Testing Direct-to-Consumer models

Last decade gave 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, along with several others are classic examples of high-growth startups in the apparel and fashion space. 

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 builds 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 orders 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  the freedom to explore different products with a wide range selection and the trust that the retailer offers 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 and Magento Commerce (recently acquired by Adobe) notably names of 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 to improve conversion rates, traffic, and average order value while brands have never done this historically. So this huge mind-shift to unlearn and start ti think like a retailer to develop the ‘merchant’s mindset’. New digital marketing, sales operations, and fulfillment teams must support the D2C business.

Just like how product and sales are two separate entities, brands and retailers have unique operating models. D2C finds the right middle ground. Hard product decisions ought 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 increased shipping and packaging costs, the future of retail heavily influenced by the speed and delivery of a successfully fulfilled order. Order Fulfillment, a very complex operation has immense potential for optimization and innovation.

Fulfillment traditionally has not been an asset-lite model, as the bulk of the work 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 excel at and outsource the rest. Amazon built the world’s largest selection of products online and deliver 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 runs fairly small and in early stages compared to the volume of outside merchandised SKUs. 

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 focus on the daily essentials around Bathe, Brush, Shave, Wash Dishes and Laundry. And necessarily not sales and delivery. 

When the company’s core competency lies in 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 through dealerships? Firstly, the law doesn’t even allow them to do that. Secondly, even if the law allowed them, they might build cars and let other companies manage leases and sales.

Alcohol industry has the same problem 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)