How Can CPG Brands Excel Using DTC?

In our previous blog, we had discussed the framework for choosing the CPG eCommerce route. This blog will discuss the success stories and challenges in choosing the Direct-To-Consumer (DTC) route. Among the available routes for CPG Ecommerce, launching or acquiring DTC Channels contributed to 40% of sales growth in the sector ^[1]. DTC brands manufacture and ship their products directly to consumers without relying on retailers or other middlemen. This might allow the brands to sell their products at lower costs than traditional CPG brands and help them maintain end-to-end control over the making, marketing, and distribution of products.

Why Should CPG Brands Ride the DTC Wave?

• With more than 30000 new products released every year, CPG brands require deeper insights about customer needs to fuel product innovation.
• CPG brands that invest in DTC models will build direct relationships with customers and foster loyalty. According to recent research, 21.4% of consumers choose DTC brands over wholesalers because of loyalty programs offered ^[2].
• Brands can identify pain points across the customer lifecycle and personalize the omnichannel customer experience. For example, Nestle launched a DTC online shop called the KitKat Chocolatory that allowed customers to design their own premium chocolate bars by picking from four types of chocolate and 14 ingredients.
• Around 84% of consumers have shopped online since the start of the pandemic. For almost 150 million of them, it was the first time they’d ever shopped virtually ^[3]. CPG brands should take advantage of this change in consumer behavior.
• Boost from Venture Capitalists: Between 2015 and 2019, almost 60% of the money invested ($3.3 Billion) by Venture capital firms was put into DTC brands ^[3].

Parameters to Evaluate the Effectiveness of DTC Brands

To understand if a DTC brand is truly successful, in addition to YoY Revenue Growth, there must be a list of parameters to evaluate the effectiveness of DTC brands.

• Control over Social Presence: A measure of how effective the brand is in controlling its reputation and customer perception across social media.
• Organic Customer Growth: A measure of how effective the brand is in adding new customers or enhancing sales internally (via Existing Customers – Referrals)
• Product-Market Fit: A degree to which a product satisfies strong market demand. Certain factors that influence product-market fit are strong word of mouth and customer retention.
• Level of control over Distribution Channels: The brand’s level of control over the channels through which end customers receive the products.
• Level of Convenience Offered: A measure of convenience offered to the customers to assist them effectively in their Path-to-Purchase (Customization and Personalization)

DTC Success Stories

Over the past few years, the early adopters of the DTC model have seen tremendous success and gained a significant advantage over the competitors. This is true for both incumbents and new entrants. Certain well-positioned start-ups are successfully competing with the biggest CPG brands.

Digitally Native Brands:

• Casper took on the mattress industry by eliminating unnecessary choices offered to the consumers and enhancing the customer experience by redefining the path-to-purchase.

• Dollar Shave Club took on the razor industry by connecting with their customers on an emotional level and making quality products more affordable for customers through subscription services. This helped them in achieving a stable demand and recurring revenue.

• Lola developed a strong bond with its customers by tearing down the stigma surrounding feminine care and sexual health products. Lola offers a convenient, transparent, and customized way for women to get exactly what they need for their period every month.

Legacy Brands:

• A well-established giant like Coco-Cola started riding the DTC wave a decade back through its ‘Share a Coke’ initiative.  Through Cokestore.com, it offers personalized bottles of aerated drinks, apparel, and gifts. Having access to first-hand consumer insights for years, Coco-Cola quickly reacted to changing consumer sentiment on sugar and health. 

• Similarly, PepsiCo launched its DTC websites Snack.com and Pantryshop.com with a wide variety of products.

• Oral Care giant Colgate recently launched its Smart electric toothbrush (with sensors and an app to track progress and provide brushing guidance) and Teeth whitening kits under its DTC channel shop.colgate.com. 

DTC Failure Stories

While several brands have succeeded in venturing into the DTC space, a few brands couldn’t capitalize on the DTC wave.

• Cocodune wanted to transform the swimsuit shopping experience and hence came up with the “free home try-on platform” approach. Customers can either buy the product if they like it or return it free of cost. This piqued the interest of customers, and the idea went viral initially. But the brand failed to consider high shipping, return, and cleaning costs. This, coupled with the seasonal decline of swimwear demand and an unanticipated currency hit (tied to Brexit), forced the brand out of business.

• Raden sold smart suitcases that can charge mobile and transmit their location to an app. Initially, the idea sat well with the customers, but people often don’t replace/misplace their suitcases, making recurring business almost impossible. Soon external factors came into play. Airlines banned smart luggage with non-removable lithium-ion batteries citing fire risks. Though Raden batteries were removable, removing them would wipe out their key features and value proposition.

• Brandless offered an extensive range of daily-use lower-end CPG products for just $3 by doing away with the “unnecessary expense” of branding. Brandless continued to experiment with its pricing strategy. It offered a new price point of $9 for slightly superior products and a subscription model with a $36 yearly membership fee (included free shipping). Brandless bet more on the price-conscious customers and severely undermined the concept of ‘Brand Loyalty’. Brandless also relied heavily on “word-of-mouth” marketing for its wide variety of products. Their repeat purchase ratio fell every quarter, and costs started catching up, forcing them out of business.

Challenges Faced by CPG Brands That Take the DTC Route

Let us look at some of the obstacles CPG brands are facing while taking the DTC route:

• Creating an easily navigable website and app is challenging. Brands need to have a “customer-first” mindset while building an app to enhance the customer experience.
• Opening up DTC channels can create conflicts with Traditional retail partners for well-established incumbents. Therefore, brands with both DTC and retail partner options must work to keep the latter happy.
• Brands launching their DTC channels should have proper teams in place for creating diverse content. Such content creation should be aimed at capturing Organic search traffic.
• Differentiating a DTC product from its competition is increasingly difficult. This requires a unique value proposition from the brand, thereby resulting in brand recognition.
• Increasing advertising prices on social media platforms is cutting into profit margins of DTC brands. Therefore, they need to plan their media buying effectively to improve their margins.
• Increased demand for convenience, faster turnaround, and intraday delivery has challenged the current DTC brands to stay ahead of foreseeable (and sometimes unforeseeable) challenges.

In summary, CPG brands should navigate the challenges and keep up with the changes in the industry to stay ahead of the competition and excel in the DTC space. Watch this space to know more about the upcoming channels in CPG eCommerce.

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References:

1. https://www.shopify.in/enterprise/direct-to-consumer#:~:text=Data%20compiled%20in%20The%20Direct,sales%20growth%20in%20the%20sector.&text=By%202022%2C%20the%20number%20of,time%20high%20of%20103%20million.
2. https://www.voucherify.io/blog/the-guide-to-building-customer-loyalty-for-dtc-brands#:~:text=According%20to%20the%20research%20done,9%25%20in%20the%20retail%20category
3. https://www.shopify.in/enterprise/direct-to-consumer
4. https://www.degdigital.com/insights/biggest-challenges-dtc-brands-facing/
5. https://www.yext.com/blog/2020/06/the-3-biggest-challenges-cpg-brands-face-when-going-dtc-and-how-to-address-them/
6. https://www.wsj.com/articles/dtc-marketing-is-disruptive-and-popular-but-it-isnt-easy-11548706306
7. https://www.askattest.com/blog/strategy/brandless-strategy
8. https://www.cbinsights.com/research/direct-to-consumer-retail-strategies/