Making the shift from direct-to-consumer (DTC) to retail can be challenging. Below, we unpack how to prepare for this change with a retail distribution strategy.
Many new consumer product businesses have launched as DTC businesses in recent years, bypassing the traditional retail brick-and-mortar networks and enjoying the lower barriers to entry with online sales and market channels. DTC is a much simpler and more cost-effective way to launch a new business. There have been many success stories around this model and innovations that have challenged the status quo for how products are sold.
Dollar Shave Club (DSC) famously revolutionized buying razors in an online subscription service and quickly garnered a measurable share of the razor market long dominated by one or two brands. However, five years after its launch, DSC was bought by Unilever, and the brand is now available for purchase today in traditional retail stores from Walmart to CVS to Target. In fact, even with the explosion of sales in online channels like eCommerce and DTC, 81% of consumer spending in 2021 occurred in a traditional retail environment versus online.
Now, there is a proliferation of native digital brands looking to enter the traditional retail environment to capture the growth and volume afforded via brick-and-mortar locations. However, shifting to a retail business from DTC can feel daunting. The demands of retail partners can be overwhelming, and the systems and processes required to manage this new business can be challenging to integrate with the existing DTC structure – not to mention, the squeeze on margins at retail from slotting costs, trade spending, and shopper marketing.
To succeed in this environment and grow a profitable retail channel, it’s important to learn the key considerations for setting up a new retail sales channel and how to ensure your systems and processes give you visibility to grow your business and profits. The growth opportunities of retail are endless, but the business can look very different. Our DTC Maturity Model will help to guide you along the path.
Planning for Retail Growth
The first step along the path to a retail distribution strategy is planning. In the early stages of maturity, organizations are often more reactionary and move toward a more deliberately planned approach.
- Distribution: There are more than one million retail establishments in the U.S. Deciding which retailers to target for distribution is often the first step. Early in the growth journey, a company may be more responsive to an inquiry or a relationship with a particular retailer. However, moving toward amore formalized process to target distribution opportunities, along with deliberately cultivating retailer relationships, will help to ensure greater success. Factors to consider are the retailer’s share of market and growth, alignment of the retailer’s positioning and consumer segments with your brand, and costs of entry, including costs to get on (and stay on) the shelf.
- Retailer Performance Expectations: All retailers have an expectation of how products will perform to stay on shelf. Some are more rigid about those expectations than others, and some will give you more time to show performance than others. As part of your planning process, make sure you understand what those requirements are, how they are measured, and how long you have in order to show performance.
Building a Retail Structure
The next step is to build your internal systems and processes to manage your new business in the retail channel. The fundamentals of this business can sometimes feel like the polar opposite of the DTC business you have been cultivating for so long.
- Staffing Roles/Responsibilities: Early in the process, it might make the most sense to tack on responsibilities for this new channel to existing staff as you see how it unfolds. For the organization to mature in the retail channel, it will be necessary to clearly delineate roles and responsibilities, as well as cultivate skills required for each channel. Developing a sales team with distributor and retailer relationships looks very different from the DTC world.
- Assortment and Placement: Similarly, when you are new to retail sales, your product mix may be virtually identical to your offerings in DTC, but as you learn and grow, understanding the physical shelf dynamics will help you to customize your offerings to the retail world, including such things as size, packaging, or pricing architecture.
- Order to Cash Cycle: An order in your new retail world looks very different and has very different implications than in the DTC environment. Ordering will require different capabilities and trigger different processes, including warehousing, fulfillment, and shipping terms for large quantities of goods. The cash cycle with retail distribution also has a unique structure, including payment handling and terms, especially when adding in any expected promotions and discounts.
- Supply Chain: Chances are, your supply chain systems are set up to manage individual orders and order fulfillment processes. With retail distribution, you are now selling in bulk to a small number of customers. Early stages of the model generally try to improvise with existing systems to accommodate this new business. However, a true investment in the future of this channel requires building processes to optimize your retail distribution strategy and related retailer-driven supply chain scorecards, sales, and financial metrics, while aiming for seamless integration with existing business architecture.
Implementing to Stay on Shelf
Gaining distribution is only the beginning of the process. The true test of your business will be performance on the shelf in the first six months to one year. Some retailers will only give you 90 days to show proof of performance; as such, planning for early success is key.
- Trade and Shopper: One of the draws of a DTC business is the elimination of the costs and challenges of managing promotions and ads at the retail level. Entry into the retail channel requires knowledge, planning, and systems to manage trade promotions and shopper marketing. Mishandling these elements runs the risk of shrinking or absent margins or losing shelf space before you have a chance for consumers to try your product.
- Merchandising: On a physical shelf, the competition sits right next to you. Comparisons on price, pack size, and packaging appeal are all immediately obvious. Out-of-stocks can have dire consequences, and your physical placement on the shelf can make or break your success. Along the maturity model, a brand moves from a reactionary mode of handling merchandising to a more deliberate strategy to manage and optimize the physical shelf, including potentially a dedicated merchandising team and system.
- Sales Analytics: In an environment where you can be taken off the shelf if you don’t perform, having access to and analyzing data is key. When you’re only looking at your internal sales and shipment data, it’s difficult to have a perspective on how you’re doing, especially when you are accustomed to looking at DTC numbers. It’s not uncommon to think your brand is doing well and then to look at the competitive set data and realize that you’re at the bottom of the category. It’s critical that you plan to have access to the category-level data to examine and understand your performance drivers and metrics, as well as the measures your retail partners care about – all of which allow you to course correct as needed.
Going Forward: Retail Distribution Strategy
Unlocking the full potential of the market where more than 80% of sales happen at the retail channel requires a thoughtful and planned-out approach as well as an investment in people, processes, and systems.
Take our DTC to Retail Self-Assessment and download the full DTC Maturity Model to examine where your business might be today and where it may need to head to fully maximize the opportunities in the retail channel. Clarkston is here to help you navigate your expansion to retail to maximize sales and profits for your growing business.