Direct-to-consumer (DTC) sales have been a significant, growing trend for the consumer packaged goods industry (CPG) over the last decade. In this ever-evolving channel, in which manufacturers of products target, reach, engage and deliver their goods directly to the end consumer (by-passing wholesalers, e-tailers, and traditional retailers) many have been named winners, while other long-standing brands continue to struggle. This channel is becoming an important investment area for CPG companies and the need for investing in direct-to-consumer during the coronavirus pandemic increases.
According to recent studies, approximately 79% of Americans now shop online, on the internet, or their phones, up from just 22% back in 2000. The emergence and ongoing evolution of the internet, and the rapid behavioral adjustment and comfort of consumers to buy online, has removed significant barriers of entry into the DTC channel for emerging small to medium size organization, allowing manufacturers and brand owners to have end-to-end control of their products and their brands. Companies can maintain their brand identity and relationship with the consumer from start to end of the product lifecycle, and throughout the consumer journey.
The DTC Evolution
As DTC evolved, digitally born companies took advantage of changes in barriers of entry and have disrupted a plethora of CPG sectors by engaging directly with their consumers.
For almost every CPG category there seems to exist a new DTC digitally-born company: Casper for mattresses, Warby-Parker for glasses, Allbirds for shoes, and Away for suitcases; the list is long and the traditional companies in these sectors they disrupted are still recovering and playing catch up after missing the DTC trend.
As established traditional brands started to react to these DTC disruptors, they have embarked on a multi-channel and omnichannel strategy in which they have maintained traditional channels via wholesale and brick and mortar retailers, while launching a new path aiming to reach consumers directly via investing in direct-to-consumer. Some companies have successfully done so; NIKE, Trek bikes, and The Gap have maintained their own brick and mortar stores, and in some cases sell through other online platforms as well as retailers and wholesalers.
Other companies have been struggling to define the right consumer path to purchase without disturbing the essence of their experience. Even the Spanish retailer Zara has received bad marks in their DTC attempts (or lack thereof).
At a minimum, direct-to-consumer has been considered a brand and marketing imperative for every CPG company – whether it was a profitable channel or not.
Direct-to-Consumer during the Coronavirus Pandemic
COVID-19 tested the world’s preparedness for living in isolation and CPG companies’ DTC methods were tested to their limits and proving that CPG companies need to increase their efforts of direct-to-consumer during the coronavirus pandemic.
During the first week of the COVID-19 stay at home orders (March 23 through 30), there was a 14% increase in the e-commerce marketplace. There was an increase in spending on items that were considered necessary or essential with an influx of new customers to online grocery store platforms. DTC-ready companies in the CPG industry saw increases of sales in their platforms of 200% according to data from Rakuten Intelligence. Even consumer staples and groceries are skyrocketing through their DTC online platforms in addition to traditional retail channels.
But some companies weren’t ready or sufficiently prepared, and the current conditions have tested them to the limits and uncovered many of their DTC flaws. In conversations we had with a CPG company in Pennsylvania who was temporarily mandated to close their 600 brick and mortar stores in March 2020, we discussed the challenges of DTC. When stores closed, they turned to their website for customers to place orders; but their site was not used to high-volume sales. The good news is that during the first 2 weeks (April 1 – 14) of the online site being up for orders, 18,630 transactions were created for a total of $1.76 million – an increase of 48% in transactions and over 35% of sales dollars compared to last year’s online sales. However, there were 3.16 million active users who tried to access the site 22.87 million times – the site would crash repeatedly, and customers were unable to place their orders. In addition to the site not being setup properly, there were no identified resources or capacity to fulfill the large increase in orders. The company is still evaluating ways to fulfill customers’ orders, however even store employees are unaware of the outcome and expected roles and responsibilities going forward.
On the opposite end, Nike has further ramped up their DTC channel. The athletic brand last month eliminated the subscription fee for its NTC Premium service, which provides streaming workout videos, training programs and expert tips from trainers. It’s a similar move to one Nike executed in China earlier, which CEO John Donahoe said drove sales through its commerce apps as a result of increased engagement and led to 30% growth in its digital business in the region. Nike’s robust infrastructure and ability to modify their sales strategy set them up to succeed in this new environment.
However long social distancing remains, ready or not, DTC will continue to be a reality of the future consumer.
The Future of Direct-to-Consumer
It’s fair to say that consumer behaviors have forever changed. In many cases, due to the restrictions COVID-19 has placed on the United States and around the world any fears related to DTC and online shopping have substantially gone away, and most consumers are likely to continue with their newly-formed DTC purchasing habits. Some changing habits will remain long enough to affect those companies that weren’t ready; some habits will go back partially, but DTC has been boosted and accelerated to levels that could have had taken many years under normal circumstances.
Nielsen states, “As shopping behavior stabilizes post COVID-19, many consumers are likely to continue to embrace manufacturer-direct technology solutions. This represents an ongoing opportunity for big and small manufacturers to assess not only their engagement platforms, but also their sales channels.” They go on to further say that in a recent survey on tech-transformed consumption, 4 in 10 online consumers said they were already using online shopping subscriptions, and a further 36% said they were willing to do so in the next two years.
The path to get back to a new normal is unclear, and we’re unsure of the mental state and economic conditions of the consumer, however we are sure that DTC will be a major growing trend and that in order to succeed companies should focus their efforts on developing a DTC strategy that works for them.
In the post COVID-19 world consumers will have adopted short-term behaviors during the pandemic that in many cases will become permanent. Consumers will emerge from the pandemic in a new economic reality, changing commerce behaviors in profound ways. A significant consolidation of retailers will fundamentally alter the competitive and partner landscape.
Investing in Direct-to-Consumer
If you are a CPG company who was an early adopter and was investing in direct-to-consumer, you were ahead of the curve and this investment will have served you well during the COVID-19 crisis. Perhaps you have identified some issues with your DTC execution but those flaws would have been minor compared to the advantages of being able to serve your consumers directly. Many companies encountered issues in their DTC processes but the recovery from any issues will help your company further your brand and relationship with consumers.
If your company has just begun investing in direct-to-consumer, but you weren’t quite ready for the increased demand resulting from COVID-19, it’s not too late. There is no better time to push through any existing barriers to continue with your direct-to-consumer journey. You have a unique opportunity to learn from the CPG companies who are selling directly now – both by adopting what worked well and avoiding their mistakes. You can leverage these learnings to help you leapfrog the competition by adopting best practices quickly and effectively without having to live through their pain.
It is very likely that consumer shopping behaviors will be permanently changed following COVID-19. No matter where you are on your direct-to-consumer journey, it’s not too late to make smart investments and turn the DTC channel into a strong revenue generating business.
To learn more about the best strategy for investing in direct-to-consumer during COVID-19, contact us today.
Contributions by Aley Morris.