In our of our previous posts, we explained the root causes of the Retail Apocalypse. In this post, we’ll focus on the growth of Direct To Consumer or DTC, and how it is accelerating the death of traditional retail.
Today, more and more established product brands bypass traditional distribution and take a shorter route to put their products directly in consumers’ hands.
In particular, Consumer Product Goods (CPG) brands and Fast-Moving Consumer Goods brands are growing their share of direct-to-consumer sales.
To explain this, one could argue it’s only about profitability, but as we’ll explain in this article, there’s much more to it.
Starting with detailed definitions of DTC, CPG, and FMCG, we’ll then dive in and explore why DTC is an excellent strategy for brands dealing with CPG or FMCG.
By explaining this strategy, we’ll cover how the growth of direct to consumer is one of the root causes of the Retail Apocalypse.
What is Direct-to-Consumer, DTC or D2C?
Direct-to-consumer is a retail strategy that brands can use to access consumers directly, without going through distributors.
These distributors can be online or offline, but they will generally take a margin to sell the products in exchange for their services and access to consumers.
In a direct-to-consumer business model, a brand will control the entire purchasing experience with the customer without any middlemen or distributors.
Direct-to-consumer can also be referred to as DtC, DTC, or D2C.
What is the difference between DNVB and DTC?
You’re likely familiar with Peloton, Bonobos, Dollar Shave Club, or Casper.
Who hasn’t thought about sampling the five pairs of glasses Warby Parker allows consumers to try before buying?
Whether you need designer glasses or a fresh razor to show up in your mailbox, these digital native vertical brands (DNVBs) offer textbook examples of how DTCs should operate.
DNVBs are products of the digital age and, by definition, are DTCs. In other words, DNVBs are just direct-to-consumer companies born in the digital age.
Here’s how a DNVB model starts:
- Born on the internet
- No initial brick-and-mortar storefront
- Source products directly
- Sell products directly to consumers
- Uses technology to scale
Unlike traditional retail businesses, DNVBs control everything about product distribution in a vertically integrated company. So, to sum it up, it’s Direct-to-Supplier and Direct-to-Consumer or D2SD2C if you like to shorten words.
Today, instead of solely describing a method, the term DTC defines a specific distribution channel. In this case, DNVBs are part of the DTC business, but they do not stand alone in the DTC space.
More and more established brands are joining the DTC party!
What are Fast-Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG)?
Let’s start with the basics: do you eat Oreos or Pringles? or have you purchased toothpaste, deodorant, or dog food?
All of these are classic examples of consumer packaged goods (CPG), but only some are examples of fast-moving consumer goods (FMCG)
Overall, you could use the same term in retail, but if you want to get technical, the main difference is the purchase frequency.
FMCGs are technically a subset of the CPG category. However, FMCGs are, by definition, consumer products that are purchased with a relatively high frequency as consumers use them every day.
Great examples of FMCG are toothpaste, potato chips, or shampoo, which are products that consumers tend to repurchase frequently for daily consumption.
On the other hand, CPG includes a broader scope of products with a short shelf life but is not as fast as FMCGs.
For most people, these two categories include the same types of products, and the only nuance is in how short is the shelf life.
CPGs and FMCGs include products consumers use every day and need to restock regularly, including the following categories:
- Food items
- Beverages
- Cleaning products
- Personal care items
- Over-the-counter drugs
From a retail standpoint, CPG and FMCG products have a few characteristics:
- High volume
- Short shelf life
- Low price per unit with low contribution margins per unit
- Low engagement and effort to choose the product
- High repurchase frequency
The Growth of Direct-to-Consumer Removes the Toll of Middlemen in Traditional Retail Distribution
In a nutshell, every CPG or FMCG goes through a similar process.
These products go through multiple channels before consumers ever see them on a store shelf.
Here’s what the CPG supply chain looks like:
- Manufacturer
- Importer
- Distributor / Wholesaler
- Retailer
- Consumer
The path from the brand to the consumer reads like a long and winding road.
Eventually, products will get to the consumer, but many middlemen are involved in the journey.
Of course, you have to consider that every middleman in the process takes a cut of profits, reducing margins for brands.
This is where direct-to-consumer increases margin by streamlining the entire process.
When a brand moves away from the traditional third-party method of getting products to the marketplace, they eliminate all middlemen involved.
- Manufacturer
- Own Store (online or offline)
- Consumer
As you can see, you’ll find no middlemen as products get to consumers directly from the manufacturer via the brand’s own store network.
Today’s Consumer is Ready for a Direct Relationship with Brands
DNVBs do many things right, but their obsession with the consumer’s experience is an area that established brands are looking at closely.
Modern consumers have much broader access to brands thanks to online shopping and technology.
The modern consumer is omnichannel in their behavior, meaning that they jump seamlessly from one channel to the other.
In this sense, the traditional retail experience is not enough to attract consumers and generate long-term retention.
Consumer values continue to evolve, along with their expectations. And today’s consumers value convenience and unique experiences more than anything.
So, to make them happy, brands should strive to reach consumers in every channel and offer them a unique experience to ensure repurchase.
Customer studies, focus groups, and other types of market research cannot substitute for regular real-world consumer interactions.
In a more traditional retail distribution approach, CPG and FMCG brands have limited interactions with customers. Instead, it’s the retailer that develops a direct relationship with consumers through its distribution network.
In other words, brands are removing the middlemen, the big box stores, the discount department stores, or the hypermarkets.
By creating a direct relationship with consumers, brands get first-party high-value data to deliver value to each unique consumer. This is the foundation of a 360 view of the customer.
E-commerce is Paving the Way for the Growth of Direct to Consumer
We’re no longer living in the dawn of the digital age.
Companies that haven’t embraced the power of digital channels are missing out on a new kind of relationship with consumers.
It’s no longer about having an online presence.
Having a website is not just about brand awareness and storytelling. Most brands realize that their websites are a powerful tool to build a direct relationship with their customers.
In this sense, brand websites are becoming their online store-fronts to interact and engage directly with their customers. In other words, brands are building an omnichannel engagement strategy.
Not only because brands have built their e-commerce stores, but also they have started selling through online marketplaces.
Marketplace commissions are a fraction of the margins that traditional retailers take when selling to consumers.
So brands can sell through online marketplaces and increase their profits, even if they don’t own the relationship with the customer.
In the old model, a brand company needed brick-and-mortar stores to reach consumers. The retailer, who played the gatekeeper, controlled what brands and products they allowed shoppers to buy.
The physical store became the focal point, which meant the retailer, not the brand, owned everything about the consumer’s shopping experience.
Through the help of e-commerce, brands are embracing the growth of Direct-to-consumer to control the entire narrative.
Direct to Consumer is a Smart Move for CPG and FMCG Brands
There is an undeniable advantage for any brand of cultivating a relationship with end-consumers. By focusing on gathering data from customer touchpoints, a brand can better understand its customers.
According to a study from Brandshop, 88% of consumers prefer buying directly from a brand if they are given the option.
Consumers expect an engaging shopping experience when they buy from the brand’s online store and physical stores.
But for CPG and FMCG, there is a strategic advantage to growing their D2C business.
When they cut out the middlemen, they take away their tolls and increase their margins.
Sourcing products directly from the manufacturer and selling them directly to consumers can significantly increase their margins.
Those additional margins mean a CPG or FMCG brand can invest more in marketing than they could if they remained tied to regular retail distribution.
These brands can increase their customer acquisition costs, as they have all the data they need to understand their customers and increase their lifetime value.
In turn, a higher lifetime value pays for the increase in customer acquisition costs.
It is no coincidence that CPG and FMCG brands are embracing the growth of direct to consumer.
As we’ll see below, some of the most established global brands like L’Oréal, Adidas, Nike, Unilever, and Nestlé are investing massively to scale their D2C business.
These brands alone expect to generate more than 50% of their revenues from DTC by 2025, if not sooner!
In summary, a DTC business model improves the following aspects for brands:
- Increase revenue
- Increase gross margins
- Minimizes the brands’ dependence on third parties
- Allows deeper relationships with consumers with higher lifetime value
That last point is what drives the success of digitally native vertical brands.
The Growth of Direct to Consumer is Impacting Traditional Retail
When a CPG brand moves to market directly to end consumers, there are many clear advantages.
However, there are multiple casualties in the process. As you guessed, those casualties are the middlemen or traditional retail distributors.
Traditional retailers are watching their entire business model crumble.
More than 135 big retailers have filed for bankruptcy since 2015 in the great Retail Apocalypse. Of course, the impact of the Covid19 pandemic accelerated the end of traditional retail, but it’s not the root cause of the Retail Apocalypse.
These companies built their entire business model upon being the point of distribution between brands and consumers.
If consumers go right to the source and purchase directly from brands, it means they’re not buying from retailers anymore.
Here’s something else suggested by a 2018 study of DTC models—manufacturers no longer send their hottest new products through retail channels. Instead, they reserve those hot commodities for their direct-to-consumer channels.
This is a process called selective distribution, in which brands keep the best products within their D2C channels.
So, if traditional retailers want to survive the Retail Apocalypse, they must lose their dependency on branded products.
They can either start their private labels and implement a direct-to-consumer approach. Or they can build stronger relationships with customers by offering better retail experiences so that customers continue to purchase from a distributor.
We’ve discussed DNVBs as an example of D2C, but the growth of Direct to Consumer is everywhere in retail.
Many established retail brands are investing massively to develop their DTC business.
Five Examples of Established Brands Embracing the Growth of Direct to Consumer
Established brands moving to DTC channels include both big and small players. As we’ve said before, embracing DTC channels is a brilliant move for brands.
Here are five established brands that are taking full advantage of the growth of direct to consumer business:
L’Oréal
L’Oréal is a global hair and skincare company with many top-of-mind brands.
The company owns brands like its namesake brand L’Oréal Paris and some global brands like La Roche-Posay, The Body shop, Biotherm, Lancôme, or Garnier.
L’Oréal is also dedicated to continued expansion in the DTC market. Currently, the brand offers consumers tools designed to help them customize makeup colors online. L’Oreal is also committing to market on Amazon due to the platform’s status as the beginning point for consumers to shop for cosmetics.
L’Oréal is massively investing in its e-commerce infrastructure. In a 2020 interview, former CDO Lubomira Rochet said the company went from zero to 25% of sales from e-commerce since 2010.
The company has also set a very ambitious target to reach 50% of e-commerce sales by 2023.
This is a really impressive share of sales to reach in such a short time.
Nike
Everyone knows Nike. It’s the world’s largest sports brand and is not precisely a CPG brand, but it perfectly fits this list.
By the end of 2020, after a year in a global pandemic accelerating the retail apocalypse, Nike is thriving, and its share price hit an all-time high.
Over the last years, Nike has implemented a “Consumer Direct Offense” strategy, moving from third-party retailers to having a direct-to-consumer approach.
Nike’s strategy is summed up in the following lines:
- Cut back on wholesale distribution and raise the bar for brand experience with wholesalers, which remained in the network.
- Invest massively in content on digital channels
- Focus on community building with native Apps
- Deploy customization, data analytics, and logistics
In 2020, Nike generated 35%, more than a third of its revenue, from DTC. This share is up from 15% back in 2010. Now that is a steep acceleration!
Adidas
The second-largest sports brand in the world refuses to be left behind by competitors such as Nike.
Adidas has set up a strategy to generate half of its revenue from DTC by 2025. This threshold is no easy task, but the brand is investing massively to get there.
The brand has set its sights on doubling e-commerce sales and strengthening its data analytics and loyalty programs. Adidas also promises to refocus on women’s apparel and recently announced a new supportive activewear line designed for women.
Overall, the brand is trying to catch up with the DTC strategy implemented by its largest competitor.
Unilever
Unilever is one of the world’s largest CPG producers within different categories, from food to cosmetics.
Among the major brands from Unilever, they own Dove, Q-tips, Lipton, Tresemmé, Knorr, Maille, Hellmann’s, Magnum, or Ben & Jerry’s.
In 2016, Unilever wowed the world with their $1 billion acquisition of DNVB Dollar Shave Club in the U.S. This acquisition marked a complete strategy of moving into the direct-to-consumer arena from razors to mustard.
Speaking at a conference, Unilever’s former CMO stated that “Direct to consumer – whether that be content or direct-to-consumer sales – has changed significantly. The opportunity for a company like ours to serve consumers directly is very exciting.”
Nestlé
Along with Unilever, Neslé is one of the biggest CPG producers globally, from food to cosmetics.
Nestlé owns some of the most influential brands like Nespresso, Nescafé, Gerber, Nesquik, Perrier, San Pellegrino, Nestea, Kitkat, or Purina.
Nestlé has made two significant acquisitions in the last couple of years, signaling their intent to move into DTC, especially in e-commerce.
With the acquisition of the U.S. meal delivery company Freshly in 2020, Nestlé moved to have a “better understanding of what and how people eat at home.” You value collecting data in a DTC strategy, considering that Neslé paid $950m for Freshly.
Continuing in this move, in February 2021, Nestlé completed the acquisition of SimplyCook, a U.K. recipe kit company.
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