pet tech. By 2021, Mars had acquired cat litter maker PrettyLitter and went on to acquire fresh pet food maker NomNomNow in January 2022. In a recent article, Blas Maquivar (President of Global Emerging Markets at Mars Wrigley) revealed Mars’ digital ambitions as distinct from its on-ground activity: “because the portfolio that will win in a Carrefour or a Walmart or a convenience store is not necessarily the portfolio that will win in digital”.
But it isn’t just Petcare that has invested heavily within DTC, within its snacking division M&Ms has been one of the core brands for which a DTC proposition has been built. Core to Mars' strategy has been thinking differently about what consumers want and expect from a DTC M&Ms offering. Focussed on events, celebrations and gifting the M&Ms DTC offering provides consumers with the ability to get M&Ms to match your favourite sporting teams, allows users to personalise M&Ms for special events and even provides corporates with alternatives to the branded gift. Whilst data on their strategy is hard to come by, according to Valtech, Mars Snacking was able to accelerate speed to market and revenue for its leading D2C proposition by 20% YoY.
// Nestle’s Nespresso
The Nespresso DTC strategy is one that many CPGs will envy. Nespresso grew its DTC business to reach $6.5 billion with a 20% EBIT margin. With a product well suited to subscription, and unwavering support from their CEO, Nespresso’s growth has not been by accident. Like Nike, Nespresso has combined its eCommerce play with a strong store network to drive reach and distribution. It has retail boutiques in 84 countries and its DTC ecommerce online ordering service is global.
For Nespresso to succeed, it established a self-sufficient DTC business unit providing teams with control over the DTC channel, allowing them to update the website and apps, as well as create and execute custom campaigns.
Consumer demand is softening, and brands appetites are waning
But it isn’t all ice cream and rainbows for many brands operating within the DTC market. Whilst there are many brands (both legacy and scale ups) that have demonstrated the true opportunity of DTC, there are many others that haven’t been as successful for various reasons.
Data is now showing that whilst many consumers are actively engaging with DTC brands, the appeal may be softening.
According to a study by Diffusion in 2022, just a little over half of Americans (nearly 6 in 10) have purchased from a DTC brand at least once this past year. However, data shows that whilst people are purchasing, the competitive advantages of DTC are potentially being eroded over time. In 2020, a Diffusion study found that over 1 in 4 DTC consumers (26%) found DTC brands to be arbiters of what’s “cool” or on-trend. But in 2022, things have shifted. Only 13% of consumers said that DTC brands typically have a cool and trendy aesthetic – a significant 50% decrease from 2020. What’s more, according to the Diffusion study, DTC also had a reputation for having top-tier customer service, but that too was quickly adopted by traditional retailers, blurring the lines between DTC brands and traditional retailers even further. In 2021, 57% of DTC consumers agreed that if a DTC brand offered guaranteed, fast, free shipping, it would secure their continued loyalty as a customer. In 2022, only 12% of consumers said that they prefer to shop with DTC brands because they have fast, free shipping.
As consumer appetite potentially softens, a host of legacy and start-up brands have begun abandoning their DTC models. Niche brands including Swoon, Sweet Nothings and Liquid Death in the US all abandoned their DTC offering instead pushing consumers to buy online via Amazon, alongside of complementing their retail distribution channels.
According to CEO Jake Kneller of Sweet Nothings: “DTC was necessary during the pandemic but became less essential when we achieved a larger retail footprint”. He stated “Sweet Nothings chose to shut down its frozen DTC operations in favour of investing in traditional retail”. The availability of their products in retailers across the US, the elimination of complicated and costly frozen shipping logistics and the reduction of Sweet Nothing’s carbon footprint were all cited as reasons to abandon the DTC model.
According to analysis undertaken by BCG, often the economics don’t always add up when assessed purely on a revenue and cost basis (ignoring the other benefits). Instead of boosting margins, many wholesale companies have seen marketing costs rise by 1 to 3 percentage points and brick-and-mortar expenses increase by 2 to 4 percentage points. Whilst benefits can be realised, it can take upward of 10 years to reach profitability and scale – something which many organisations and brands are unwilling to commit to.
So where to from here for DTC?
Whilst DTC investments aren’t always just about delivering value to the bottom line, enabling brands to experiment, collect data and build a more direct relationship – profitability and sales are often still key drivers of investment. So what does that mean for brands looking to invest DTC?
Product / market fit
Brands that have shown great success in the DTC space have often done so because the product / market fit exists. M&Ms are a good case in point; they didn’t simply take their retail product and allow consumers to buy online. Instead, they thought about the needs of the consumer that could be fulfilled through an online proposition for those buying gifts and planning events, and they built a super convenient, highly personalised offering that allows the customer to provide a unique and memorable gift. Nespresso’s opportunity was very different – the frequency of purchase of coffee pods allowed Nespresso to build a direct relationship with the customer over time and provide the consumer with a convenient way to get their regular coffee order without even needing to think about it.
Be clear on your intentions
For some brands, scale may never be possible, and DTC will also dwarf sales through other channels. It is therefore important that the organisation is aligned and clear on the role and purpose of DTC. Is it to collect data and insights or utilised as a testbed for innovation, or something else? Whatever the plan, executive buy-in is critical to ensure the DTC strategy is measured against the appropriate benchmarks.
Be prepared to be in it for the long haul
For the brands that have strong product market fit and a material size of prize, it is vital to understand that building scale will take time and investment. When we look at Nike - it took them 13 years to drive growth from 15% to 43%. That is not a short-term strategy. Building scale and profitability within legacy businesses takes time and grit. Often, shifting mindsets within the organisation is the hardest part.
Don’t underestimate the importance of the physical
In the cases of both Nespresso and Nike, what has been core to their success is thinking about DTC as more than an online play. In footwear and in appliances, the physical matters. Consumers want to touch, see and trial the product, and that is a difficult process to replicate online. Both brands adopted an omni-channel approach to scale their DTC operations.
Create a differentiated value proposition
To avoid getting lost in a crowded marketplace, companies must give their target audience a clear reason to engage in the DTC model. Exclusive products, loyalty & subscription, and special pricing are just some of the many ways brands are differentiating their offering as part of their DTC strategy.
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