Shifts in retail trends: direct-to-consumer
By 2019, 39% of the UK’s online population had bought a product from one or more of the top 50 direct-to-consumer (DTC) brands, according to an IAB UK report published in September that year.
OMD looks at the rise of DTC and suggests three deployment strategies
Some 97% of respondents to the Born Online study knew of at least one of these 50 brands, signaling how they’d entered mainstream retail with strong potential for future market growth.
Over the four years prior to 2019, venture capital firms in the US, investing in consumer packaged goods companies, ploughed $3.3bn into DTC brands.
Major global retailers were sitting up and taking notice – resulting in acquisitions such as Unilever buying Dollar Shave Club for $1bn and Target investing in the challenger mattress brand Casper.
Then, in 2020, the pandemic hit and 10 years of e-commerce growth occurred in just 90 days.
Those DTC brands already trading successfully online were able to transition their marketing and messaging more quickly, placing them in a better position to compete against or take advantage of the dominance of the Amazon digital marketplace.
Some of the world’s largest legacy brands meanwhile had to completely rethink their business models – swapping brick-and-mortar stores for online-only DTC initiatives at blistering speed.
In response to the way people were buying groceries, PepsiCo created Snacks.com and PantryShop.com, selling brand products such as Tropicana, Doritos and Quaker. Heinz launched its first-ever DTC initiative, Heinz to Home – making food products such as baked beans and tomato ketchup easily accessible to vulnerable communities.
Nike had been distancing itself from department stores and other wholesale outlets for a few years prior to 2020, claiming that digital sales were more profitable.
In the first quarter of 2020, Nike saw its big bet on DTC pay off as e-commerce sales soared 82%.
By the third quarter of last year, the brand had smashed its original target of e-commerce sales accounting for 30% of total revenue by 2023.
Beyond Covid-19, accelerated trends within e-commerce will ensure that DTC remains a competitive and highly sought-after retail strategy for both legacy and challenger brands evolving for a changed world.
That said, while the picture is very different depending on market segment, the importance of brick-and-mortar stores remains, even if the exact role of these physical stores is changing.
The relationship between the offline and online retail experience is a critical part of any DTC strategy. Ensuring they connect and complement one another will be a key point of difference for many DTC brands as physical retail returns – something that Nike understands well.
In addition, it would be tempting to predict a future of ubiquitous DTC brands, operating entirely independently from third-party retailers, but the reality of course is very different.
It is highly likely that many brands will continue to need productive relationships with third-party retailers and online marketplaces. In these instances, ensuring best practice alongside a progressive DTC approach will also ensure a coherent and holistic commerce strategy.
The rewards are clear, however, besides future-proofing against global disruption. Selling direct allows brands to take real ownership of the customer relationship and leverage both user and behavioral data to evolve the retail experience and provide a more personalized consumer journey.
Three ways to sell direct-to-consumer
1) The subscription model
The subscription economy is fueled by shoppers opting for ongoing relationships with brands over one-off transactions.
Brands such as Beauty Pie and Whisky Me offer regular orders – personalized, delightfully packaged and delivered straight to your door.
According to The Subscription Economy Index, those DTC companies that began offering subscriptions during the past decade have grown five times faster than regular businesses.
A report by the Subscription Trade Association now estimates that 75% of DTC brands will offer subscription services by 2023.
2) The brand loyalty model
Research by Metrilo into cosmetic DTC brands found that 63% of their revenue derived from loyal, returning shoppers.
The cosmetics industry is notorious for its low customer loyalty and deal hunting. However, DTC beauty brands that cater for specific needs and customer groups have built communities grown through peer-to-peer recommendations and social influence and, as a result, no longer need to compete on price.
Building loyal communities isn’t just about selling either.
Last year, when gyms closed, DTC fitness apparel and accessories brand Gymshark offered an hourly rate to any personal trainer struggling to find work to host online workouts.
By supporting the mental and physical wellbeing of its customer base, Gymshark will reap the rewards for a long time to come.
3) The value driver model
DTC creates value to consumers through multiple drivers. By understanding their nuances, brands can focus on evolving them into future strategy.
Two key drivers are the ability to bundle or group products together, plus the reduction of friction associated with the in-store consumer experience or the Amazon delivery driver that keeps hiding your package (just me?).
Bundling entices the customer to upgrade their purchases, thus boosting total revenue by increasing the amount customers spend per transaction. However, it’s also a good way to speed up end-of-line inventory clearance and enhance both brand loyalty and the customer experience by relieving the pressure of decision making through personalized product search algorithms.
Heinz to Home allows customers to bundle ‘essentials’ such as soup, hoops and beans or build a bundle of sauces, enticing customers to add salad cream and classic BBQ when they buy the more popular Heinz Tomato Ketchup.
By focusing on the frictionless experience and by exploring new bundling opportunities, DTC brands have developed personalized products in well-designed packaging that fits through the letterbox, along with rich category, brand and product experiences that create value beyond the initial purchase.
Mark Murray Jones is chief strategy officer at OMD EMEA.
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