The Race to Direct-To-Consumer (D2C) within Retail and CPG Brands (also known as Business-To-Consumer)
E-commerce has shaped the retail experience, but one of the most dramatic changes has been the rise of D2C models, often referred to as “The Future of Retail”. Even though this is not a new trend anymore, it is an area where many food and beverage manufacturers and retailers are still lagging behind.
D2C, short for direct-to-customer, is a sales strategy where a company not only produces a product in its own facilities but also takes care of the distribution within its own channels, which can vary from e-commerce platforms to retail-stores. Consequently, this approach allows a brand to enter the market without the need for a distributor, effectively eliminating the middle-man, a position often held by another business (B2C). Well-known examples of D2C business models include Casper, a mattress selling company, or the eyewear brand Warby Parker. Brands today often use a combined strategy of D2C and B2C models and, in many cases, integrate omnichannel as part of the mix. However, we are going to focus on D2C and why this is a must-have strategy for established brands.
A very important role and contributor to the rise of D2C models is the Internet. That may seem obvious to some, but it is responsible for accelerating and revolutionizing tools essential to starting and scaling a D2C business.
Low barriers to entry brought by streamlined supply chains, e-commerce adoption, and last-mile delivery have made it easier than ever to launch, validate, and scale new products. While the point of purchase has historically been owned by retailers in the past, the D2C approach has changed the game, and has resulted in:
- A better understanding of the customer through owned data
- Increased ownership and control of the brand
- Higher customer focus, agility and margins
Let’s have a closer look at these advantages.
Better Understanding of the Customer Through Owned Data
By controlling the complete customer buying experience, D2C brands can build one-on-one customer relationships and gain deep customer insights. In a perfect world, a brand would have ownership of every stage of the customer journey. Although this is rarely the case in a traditional retail environment, a D2C approach takes advantage of every customer touchpoint by gathering customer data points using digital analytics tools, relatively cheap and personalized social media advertising, and direct after-sales feedback. The D2C model thrives on hyper-targeted marketing, enabling brands to launch campaigns for past and potential customers at speed. And to top it all off, transparent analytics let marketers calculate the true return of advertising spend and allocate their marketing budgets more effectively.
The battle for shelf space is slowly coming to an end. The new battle for big data, however, has just started and is becoming increasingly competitive.
The famous makeup brand Glossier serves as a very good example. Founder Emily Weiss started with her blog Into the Gloss in 2010, aiming to casually inform women about makeup rituals. After hitting 1.5M unique views every month, she seized the opportunity and launched her beauty line with an initial collection of only four products. Due to her early and deep engagement with her customers, Glossier succeeded where traditional beauty brands were struggling: creating personal relationships with their customers. Glossier is often described as a “people-powered beauty ecosystem”, serving as a role model on how to use the advantage of customer proximity to provide the right products.
Owning and Controlling the Brand
In a traditional B2C relationship, the brand controls product packaging and marketing activities but loses control as soon as the product hits the middle-man and is no longer able to influence sales. A D2C model, on the other hand, allows brands to be the sole owner of the customer experience: allowing the company to meaningfully protect and promote its brand. Subsequently, the brand is able to increase customer engagement and controls the communication and alignment of its values, mission, sourcing strategy, and much more, with direct and instant feedback on the return of investment.
Everlane, an American clothing retailer, demonstrates how to leverage these advantages and was mentioned within the industry as a model brand. The label used an infographic that laid out the actual costs to produce a piece of their clothing and subsequently gained nearly 20,000 notes on Tumblr. With its transparent approach about its supply chain, the brand was able to communicate its values and mission and proved that they actually do what they stand for. This has been a refreshing take for consumers that are increasingly demanding more transparency in packaging and marketing.
Higher Consumer Focus, Agility and Margins
With a higher consumer focus comes better agility and higher margins. That is without a doubt the measurable outcomes of the two advantages of D2C listed above. By gaining a better understanding due to consumer proximity, a brand has the chance to further improve the consumer experience. This is emphasized by the study done by PA Consulting, where 80 percent of consumers said they are more likely to make a purchase when brands offer personalized experiences.
Additionally, consumers are willing to pay a premium when a brand is aligned with its values, which is an important selling point for like-minded consumers.
Applying a D2C model can also result in lower overhead expenses. Avoiding costs related to warehousing, transportation, inventory insurance, and commission fees can all result in thicker margins and lower operating costs.
Moreover, a D2C approach makes it easier for brands to rethink and innovate their products and to move more quickly to the market by launching products on a smaller scale. Compared to a traditional product launch cycle of 18-36 months, the innovation cycle is not only much faster but also less cost-intensive and therefore contributes to more sustainable business models.
But are these advantages enough to outperform other more traditional business models?
Traditional F&B CPG Brands and D2C
The traditional Food & Beverage brands have been retail-focused until recently, meaning they have only sold their products through retail intermediaries. But what are those corporates doing to catch-up with D2C competitors, which in the long-run will put such brands under high pressure?
Basically, there are 3 ways for an F&B corporate to join the D2C sector:
- Launch their own D2C venture
- Buy a D2C company
- Invest in a D2C company
To find out if the traditional F&B brands are already going on the offensive in the D2C space, we analyzed the top 10 leading European F&B companies for the three approaches mentioned above. We looked at them in order to find out if they already have a D2C online shop for their products, if they have made any acquisitions of D2C ventures, and if they have launched their own startups in the last five years (2015-2020).
As can be seen from the results, the approach food & beverage corporates are taking is obvious: they are investing in D2C startups, either through direct investment, through an accelerator/open innovation platform, or through outright buyouts in order to be close to the consumer.
At Stryber we take quite a different approach. But first, we want to show you the benefits that D2C models can provide Consumer Packaged Goods (CPG) brands.
How D2C Can Help CPG Corporates to be More Consumer-Centric, Agile and Sustainable in The Long-Run
There are several reasons why traditional Food & Beverage CPG brands need to incorporate a D2C component into their business strategy, apart from creating a new sales channel. But before we go into the details, we would like to highlight that the D2C delivery model does not work for all product types.
For example, bulky, low-cost items and perishable food are not optimal for such models. D2C models work best for compact products that are not easily perishable and have a high value (e.g. protein powders and supplements). However, just because food & beverage brands are producing products that may be less suited for delivery doesn’t mean they are by default excluded from the perks of a D2C business model. In this case, a more open approach to innovation is needed. These companies should dare to experiment with new product lines and business model innovations as a way to establish a direct relationship with the consumer.
- D2C Sales expected to grow
While it is not surprising that the D2C brand movement has flourished in recent years, it is expected to increase in popularity even more in the coming years. Corporates can even use their advantageous position (already owning a strong consumer base) when building a D2C brand and can, therefore, profit from this rising trend.
According to emarketer, D2C e-commerce sales were $14.28 billion in 2019 in the US alone and are forecasted to hit $18 billion and $21 billion in 2020 and 2021, respectively.
- D2C and their upper hand when it comes to integrating transparency (Everlane)
Transparency is becoming more and more important for consumers. A 2016 study from Label Insight reveals that nearly 40 percent of consumers will switch to a brand that is more transparent, and 56 percent of people say additional product information inspires more trust in a brand.
While it is difficult in a classic B2C model to ensure and communicate transparency along the whole supply chain, a D2C model can take a stronger position by implementing the proper technologies and driving direct communication with consumers. We already mentioned Everlane, a model brand which is implementing this strategy to the fullest. Not only do they show their factories behind the curtain, but they go so far as to even list the breakdown of their pricing model.
- E-Commerce as a way to precede set-backs (the example of the pandemic)
The COVID-19 pandemic has shown the rising importance of e-commerce, as seen in the graphic from Statista below. While many retailers were challenged to survive in the short-term, the crisis also presented an opportunity for established brands to meet the new demands of the modern consumer.
Online demand increased in multiple categories, while entertainment and food & beverage were the clear winners. For example, a study by bitkom shows that more people in Germany order their groceries online today than before the pandemic.
- D2C as a way to listen and build consumer relationships
Since 2019, industry leaders are racing to adopt this model, turning this race also into a bidding war. With Consumer Acquisition Costs (CAC) rising and consumer attention spans falling, listening to the consumer, and building a close relationship becomes crucial to building brand loyalty.
Data-driven insights enable companies to understand demographic trends, analyze their impact in design and marketing, and constantly evolve and adjust their brand strategy in order to create positive brand associations. For many CPG firms, D2C channels are more than an additional sales channel. They represent an opportunity to consistently achieve the personal touch and create value for their consumers in many different meaningful ways.
Large companies have a variety of different innovation instruments to choose from, each of which has different objectives. If the goal is to make a real contribution to the operating result in the medium term, only two valid vehicles are ultimately available:
- Build it on your own or
- Buy it
The underlying “build or buy” question is:
Is the cost of acquiring a start-up really worthwhile compared to using the same amount of capital to build the business model independently?
Even though this question needs to be analyzed and answered more precisely in each individual case, the business model and corporate culture can be adapted much better to the existing assets of the established company in the case of an independent build-up.
The “real” venture building must always be implemented in independent units and with a clear business model focus, always with a view on leveraging existing assets and a clear, strategic and timely focus.
While the lack of a business model component reduces the probability of greater cannibalization, it also prevents the generation of shareholder value that goes beyond improved consumer service.
In principle, new business models can be established either in the core business, adjacent or diversified business. With regard to the optimal use of existing assets and the immediate prevention of direct cannibalization, we believe that especially the adjacent business is the strategic “sweet spot” for corporate venture building. However, this does not mean that venture building cannot be used in the core business or for diversification.