Getting Direct-To-Consumer Right
Paradoxically, the most important step for consumer goods companies seeking to launch a new direct-to-consumer (DTC) site is to resist the urge to set up a direct-to-consumer site — at least until they get some critical homework out of the way. While many traditional CG companies are feeling tremendous me-too pressure to field a DTC offering, success comes to those that approach it with a well-conceived strategy that serves the consumer and business alike.
As Ben Lerer, managing partner of venture firm Lerer Hippeau, told Harvard Business Review, “There’s still a lingering idea that DTC is innovative. That simply isn’t the case anymore … It’s about how you do it now that’s innovative.”
But even consumer goods companies that are just getting started can see DTC success by leveraging best practices gleaned from those that have already forged ahead. Read on to uncover the steps CGs can take to reap the benefits of getting DTC right.
Pressure to enter the DTC space ramped up with the significant consumer behavior changes wrought by the pandemic. According to research by Pymnts.com, 55% of consumers in the past year have used DTC channels to purchase CPG products or nonperishable items that are used on a regular basis, and 73% of new DTC purchasers plan to maintain some of these habits.
Opportunities Lie in Better Planning
CG companies developing DTC businesses now have the opportunity to rocket past those that are foundering by developing and executing on a DTC plan that offers real value for consumers as well as the brand. The four steps outlined below can guide them on their journey.
#1. Define the Consumer Value Proposition
Consumers accustomed to relying on retailers to supply a given DTC product need a reason to change that habit. During the pandemic, the leading consumer DTC drivers were to find a full range of products in stock (44% for food/beverage, 45% for non-food) and because it was the only way to get the product (24% and 23%), according to Pymnts.com data.
Impossible Foods, for example, has been contemplating DTC since 2016 and finally slated a launch for late 2020. But when the pandemic kicked off a massive consumer shift to home grocery delivery, the brand accelerated its launch and quickly exceeded its internal revenue expectations, even without promotion.
Some CG companies decide to offer exclusive, online-only products in their DTC businesses, or, like PepsiCo and Kraft Heinz, only large items or bundles. Others appeal to consumers’ interest in ensuring a never-ending supply through subscriptions or personalization. L’Oreal’s new “Perso” smart device enables shoppers to devise custom formulas they can try on virtually. Setting up a platform made up of these custom formulas sets the stage for regular experimentation and recurring purchases. The DTC leader expects half its sales to come from online channels by 2023.
Making this call starts with understanding target consumers and what they’re looking for from a particular segment. Expectations for food items, for example, tend to be very different than apparel or beauty. But these decisions are also heavily influenced by what model makes the most economic sense, and the need to mitigate channel conflict.
#2. Establish a Clear Business Case
Successful DTC sites rarely arise simply out of competitive pressure. Those that thrive typically do so because they met the needs of both the consumer and the consumer goods company. Common goals include generating incremental sales, differentiating the brand, fostering brand loyalty, generating first-party consumer data and insights, or a combination of these.
For example, Procter & Gamble’s stance is to be channel agnostic, so its DTC presence is about getting closer to customers and deepening understanding of their needs and habits, including their purchase habits.
Too often, CG companies rush to launch a site without this clear plan and then wonder why it’s not producing. A DTC business plan must demonstrate the ability to scale and deliver growth for the business. Costs such as customer acquisition and retention, IT investments, fulfillment changes, and talent must be offset by the anticipated benefits, whether that’s in direct revenue, or in the new consumer insights that will help drive brand loyalty, product development, and indirect revenue.
To compete in an already crowded marketplace, one global CG company chose to bring in expert consultants to help identify a winning strategy. The consultant built and tested prototypes for new business models, then leveraged user testing and financial modeling to iteratively refine the concepts, to ensure the new models delivered both consumer and business value. This foundation led to the development of technology and data requirements to turn concept into reality.
That work informed a detailed business case that included the full DTC operating model, a data-driven marketing plan, and KPIs. The plan gained executive committee approval, and its implementation put the CG on track to deliver $250 million in DTC revenue and $60 million in operating profit over four years.
#3. Ensure a Solid Foundation
One common mistake CG companies make in pursuing DTC is to treat it as just another channel — and assume they can use the same infrastructure to service it. In reality, DTC is a whole new business model, retail, and requires re-tuning everything from marketing to analytics to fulfillment for this new way of doing business.
An e-commerce platform is an obvious requirement, but all those new orders must be fulfilled, and CG supply chains are built around pallets and cases, not each-picks. Many CG companies partner with 3PLs or specialty distributors for this function.
While CG companies are generally more advanced in their overall analytics acumen than retailers, many lag in the ability to collect customer-specific data and leverage insights from it. According to the CGT & RIS, “Retail and Consumer Goods Analytics Study,” 75% of CG companies admit just “basic” levels of reporting/analytic capability for consumer insights (profiling, analysis), and 87% say the same about their current personalization analytics capabilities. Optimizing consumer data requires investing in the infrastructure required to collect, organize, analyze, and apply data strategically.
NIKE, which has always put the consumer at the center of its decision-making, recently realigned its organization so its data teams sit alongside the creative teams. The move supports its plan to rely on direct relationships with consumers to drive personalization and product innovation.
All those new functions also require the right talent, including analysts conversant with consumer data, e-commerce experts, marketers, and supply chain pros experienced at catering to the consumer. Experts recommend CG companies create dedicated teams for their DTC efforts in order to give the initiative its proper focus.
#4. Test, Learn and Scale
That DTC function should be a team effort, working cross-functionally to learn and iterate as they go. That learning starts by identifying specific products and markets to test concepts and infrastructure, ensuring that these tests are well-coordinated across the enterprise.
Because of their lack of retail skills, urgency to enter the market, and the importance of getting it right, many CG companies turn to partners to get their DTC efforts off the ground. Partners bring depth of experience, economies of scale, and insights and best practices gleaned from participating in a wide range of DTC projects. CG companies can rely on well-prepared partners to fast-track their projects, avoid mistakes, and determine which functions they eventually want to take in house. Kraft Heinz, for example, continues to use a third-party e-commerce provider, while PepsiCo built its PantryShop.com and Snacks.com sites in-house.
Bimbo Bakeries USA leaned heavily on its e-commerce provider to quickly get a DTC business off the ground in the midst of the pandemic. The snack maker uses the site to offer pre-made boxes featuring its Entenmann’s, Sara Lee, Thomas’, Takis and other brands based on consumer needs, such as movie night and school snacks. The brand sees its DTC offering as positively impacting its retail channels and providing valuable consumer insights it can leverage for product development.
Initial DTC plans should also include strategies to iterate from what pilots reveal and scale those small projects into full rollouts — and then flex as new market trends emerge. When the balance of demand suddenly shifted away from its retail customers and toward DTC, for example, pet food brand The Honest Kitchen relied on the expertise of its 3PL to help it shift orders and rebalance inventory levels to meet new demand patterns.
Full Commitment Is Key
It’s easy to think of DTC as just another way to serve consumers already familiar and loyal to a brand. But the DTC sites posting impressive growth scores view their offerings as far more than just another sales channel. Instead, they approach launching a DTC business as launching a business, period, with all the requisite due diligence that entails.
At the end of the day, consumers want to buy their consumer goods where they want to buy them, and brands need to be able to step up and sell wherever that is — including DTC. But no DTC strategy will succeed unless it is rooted in a sound business case that considers both company and consumer needs.
