Direct to Consumer Brands are Not Yet a Threat to Established Brands

In a report sent to clients and the trade press, GroupM shared that direct to consumer (DTC) brands were not only harmless but they fail to grow at the same pace as the legacy companies they claim to be coming after.

“While not all DTC companies are small, few of the companies which have emerged have exceeded a 1,000 employee threshold,” said Brian Wieser, Global President of Business Intelligence at GroupM, in a blog post.

“Arguably, it is equally – if not more – accurate to think of emerging DTC businesses as the form that small business increasingly takes. It’s not yet clear that many of them will become giant killers and collectively take share from a given industry’s largest companies.”

 
 

Across the board, experts agree that not every company has the culture or operational advantage to get the ball rolling with DTC, with CPG companies lacking the essential talent and mindset to see it through to the end.

At the Forrester Consumer Marketing 2019 event this week, the DTC model was a key focus, with research analysts presenting the reality of the unsustainable business model, coupled with the operational challenges in redirecting an established supply chain & distribution network around a real-time demand model.

“Yes, there’s a ton of excitement around the new wave of DTC brands, and they’re taking enough market share to demand being taken seriously,” said Melissa Parrish, VP of Forrester in a blog post.

 
 

“But it’s important to get beyond the hype and truly understand what’s driving this trend so that both the nimble DTC companies and their much larger established competitors can make the best decisions about how to sustain and grow their businesses in the future.”

This includes companies such as The Dollar Shave Club that were formed and funded for the sole purpose of being a loss leader, with the end goal being an exit – which came in the form of an acquisition by Unilever. The sentiment has been echoed by consultants at Deloitte while adding the operational challenges that come with executing on a direct relationship with customers and risking existing relationships with distributors.

“Opening up direct-to-customers channels creates new, profitable opportunities for brands, but it can also create conflicts with their traditional channel retail partners,” said Jennifer Lee, National Omnichannel Leader at Deloitte.

“Product and offer differentiation become a crucial strategic decision, as is careful attention to pricing strategies for the various channels used. Understanding how customer segments shop across product categories can help match the appropriate channel and offering with the most receptive segment.”

When the operational model already has a DTC channel, adding a digital stream only augments the approach. This is the case with Nike, which has DTC retail outlets and counts the channel as a contributor towards 24% of its 2016 sales, coupling in sales generated via its eCommerce store.

“Nike plans for its DTC sales to grow by almost 2.5x in the next five years, from $6.6 billion in fiscal 2015 to $16 billion by fiscal 2020,” reporter MarketRealist. “The company beat its own target of $5 billion in DTC sales by fiscal 2015 by over $1.5 billion.”

Both online and offline, the DTC model of Nike take place with owned assets as opposed to outsourced partners, a tactic competitor brands opted for which in turn hurt future customer data acquisition goals. The control that Nike has over its owned channels gives it leeway over pricing, inventory, and merchandising decisions.

Taking a cue on the owned media approach, instead of relying on Amazon or Alibaba, last week Molson Coors launched an eCommerce store for Blue Moon, a follow up to the Coors Light store launched in February, with both sites serving as a data and brand visibility play.

“A direct-to-consumer website allows us far deeper insights around clickstream data, consumer behavior, how they operate and where they live,” said Trey Harshfield, Global Director of E-Commerce, in an interview with DigiDay. “It’s effectively solving another problem of driving awareness around buying beer.”

Not too far behind is Kellogs, which is currently on the hunt for the experienced candidate that can digitize supply chains and drive integration solutions, while Disney anticipates burning $3.4 billion over the course of three years in its bid to compete with Netflix. The losses include reduced licensing revenue, lower earnings per share due to the acquisition of Fox, and all marketing expenses around Disney+, the upcoming over the top (OTT) video on demand service.

Across the board, experts agree that not every company has the culture or operational advantage to get the ball rolling with DTC, with CPG companies lacking the essential talent and mindset to see it through to the end.

“Direct-to-consumer is a symptom of the disease,” said Sir Martin Sorrell, chairman of S4 Capital, adding that DTC is a tactic that is seen as a solution to customer disconnect, while the reality is that the true basis behind the disconnect is yet to be addressed by companies trapped in a tactics mindset.

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