In much of the marketing industry, what is old always becomes new again – usually with a different name or new buzzword. The current direct-to-consumer (DTC) craze is no exception.
In the late 19th century, the retail process in the UK consisted of manufacturers creating a product and selling it in bulk to wholesalers, who would then provide it to individual stores for sale to customers. At the time, wholesalers held the power and dictated to producers what they wanted and how much they would pay. Retailers could also sell only whatever wholesalers would give them.
Everything changed in the early 20th century. Manufacturers created unique products and patented them with brand names. Retailers advertised to consumers what brands they carried. By the 1960s, those actions had increased the power of producers, stores and brands. Wholesalers had become little more than distribution agents.
The entire history is recounted in this fascinating video of a discussion between advertising legends Jeremy Bullmore and the late Stephen King at J Walter Thompson in 1974 (the recording is also a good educational introduction to brands in general).
Today, almost 50 years after that conversation, something similar is occurring. New DTC product manufacturers and existing brands opening DTC stores are again challenging the wholesale middlemen – as well as now challenging retailers themselves.
The number of DTC brands
Just look at the DTC Brand Lumascape created by Luma, a US investment bank focused on digital media and marketing.
The Interactive Advertising Bureau (IAB) in the US also released its list of 250 direct brands to watch at its annual leadership meeting in Phoenix last week.
“Thousands of smaller brands are storming the barriers that once protected the giants, and they are changing the craft of marketing and selling,” IAB chief executive Randall Rothenberg said in a statement.
In terms of distribution, companies today have three options: selling through traditional wholesalers and retailers, through Amazon or through their own platforms. Each has its positives and negatives – and, for marketers, there is no simple or easy choice.
For this column, I interviewed executives at DTC brands, analysts and representatives of wholesale and retail trade organisations on the pros, cons and best practices in distribution and promotion. Here's what I found.
The beginnings of modern DTC
Of course, DTC is nothing new. Most internet-based marketing ‘revolutions’ are nothing other than doing some existing, traditional practice over a new set of channels.
Sears mailed catalogs 130 years ago. Since the 1950s, Avon has recruited women to host parties at which they demonstrate and sell the company’s beauty products. The famous "Ding Dong, Avon Calling" TV ads built the brand among American and British women.
Other brands created flagship stores as well as outlet locations, where they sell overstocked items or marked-down goods. And who can forget the hilariously stupid products sold through DTC 'As Seen on TV!' infomercials?
In the US and New Zealand, pharmaceutical companies can advertise directly to consumers on television. Typically, these businesses lobby physicians – as depicted in a great episode of the 2000s sitcom Scrubs.
One of the first internet-based DTC companies was Dell, which coined the 'Dude, You’re Getting a Dell!' catchphrase in the early 00s. The computer company sold and delivered customised products directly to buyers through its website.
Today however, as in the past, the most popular DTC brands are not tech companies but consumer products.
How DTC is different today
Forrester Research recently completed a multifaceted consumer research program – including a comprehensive survey – and will unveil the results at the company’s Consumer Marketing Forum in New York in April. Brigitte Majewski, Forrester’s B2C vice-president and research director, gave me an exclusive preview.
“Consumers still consider the same things when purchasing – price, quality, convenience,” she said. “But what they lump into each of these categories has evolved. Take quality – they used to consider the product, its features, what it was made of. Now they consider the whole experience with the brand as part of quality. Your marketing, customer service, the other services baked into your product all contribute to their sense of the total experience of a solution.”
Manufacturers and marketers should think about pain points during purchase and usage experiences, the emotional drivers behind purchases, and what prior bad assumptions they have made, Majewski added.
“These consumer-focused lenses matter because we are seeing brands jump into DTC focusing on the D and not the C. They are taking their existing value proposition and just replicating it into an online channel – expensive box checked. This risk is that they have failed to take a step back to evaluate what consumers want now as they shop with higher expectations and more choices than ever.”
The popular DTC verticals today
AYR, Bonobos, Cuyana, DSTLD, Everlane and Outdoor Voices are clothing brands. Glossier sells beauty products. Warby Parker provides glasses. What do such DTC brands today have in common?
“The best examples of DTC brands that have disrupted stale industries are those that focus on the everyday,” Harvey Hodd, chief executive at Matcha Works, a British health beverage brand, said.
“By this, I mean products that are used on a daily basis. Things like mattresses, toothbrushes, razors. A lot of the time, their value proposition can simply be ease of availability rather than product differentiation.”
One of the best examples is Dollar Shave Club. The founder sold the company to Unilever for $1bn largely as a result of a single, wonderful ad in 2012 that reportedly cost $5,000 to make (remember that, marketers who think advertising is ‘dead’ and merely put out constant, cheap ‘content’).
UK agency Straight Forward Design found success with a new DTC femcare brand for teen girls called Betty. The firm promoted the business through methods such as educational forums.
“Products and services that are still considered socially ‘embarrassing’ or ‘taboo’, such as femcare brands or products relating to sex and contraception, stand to benefit from the DTC approach,” Mike Foster, the agency’s founder and creative director, said.
The traditional companies exploring DTC
The current move towards DTC comes in two forms: new brands avoiding retailers and existing brands opening supplemental distribution channels.
“Unilever, under global business development director Neil Roberts, has also been pioneering really interesting DTC stores for some its most loved FMCG brands,” Meredith O'Shaughnessy, the founder and creative director of The Meredith Collective, a creative design studio that produces pop-up events, said.
“Magnum Pleasure Stores – where fans can customise their ice creams – have proved immensely popular, starting in Asia and migrating across the globe,” she added. (Free tip: ‘Magnum Pleasure Store’ could be used by another brand in a slightly different industry.)
Aaron Goldman, chief marketing officer at Chicago-based data science and media technology company 4C Insights, also pointed towards Nike as an example.
“Nike has a long history as a traditional retailer but is making moves to compete with DTC brands like Allbirds,” he said. “The brand has ramped up its focus on digital platforms like Nike.com and a fleet of global apps.”
When my cat broke my Macbook – don’t ask – one day before my deadline for a column, I went to Apple’s iStore in Tel Aviv. A very polite teenage kid saw that I was stressed and fixed it himself in a few hours after saying it would take a few days. Talk about surpassing expectations!
The pros and cons of DTC
New DTC brands have a lower barrier to entry (just create a website, social media page or mobile application), more potential customers (literally everyone on the internet) and can get immediate feedback from buyers (the internet loves to comment).
Further, they have direct control over distribution. And in the opinions of the people I interviewed, the most important strengths of DTC are that brands have better margins and direct relationships with customers.
However, new DTC companies need significant investment – often from the nebulous world of venture capital funds – to cover everything from production to distribution to promotion.
“Reach can be difficult to achieve without strong financial backing,” Rosh Govindaraj, the founder of Issara, a DTC luxury leather goods brand, said.
“There are many DTC brands that have failed over the last few years as customer acquisition costs increased dramatically, and advertising on Facebook and Google became unsustainable for many products and brands,” Hodd added. “Without large VC cheques, this can be almost impossible to scale.”
Companies that sell through retailers merely need to place their products in stores that will then do a lot to sell them. DTC brands must do it all themselves. As with most options in business, there are trade-offs.
Still, the biggest problem for DTC brands today is that many are tying their fates to the whims of social media networks (Matcha Works, mentioned earlier, sells exclusively on WhatsApp). Do people not remember Facebook’s cutting of company pages’ organic reach and the debacle of the company’s recommended ‘pivot to video’?
Many DTC brands sell through Facebook, Instagram and WhatsApp. But those three applications are together a single for-profit business that cares only about itself. Seller, beware.
What about selling on Amazon?
Recently, I caught up with Shimon Finkelstein, a friend of mine here in Tel Aviv who is senior account manager at the Israeli e-commerce agency e-Community as well as a speaker and workshop presenter on Amazon selling.
I mentioned this future column while we were having a few pints of Goldstar and Guinness, and he offered some thoughts on the pros and cons of using Amazon.
“Most carts are abandoned at checkout. Amazon recognised this problem and offered consumers a risk-free shopping experience,” Finkelstein said. “Customers feel safe buying through Amazon because they know Amazon will make sure they are satisfied with their purchase or accept the return, no questions asked.”
“When you purchase on a random company’s website, you don’t know who you are buying from or if they will honour their guarantees. This causes many to abandon their cart last-minute. Amazon offers a higher conversion rate because customers feel safer shopping on Amazon than they do on other websites.”
However, Finkelstein added that new buying trends on Amazon can lead to losses. When many people now purchase shoes, for example, they will get their size as well as one size smaller and larger. After they see which one fits the best, they return the others.
If a consumer buys three $50 pairs of shoes for $150 and then returns two of them, he said, the manufacturer will have to cover the costs of shipping for all three. Even if the manufacturer gets his 15% Amazon referral fee back, this still does not include the price to send the inventory to Amazon's fulfilment centres and the money paid for production and promotion.
The effect on profit margins is obvious. In this hypothetical example, the sale of one pair of shoes resulted in $50 in revenue, but at least $22 was lost on covering the costs of the returns. Do the math.
“Any smart consumer would actually do this. As online sales are increasing, the tactics of knowing how to do it in the best way are growing too,” Finkelstein said. “You must calculate these costs and take them into account, or you will be in for significant losses.”
The new DTC promotion methods
Amazon, social media and Google Ads are often the first promotional channels that DTC companies use. But the trend is now moving towards brand activation events and direct selling similarly to Apple, Nike and Unilever.
Terence Kawaja, the founder and chief executive of Luma, recently wrote in AdExchanger that “DTC brands are approaching an inflection point where it’s necessary to move outside of the digital channel to maintain the growth that has made these brands successful thus far.”
“Alternative channels for DTC brands include out-of-home advertising to increase brand awareness and reach as well as forward integration into physical retail to provide an additional touchpoint for new and returning customers.”
In one significant example, Tim Armstrong, the former head of Google Ads and chief executive of AOL, recently launched The DTX Company, which will invest in and grow DTC startups through brand activation ‘pop-up experiences’.
“Real human connection can be overlooked in today’s always-on world, but it is such an important aspect of human behaviour,” Armstrong said. “We are focused on creating immersive retail experiences to help these digitally native brands differentiate, connect and acquire new customers as most are already super strong on social, but that can only take them so far.”
According to research by London-based event agency Mesh Experience, the best DTC brand experiences occur in the real world and not on a computer screen.
“There is a strong movement towards brands owning a 'share of experience' over and above 'share of voice',” O'Shaughnessy, the Meredith Collective founder, said. “Pop-ups are the places to make your mistakes, learn, evolve and test. It enables brands to inject a startup mentality into a retail experience, without budget-crushing investment.”
DTC brands focus more on brand activation at live events rather than sales activation. Leave that to direct sales channels, she said.
“What's needed are pop-up ‘experiences’ that showcase the brand and its unique attributes. People aren’t drawn to another shop – they are drawn to experience. From that experience, brands can introduce the the retail element, finally building it up to a full-on store.”
Compared to other promotional tactics, brand activation events may be the best way to create the relationships and communities that DTC brands – and companies with new DTC distribution channels – crave.
“In the age of the customer relationship, the quality time DTC brands spend with their customers is unparalleled, resulting in relationships that stand the test of time and competition,” Ryan Shaw, EMEA creative director at the San Francisco brand consulting firm Landor, said. “From wine to fashion, many categories have recognised this and the reaped rewards by doing so.”
The response from retailers
In the early 20th century, manufacturers and retailers wanted to bypass wholesalers. 100 years later, many new DTC brands now want to skip retailers as well.
For this column, I contacted several retailer and wholesaler trade organisations in the US and UK for comment. Most did not respond – which was curious because any DTC growth directly affects their profits.
In one of the only two replies I received, a spokesperson for the US National Retail Federation simply said “these are not issues that we follow, so we can’t provide comment".
Andy Mulcahy, strategy and insight director at the UK online retail association IMRG, did say that new DTC brands do often face problems as they grow.
“Upscaling operations then becomes a major challenge, as the brand essentially has to do all the stuff retailers do – handle customer service, operations, fulfilment,” he said. "Every process has to be continually optimised if the experience is going to be good enough for customers to want to buy from them.
“Retailers compete around experience; it’s a primary battlefield for them. There is also a lot of cost involved in getting all the systems in place to support that aspiration. So, I don’t think DTC is going to replace retail entirely. Having retailers take care of all the complexities of being customer-facing will remain an attractive option.”
The Promotion Fix is an exclusive biweekly column for The Drum contributed by global keynote marketing speaker Samuel Scott, a former newspaper editor and director of marketing in the high-tech industry. Follow him on Twitter. Scott is based out of Tel Aviv, Israel.