Consumer Packaged Goods (CPG) companies have in the past year faced a legitimate challenge from the Direct-to-Consumer (DTC) sector, as online retailers forgo using an intermediary to retail products to a large audience, and instead take control of the process and attempt to reach customers with competitive prices, quality products, personalization, and exclusivity.
The primary area of growth for the DTC market is online grocery sales. Research shows that in times of economic hardship consumers gravitate towards private label and DTC products, and the pandemic has been no exception.
While retailers have worked to improve the quality of DTC products in recent years, another advantage of the industry model is the personalization of products, which is appealing to a generation of online users who want to broadcast aspects of their lives on social media. The DTC sector has embraced its unique ability to cater products to individuals, and present items in ways that encourage the sharing of the ‘unboxing’ event online.
It is by using strategies such as packaging, personalization, and tribal belonging, combined with competitive pricing, social media presence, and a horde of customer data that the online DTC sector is seeing continued growth. While it is predicted that consumers will return to CPG, the strength of the DTC market looks set to continue for at least the coming 12 months, with those who are willing to try, fail and try again likely to be the biggest beneficiaries of the trend.
What does Direct to Consumer mean?
DTC defines a sales strategy in which products are sold directly to customers rather than via a third-party retailer as an intermediary. So rather than a seller passing their product to a trailer at a wholesale price to then sell to consumers at a mark-up rate, products are sold directly to consumers, usually at a far lower rate than retail.
DTC businesses have an advantage over large manufacturing brands. DTC businesses avoid the cost and hassle of setting up manufacturing facilities and operations, and many DTC brands continue to use contracted manufacturers even as they grow. They also have more direct and personalized interactions with their customers as compared with traditional retailers, meaning that they can adapt products quickly, and even offer personalized items at far lower costs than CPG models.
However, DTC or private label products are typically only available via a specific retailer or eCommerce site, meaning that the audience for the product or product line is far smaller. But, in 2020, the pandemic changed the fast-growing DTC industry, and customers’ experience of off-brand products.
How the Pandemic Changed the Customer Experience of DTC
Unboxing, the online phenomena of opening purchases ‘live’ on social media – has been driving custom packaging, mastered by the DTC sector. The complete personalization of the product, buying experience, and the packaging is one of the main areas in which DTC businesses have excelled, and gained attention. Rather than devoting huge budgets to advertising and seeking retailers to sell products on their behalf, online DTC sellers have harnessed the power of social media to gather an audience.
However, it isn’t just niche market products that benefit from the boost that online sales have seen from lockdowns during the pandemic. Retailers’ own brands have seen a boost in sales as fears over economic hardship, and even another global recession, force people to assess their spending habits. Past economic upheavals show that CPG sales tend to dive, and DTC sales surge during times of uncertainty.
During the 1981-1982 US recession, “private labels peaked at 17% of US supermarket sales by value,” then settled to an average 14% in the two decades ended 1996,” a Harvard Business Review article indicated.
It is because ‘own brands’ offer sellers higher profit margins than branded products that they can be priced more competitively. While in the 80s and 90s such products within the grocery market were often of lower quality, did not taste as good as branded products or perform as well, such products now often offer higher quality than branded products, and meet with customer demands more precisely, because DTC sellers have more contract with customers and can tailor products to answer their needs.
“…these studies and others have shown not only that excessive choice can produce ‘choice paralysis,’ but also that it can reduce people’s satisfaction with their decisions, even if they made good ones.”
DTC merchants are also gaining traction online by automating shipping and fulfillment. Orders must have fast, free, and sustainable shipping, with custom branded packaging an added bonus. For many people, the idea that you find a ‘bargain’ or new product that is of high quality at a fraction of the cost of a branded item is all they need to become a convert to that DTC brand. The online ‘cult’ communities that form around different products or solutions lean on the idea of tribalism that has attached itself to marketing strategy for about 10 years or more. DTC businesses don’t need a brand voice or targeted marketing campaign as such, they need devotees who will share their stories online and attract more customers through word-of-mouth, which can work for all products from homewares to household staples.
The Problem and the Solution
One of the biggest issues that face consumers today is too much choice.
According to a Harvard Business Review article about DTC and CPG products, “…these studies and others have shown not only that excessive choice can produce ‘choice paralysis,’ but also that it can reduce people’s satisfaction with their decisions, even if they made good ones.”
So while shopping online has made dealing with the pressures of lockdowns and social distancing easier, especially for the most vulnerable, the sheer amount of choice of products available has made decision making a mammoth task for many consumers who feel overwhelmed.
Retailers like Lidl have responded to this by limiting the number of branded items on their shelves and offering more DTC products in a limited range of options. This minimizes shoppers’ decision-making time and helps to eliminate unnecessary anxiety, providing the customer with greater satisfaction once they’ve made their choice. By simply reducing the options, but still providing what consumers want, the DTC supermarket has captured a huge market share of shoppers who are probably not even aware that part of the reason they choose to shop at Lidl is that it has used its customer data wisely to provide a better shopping experience.
- In the US, sales of private-label consumer products grew from 2.2% in 2015 to 5.8% in 2018, with annual sales growing faster than national brand sales by a factor of four.
- Costco’s Kirkland remains a titan in the DTC sector with sales exceeding US$39 billion last year, reflecting a higher than 10% growth rate.
- CPG makers are competing with the DTC sector through major mergers and acquisitions, such as Unilever’s 2016 acquisition of Dollar Shave Club, Procter & Gamble’s eStore, and new iterations of the products themselves.
Those companies that develop and produce major consumer products are beginning to claw back some of the market demand, buying the DTC businesses and using their data to create the products that consumers want.
In 2016, Unilever bought Dollar Shave Club for a reported US$1 billion. And DTC grooming and beauty products company that makes products for people of color Walker & Co, was purchased by Procter & Gamble in December of 2018 for an undisclosed amount. Edgewell Personal Care LLC, which owns shaving brands Schick, Wilkinson Sword, Edge, Personna, and Skintimate, last year planned to acquire men’s grooming brand Harry’s for almost US$1.4 billion, but it has been rejected on unfair competition grounds.
One of the main reasons that DTC companies have been so successful, particularly in Europe, is the proliferation of Aldi and Lidl stores, which helped to normalize off-brand products. The two major grocery discounters are a major factor behind a high level of private-label penetration in Germany.
DTC goods in the UK have become increasingly popular as Brexit grips the economy, and people are limited by choices as imported product prices rise. Consumers are increasingly opting for DTC products, with researchers finding that 48% of 2,000 customers questioned said they’d switch to cheaper private-label alternatives if their weekly food shopping bills rose.
- In the highly competitive retail market, an effective price strategy has proven to be one of the most effective ways to attract customers. DTC businesses offer retailers higher profit margins with each sale, meaning that products can be priced more competitively.
- Aldi is a prime example of a retailer reaping the benefits of low price points. The bulk of the grocery store’s product offerings are its own private-label goods, benefiting the business by giving it more scope to set lower price points and implement direct marketing strategies.
- Aldi sets the benchmark for private label success, and it achieved this by focusing on design, taste, and price.
- The grocery retailer has more than 10,000 stores in 18 countries and a combined annual turnover of €50 billion.
- Vast numbers of brands and, product types all claiming to achieve the same end can be somewhat overwhelming for consumers, and can ultimately reduce customers’ likelihood to actually make a purchase.
- Too much choice can also affect consumer levels of satisfaction post-purchase.
- Retailers like Lidl offer shoppers fewer choices by predominantly filling their shelves with DTC products. This minimizes decision making, helping shoppers to make selections fast and feel more satisfied with their end decision.
- While brands will always have a space in retail, DTC products are speaking to an audience who want a personalized and ‘unique’ experience.
- By offering exclusivity and achieving differentiation through a well-designed, reasonably-priced, and trustworthy DTC image, businesses are able to attract customers, especially online where shoppers generally seek out reviews and customer opinions before making purchases of DTC items.
Your DTC Store Online
DTC brands have seen a massive increase in customers and profits as lockdowns in many countries continue to require people to order household supplies online, and tighten their budgets.
DTC startups had already been seeing outsized growth before the pandemic forced people to rethink their shopping habits. More than US$17 billion in sales have shifted away from traditional, larger CPG brands (with sales of US$1 billion or more) to smaller brands since 2013, according to researchers. While predictions for online grocery purchasing were for the sector to claim 10% by 2023, it managed to do that in 2020, three years earlier than expected.
“There is no Expo West. We can’t visit stores; we can’t do demonstrations. The traditional means for growing an artisan food brand have now been thrown out the window.”
This meant that DTC brands that were sitting on supermarket shelves with no positioning and major competition from known brands were now seen, and attractive, as their price point drew new customers.
A Boring Life Inc., a DTC brand that produces CBD-infused nut, honey, and snack products, last year pivoted to focus on its DTC sales after determining that traditional distribution channels would be costly and ineffective.
“The old model is gone,” co-owner Jennifer Johnson told reporters. “There is no Expo West. We can’t visit stores; we can’t do demonstrations. The traditional means for growing an artisan food brand have now been thrown out the window.”
For online businesses in the DTC sector, the time to capture an audience has never been so ripe. With an increased number of people working from home, looking to the internet for answers for everything from curing boredom to disseminating the meaning of life, there have never been so many eyeballs so consistently glued to social media, and seeking a reprieve from the madness that has been 2020, and which is continuing in 2021.