Since the onset of brands such as Bonobos and Warby Parker, marketers have long-hailed the arrival of the direct-to-consumer (DTC) model in eCommerce as a rapid consumer revolution – and potential apocalyptical threat to the mass retail landscape as we know it. From slippers to mattresses, toilet roll to beauty, challengers such as Mahabis, Casper, Harry’s and Fenty Beauty have heralded a new dawn of selling goods online exclusively through first-party channels.
However, well-tenanted shopping centers, digital retailers and marketplaces – including Amazon – are stocked with countless examples of once exclusive DTC brands now sharing shelf space with competitors in more traditional surroundings. Brands like Harry’s now sits in Boots and Target stores alongside competitor brand Gillette, Graze snack boxes are available in Sainsburys, Mahabis slippers are nestled amongst other cozy alternatives in footwear specialist Office and luxury sleepwear brand Desmond & Dempsey is sold on Net-a-Porter. It’s ironic, really, given the industry rhetoric framing DTC against retail as a David v Goliath battle for survival.
It’s evident that DTC, once home to only a few hefty players, is now bursting at the seams with new entrants; perhaps the best example is the mattress industry, with over 175 new brands all competing with the likes of Casper, Eve and Simba, through DTC models. With such consumer choice and over-saturation, customer awareness and acquisition are increasingly becoming an expensive headache for brands, all vying for awareness and consideration during the discovery phase. Further, glasses brand Warby Parker now has over 100 physical retail destinations across the United States, recognizing that true scale is more realistically achieved through traditional routes to market, including a store footprint.
The industry has arguably become so fixated with the opportunities created by DTC that its hype fails to consider the unit economics of this model, particularly the impact of returns, fulfillment complexities and the rising costs of content marketing and paid advertising. Making DTC efficient, profitable and a permanent replacement of the well-oiled retail landscape at scale is a tricky business, especially in the fast-moving consumer goods (FMCG) space. One must also question whether consumer are willing to reverse long-standing behaviors and go through the inconveniences of added time, potential inflated pricing and delivery costs for individual products (razors, toilet paper, hair products, etc), when the alternative is simply to add the majority of FMCGs to an existing grocery shop at large retail stores.
So, does this mean that DTC is an over-hyped route to market? Should FMCG brands write off this opportunity entirely and reappraise its focus solely on existing retail relationships?
In short, no.
Despite its challenges, direct-to-consumer does have distinct opportunities that offer brands seismic benefit.
In today’s data economy, rich market and customer insights are an essential commodity for any brand, with direct-to-consumer platforms offering unrivaled access to first-party customer data, behavior and trends. These insights are paramount in efficiently targeting customers one-to-one at scale, understanding their needs, communicating the right message at the right time, and even shaping product development. Razor brand Harry’s, for example, has the opportunity to own more data, insights and strategic market behaviors of its customers through its owned platform than the mere snippets of ad hoc insights offered up by retailers; the value and potential of this is simply colossal.
An area currently under-utilized by brands is integrating direct-to-consumer as part of a broader test and learn strategy. Owning the entire end-to-end experience allows brands to harness one-to-one relationships with customers to trial new product variations and quickly assess feedback for onward opportunities. Similarly, multi-variate testing and finely tuned customer relationships gives DTC brands options to learn and optimize aspects that wouldn’t necessarily be possible through third-party retail platforms including acquisition strategies, brand messaging, product descriptions, content enhancements, pricing and user-generated content. Interestingly, these learnings can be fed back into retail partners to grow share of shelf and conversion, benefiting all sales channels, not just DTC. Recognizing this, Procter & Gamble recently launched P&G Ventures, an incubator of brands that through test and learn can be blossomed into tomorrow’s billion-dollar brands and later folded into the parent company’s portfolio for maximum scale and distribution. This is easier said than done, of course, and is substantially more challenging for large global businesses versus lean, purpose-built start-ups, given the alignment and drain on internal resources, capability and investment required to take a credible DTC to market, underpinned by solid fulfillment and supply chain operations.
In most cases, the scale, awareness and customer-pull of existing retail destinations and online marketplaces represent the largest opportunities for brands to reach the widest audiences for commercial growth; it makes sense that brands should be present where customers express demand. Breaking long-standing customer purchasing behavior and developing profitable FMCG businesses at a sizable scale in this space is undeniably a significant challenge. Brands should heed caution to ensure they achieve the desired reach effectively and profitably, which may not be achievable through DTC alone. Bottom line? On the most part, brands – where they can afford to and have fulfillment capability – should consider undertaking at least some DTC activity to unlock insights that are simply unavailable through traditional retail and third-party channels. After all, the power of data can’t be over-hyped enough.
Author: Stuart Johnston, Global Commerce Director, Zenith