Direct-to-consumer brands have unfiltered insight into customer behaviour, streamlined supply chains and highly competitive price points, but as a business model it doesn’t come without its challenges.
The explosion of direct-to-consumer (DTC) brands over the past few years marks a shift in the way products are sold, disrupting established industries and causing a fundamental change in brands’ relationship with consumers.
Born in the online world, DTC brands are changing the way we buy everything from beauty products and mattresses, to vitamins and contact lenses, cutting out the retailer in order to own the end-to-end relationship.
Many such brands have built up a global cult following. Prominent success stories include Dollar Shave Club, the subscription shaving brand acquired by Unilever for $1bn in 2016, and beauty brand Glossier, which despite only being four years old is valued at $390m.
Speaking at Cannes Lions in June, Glossier president and chief operating officer Henry Davis described how he analysed the dynamic between brands and retailers, concluding that brands fail to exploit direct-to-consumer ecommerce because they are too reliant on money generated from retailers, while stores depend on the customers that brands attract.
Davis described it as a symbiosis where both parties are stood “with guns against each other’s heads”. Meanwhile, both retailers and major brand owners – particularly in the FMCG sector – are seeing their sales growth slow to a glacial pace. This is the reason Glossier believes owning the relationship with the customer is now the only way to build a brand.
The same philosophy has been adopted by DTC brands across a variety of sectors. Having worn contact lenses since she was 11-years-old, Ashleigh Hinde, founder and CEO of Waldo, wanted to elevate the customer experience of buying lenses from a functional, medical necessity to a lifestyle choice.
Each bottle delivered is an opportunity to interact with an engaged wine consumer.
Brian Smith, Winc
She credits the rise of platforms such as Shopify and Stripe with opening ecommerce up to direct-to-consumer players, while the prevalence of online shopping has also made it easier to access global suppliers.
Consumers are also much more comfortable trying new brands they discover online, which plays into what Hinde describes as the “macro trend” of shoppers distrusting big brands. As a result, consumers are turning more readily to smaller companies that are “thoughtful” about their products and closer to their customers, she states.
These consumers also increasingly value specialism, which buying direct from the brand conveys, according to Tom Broughton, the founder of British eyewear brand Cubitts. He agrees that people are becoming more discerning in what they purchase, in line with a movement towards fewer, but better things.
“Brands play a bigger role in representing the person and who they are. As a consequence, the end consumer has a much stronger relationship with the designer of a specific product,” Broughton adds.
Often the rise of a DTC brand comes from a failing within the sector to meet consumer demands. Mattress and sleep brand Simba regarded the traditional mattress industry as riddled with “fantasy mark-ups” throughout the supply chain.
“You could buy a £4,000 mattress with a £2,000 discount and still get the value of a £500 product,” explains brand and communications director, Mario Rauter.
“We thought that is unfair to the consumer and there’s something we can do by offering a better product, paired with risk-free online shopping and an experience that actually lets you trial the mattress in your natural habitat.”
One of Simba’s early investors was advertising icon Sir John Hegarty, who advised the team to build a brand, not a business, by creating a product that people will love.
When rival sleep brand Eve started out in February 2015, it realised that to create the perfect mattress at a fair price point the traditional retail route would never work. So the team decided to cut out the retailer and deliver its British-made mattresses for free direct to the customer’s door at a lower price point.
Eve then invested in marketing to educate consumers used to the traditional purchase cycle about the benefits of a mattress delivered in a box.
“The only real way to do it is by playing that classic marketing message of ‘there is a better way’. I would say the first 18 months of our marketing journey was all about educating consumers,” explains Eve co-founder and chief brand officer, Kuba Wieczorek.
“Now it has become more about how we differ from the other players, about product quality and brand. Now the education has been done we can really concentrate on building that brand love and emotion.”
Direct consumer insight
Owning the relationship with the consumer means DTC brands hold a large amount of detailed demographic and behavioural data about their customers.
Wine subscription brand Winc describes itself as a “digital native winery” using its close relationships with vineyards to ship wine direct to consumers. The brand gathers insight about its customers via a palate profile quiz, which asks six questions about their taste preferences. The team also analyse a variety of behaviours from cart abandonment and reorders to social listening and surveys.
“Each bottle delivered is an opportunity to interact with an engaged wine consumer,” explains Winc co-founder Brian Smith.
“Behind the scenes each bottle represents an intersection between a consumer and a wine. We track data on both the wine and consumer preference to constantly optimise for better wines and targeted recommendations.”
Winc uses insights to develop wines such as Summer Water rosé and Folly of the Beast pinot noir. Last year, the company released 100 unique wines from grape to glass and over the past three years alone has grown sales of Summer Water from 400 cases to 35,000.
For luggage lifestyle brand Away, the focus has always been moving the conversation on from talking about the product features of a suitcase to the wider concept of travel. The company was founded in 2016 by Jen Rubio and Steph Korey, who met while working as head of social media and head of supply chain at eyewear brand Warby Parker.
That whole back end is so mega important that if you don’t get it right you’re screwed.
Kuba Wieczorek, Eve
The pair started researching the luggage industry, only to discover suitcases were either cheap and poor quality or extremely expensive. They saw a gap in the market for a brand like Away, not only to improve the product experience, but to tap into the emotions created by travel.
The customer experience, data and insights teams work closely to ensure everyone is aware of the customers’ evolving needs. This was particularly important when Away decided to test pop-up retail to better understand how customers engaged with its brand.
“When we decided to open physical retail stores, we thought that they would be great for brand awareness, but not something that would necessarily become a cornerstone for the business,” explains vice-president of brand marketing, Selena Kalvaria.
“We were quickly proven wrong when we realised that not only did our customers enjoy the in-store experience and ability to interact with our brand in this way, but that they were valuable to the business as well.”
Today, Away has multiple retail locations and plans to open more by the end of the year, particularly as each store lifts web traffic in its surrounding area by around 40%.
Vitamin brand Ritual, which describes itself as a “habit company”, uses emails, content and direct marketing to turn taking vitamins into a routine for its customers. Ritual has also put ingredient transparency at the core of its brand by making its vitamins completely see-through.
“We saw an opportunity to lead with transparency, because we believe that women deserve to know what they are putting in their bodies and why,” explains founder and CEO, Katerina Schneider.
“We started geeking out over ingredients and we couldn’t help but share them with our customer. Transparency isn’t just something we print on a label, we take it one step further. We’ve turned transparency into traceability.”
Defining the business as being as much a technology company as a product company, Ritual puts its data and analytics teams at the heart of interpreting consumer behaviour. Schneider believes legacy brands fail to use this level of insight to forge deep relationships with their customers.
This is not the case at home delivery floral company Bloom & Wild, where data and insights are central to every part of the business, from marketing to tech and operations.
The brand uses qualitative and quantative data to shape its products, identifying the blooms customers like, designs that give the longest vase-life and product ideas to reach new audiences.
The aim is to “democratise floristry” by sourcing better and taking a mobile first approach, explains vice-president of brand Sara Gordon, who describes technology and data as the bedrock of the brand’s overall push to work smarter.
Why supply chain is crucial
While cutting out the retailer and managing all operations strips out costs from the supply chain, it is not always easy for a fledgling brand to co-ordinate. Glossier initially had problems keeping its products in stock, Davis recalls.
“This is an industry dominated by some very big players and trying to carve your niche is hard. And while I think their go-to-market strategy is old, they’re incredibly good global supply chain people – I mean meticulous,” he explains.
“As a small company with this idea about how to serve the customer better, to then let them down because you couldn’t keep up operationally was very disappointing.”
Glossier decided to be honest, writing a letter to customers explaining the problem. Rather than being angry the shoppers were empathetic, though Davis recognises this is not a card you can play too many times.
Cubitts founder Broughton agrees that consumers are willing to cut an independent brand a bit more slack if things go wrong, compared to a traditional retailer.
“When you’re a smaller independent brand, your customer still has an extremely high expectation, but I do think they are a bit more accommodating if you are open and honest and put your hands up,” he explains.
He admits that it is difficult managing your own supply chain and lots of things can go wrong, but DTC brands are all about challenging the perception that you cannot be a designer, manufacturer and retailer at the same time.
We saw an opportunity to lead with transparency, because we believe that women deserve to know what they are putting in their bodies and why.
Katerina Schneider, Ritual
There are, however, risks for DTC brands in not having the infrastructure and stock-holding in place to support demand, says Hinde. When Waldo ran out of stock in the UK last December, the team had to be up-front with customers and explain that they had not expected demand to grow so rapidly.
“The challenge is that you’ve really got to have your finger on the pulse, and when you’re operating in different markets and you’re scaling quickly, you have got to make sure that you’ve got the manpower and processes in place so they know how to respond,” Hinde explains.
The Eve learning curve started four years before the business launched in 2015, as Wieczorek’s cousin and co-founder, Jas Bagniewski, built up experience in the mattress sector through a previous business. This experience was crucial as Eve rapidly went global following its £140m flotation in 2017.
“The number of brands launching and failing in the mattress space because they have not got the product right is “ridiculous”, says Wieczorek.
“Every month there’s someone and they last maybe three months because they’re not able to produce an amazing product and get it to consumers in three days. That whole back end is so mega important that if you don’t get it right you’re screwed,” he says.
Wieczorek argues that brands must ensure their product is thoroughly tested and the supply chain is as good as it can possibly be before they launch, “not just go ‘let’s just launch this and see what happens’, which is what I think a lot of young brands are guilty of doing”.
Big brands muscle in
The success being enjoyed by disruptive players has encouraged global brands to get a piece of the direct-to-consumer action.
Unilever CEO Paul Polman explained that ecommerce is growing by between 60% and 70% for the company, as it applies learnings from Dollar Shave Club to other parts of the business, such as premium tea brand T2.
However, while direct-to-consumer works well for “prestige businesses” such as beauty and health, Polman explained that Unilever will only explore this model “where it’s sensible”.
Nike took a more dramatic approach in June 2017 when it announced the restructuring of its entire organisation for a direct-to-consumer push, which involved cutting 2% of its global workforce, equivalent to 1,400 jobs.
The new division – Nike Direct – unites Nike.com, direct-to-consumer retail and Nike+ digital products such as SNKRS Stash, which offers users access to exclusive Nike trainers based on mobile geo-location data.
As a small company with this idea about how to serve the customer better, to then let them down because you couldn’t keep up operationally was very disappointing.
Henry Davis, Glossier
The sportswear giant credited its new structure with helping to drive a 13% rise in revenue to $9.8bn during the fourth quarter of 2018.
Then in March, Disney announced a reorganisation of its company structure to create a direct-to-consumer and international division, led by chief strategy officer Kevin Mayer.
The new business segment includes Disney’s direct-to-consumer on-demand film streaming service, set to launch in late 2019, and sports streaming subscription service ESPN+.
The impact on the big brands
For other brands the explosion of the direct-to-consumer sector has encouraged them to find new routes to market. Diageo closed its ecommerce business Alexander & James last year, admitting the site was not performing in the way the business needed.
Speaking to Marketing Week at the time, general manager for Great Britain, Ireland and France, Charles Ireland, described direct-to-consumer success as “a pot of gold at the end of the rainbow” you need to keep chasing.
The company is now focusing on building close relationships with digital retailers such as Amazon. In December, Diageo launched ‘The Bar’ skill for Amazon Echo, which allows consumers to send a shopping list of cocktail ingredients direct to the Alexa app.
Amazon is also an important revenue stream for fellow drinks business Campari Group. UK marketing director Nick Williamson believes the failure of other players to make DTC ecommerce work “says something” about the model.
“There are people much better placed than ourselves that do this – the obvious example is Amazon – and our business with them is absolutely booming. It is growing extremely fast. I’m not surprised about that,” says Williamson.
The competition from direct-to-consumer brands is encouraging healthcare giant GlaxoSmithKline (GSK) to rethink the way it connects with customers. Head of global categories, Carlton Lawson, considers the small players with close customer relationships as more of a threat than the likes of Unliever or P&G.
This opinion is echoed by GSK chief digital officer Marc Speichert, who acknowledges that working with retailers can cause a brand to “lose touch” with the shoppers, a reason why the healthcare company wants to become more “consumer obsessed”.
“When a small company knows our consumers better than we do, that’s just not acceptable,” says Speichert. “We should know them better than anyone else.”
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