Testing Direct-to-Consumer models

Last decade was the rise of many Direct to Consumer(D2C) business models.

The D2C model eliminates the middleman i.e. the retailer and the wholesaler.

So from Brand > Consumer. As opposed to Brand > Retailer/Dist. > Consumer.

Warby Parker, Everlane, and Bonobos are classic examples. And there are many startups in the apparel and fashion space that have been emerging real fast.

Will D2C completely change retail? Don’t think so. But will certainly distract a certain portion of the market.

To succeed in D2C brands must develop a merchant’s mindset.

Imagine Procter and Gamble building a mobile-app + free-home-delivery model with their products like Tide, Head & Shoulders, Oral-B. Will this model work? Will consumers download a P&G app and start ordering from there?

This goes back to the famous question, will a D2C model end retail? Will stores completely go away?

When we look at the fundamentals of shopping, one of the key reasons people walk to a Walmart store or Safeway is the freedom to explore different products with a wide range selection and the trust that the retailer is offering the best price. One could argue that when Amazon has over 500 million products, isn’t it easier to buy from there? Why do people still drive to stores?

Now, this philosophy essentially boils down to three simple concepts: Price, Selection & Convenience (noted from Jeff Bezos’s interviews).

Shopify, Symphony Commerce, Magento are platforms where brands can set up shop online and partner with fulfillment providers to deliver the product; but mastering the art of retailing cannot happen in a short period, gaining customer’s trust is a slow process and brands must relentlessly focus on the right metrics to grow and scale.

Data plays a big role here. For instance, good retailers, overtime become experts at improving conversion rates, traffic, and average order value while brands have never done this historically. So this will be a huge mind-shift to unlearn and start thinking like a retailer to develop the ‘merchant’s mindset’. New digital marketing, sales operations, and fulfillment teams must be created to support the D2C business.

Just like how product and sales are two separate entities, brands and retailers are have unique operating models. D2C is about finding the right middle ground. Hard product decisions must be made e.g. buy or build fulfillment services, payment providers, content management systems and SEO advisory products.

Next, brands must master order fulfillment to satisfy the instant gratification requirements for their consumers. With increasing shipping and packaging costs, the future of retail will be heavily influenced by the speed and delivery of fulfilling an order. Order Fulfillment is a very complex operation and has immense potential for optimization and innovation.

Fulfillment traditionally has not been an asset-lite model, as the bulk of the work is done off the platform. To fulfill an order, brands would need warehouses, delivery trucks, cars, inventory management mechanisms that significant results in an increase in Capital and Operational expenditures.

As per the basic law of economics, companies do what they are good at and outsource the rest. In the case of Amazon, since they do such a good job at building the world’s largest selection of products online and delivering with such an efficient logistics business, they will continue to buy from Brands or Manufacturers who make the products. Even the private label business of Amazon is fairly small and in early stages compared to the volume of outside SKUs that are merchandised. 

In the case of Procter & Gamble, arguably the worlds largest CPG brand, their core innovation lies in building quality products that touch people in small and meaningful ways. They are primarily focussed on the daily essentials of Bathing, Brushing, Shaving, Washing Dishes and Laundry. And not selling and delivery. 

When a company’s core is building great products, does it make sense for Procter & Gamble to go D2C? Or should they continue to focus on their strengths?

Let us look at the auto industry: Why can’t car manufacturers directly sell to consumers instead of going through dealerships? Firstly, the law doesn’t even allow them to do that. Secondly, even if the law allowed them, they might still focus on building cars and let other companies manage leasing and sales.

Alcohol is another industry where liquor manufacturers don’t sell directly to consumers and go through distributors.

Conclusion: To succeed in D2C brands must build the ‘merchant’s mindset’ with sales and marketing focused teams; while the product innovation business operates as a parallel entity.

(Feature photo by m0851 on Unsplash)