Direct-to-Consumer Transformation of Consumer Brands
D2C Many consumer brands are currently evaluating an investment in a direct-to-consumer (D2C) strategy. In this process, thoughts quickly turn to a brand-owned online shop. But does it even make sense to consider the topic of D2C from a pure sales perspective? Or is D2C rather a transformational as well as a strategic approach for classic brands into a digital world?
There are many valuable reasons for consumer goods brands to consider a direct-toconsumer (D2C) strategy: lower transaction costs, direct access to customers and data, forward integration in the value chain, or more independence from retail partners (Schögel & Lienhard, 2021, S.4).
But the topic of D2C is very often misunderstood. According to a study by the University of St.Gallen, the majority of FMCG managers hope to generate sales from a D2C strategy (Schögel & Lienhard, 2021, S. 21). However, a pure focus on sales is not sufficient for a successful D2C strategy. D2C is more than just another sales channel in an omnichannel strategy. Integrating a D2C strategy has the potential to transform the entire value creation model of traditional consumer brands.
To understand this, we must first look at the model that has given rise to the major brand names in recent decades, but which is no longer applicable today due to digitization, among other things. (Haddad, 2016, S.xiii) In the past, it seemed to be fairly easy to establish a successful consumer brand. The value creation model of consumer brands has been based mainly on the following three pillars since the 1950s:
- The introduction of premium products combined with product development and branding gave consumer brands a significant competitive advantage over weaker “no-name” products (Kelly et al., 2018).
- Relationships with retailers opened up mass markets for consumer brands and gave greater access to consumers and broad distribution, while the number of competitors remained limited (Kelly et al., 2018).
- Early entry into developing markets, the development of new market categories, and higher consumer incomes generated an additional 75% sales growth between 2008 and 2018 (Kelly et al., 2018).
But the success of this value creation model is stagnating. Organic growth is no longer as easy for large consumer brands as it was in the past. McKinsey puts it this way: “The issue is organic growth. From 2012 to 2015, the FMCG industry grew organic revenue at 2.5 percent net of M&A, foreign-exchange effects, and inflation, a figure that is a bit lower than global GDP over the period. But companies with net revenue of more than $8 billion grew at only 1.5 percent (55 percent of GDP), while companies under $2 billion grew at twice the large company rate.” (Kelly et al., 2018)
One driver of this trend is the increased variety of offerings. The conditions for small, up-and-coming brands to grab market share from the big consumer brands are more favorable than ever.
On the one hand, a generational shift is currently taking place that is having a significant impact on consumer behavior. Consumers born between 1980 and 1995 - the so-called “millennials” - are 4 times more likely to avoid products from “the big food companies,” according to a McKinsey study. They are resistant to advertising and prefer to inform themselves rather than trusting brand promises. At the same time, they fundamentally perceive new brands as more “innovative” (Kelly et al., 2018). Another cross-generational trend is the shift toward more conscious consumption. Consumers are paying more attention than ever to the origin and production of products, ingredients, sustainability, or climate neutrality (Utopia GmbH, 2020).
On the other hand, new technologies, digitalization, access to data, and new communication channels are lowering the barriers to entry in the market. This is also confirmed by Gero Furchheim, President of the German E-Commerce Association (bevh) and Spokesman of the Board, Cairo AG: “E-commerce promotes variety because small companies can start out in e-commerce with low entry barriers.” (Bundesverband E-Commerce und Versandhandel Deutschland e.V. (bevh), 2021) The number of competitors is no longer limited to the restricted space on the shelf but is expanding through numerous online offerings. Online shopping has become the new normal and the Corona crisis has helped e-commerce to boom. “More than one in eight euros of household spending on goods was spent on e-commerce, according to the bevh survey.” (Eberhardt, 2021). Online shopping is not limited to younger generations. More than half of online sales are generated by people over the age of 50 (Eberhardt, 2021).
Changing consumer behavior and low entry barriers have created a veritable explosion of new, highly specialized brands and business models in the consumer goods industry in recent years. This applies to all categories, although beauty products are particularly noteworthy. According to McKinsey, small brands in the color cosmetics sector already hold 10% of the market share and are growing four times faster than their competitors (Kelly et al., 2018). Carlton Lewis, Head of Global Categories at GlaxoSmithKline considers the small brands with close contact with the customer to be a greater threat than competitors like Unilever and P&G.
The trend shows: The value creation model of traditional consumer brands is under massive pressure. Small, agile brands are gaining more and more market share and seem to be better able to serve the needs of consumers. Traditional brand manufacturers are under pressure, but still seem to shy away from implementing D2C strategies.
The Paradox of Trade Relations and D2C Approaches
Many brand manufacturers fear that implementing a direct-to-consumer strategy will damage existing trade relationships that have been nurtured over the years (Bashkin et al., 2017). However, the tone between brands and retailers has become increasingly rough in recent years. In the battle for price increases or reductions, retailers didn’t shy away to use delivery stops and delistings (Leitherer, 2019).
A popular example is the conflict between Kraft Heinz and Edeka. As a result of the conflict, no Kraft Heinz products could be found on Edeka shelves for several months in 2019. To compensate for the products, Edeka simply developed its own brand “Papa Joe’s”, whose packaging design was reminiscent of Kraft Heinz sauces (Handelsblatt GmbH, 2019). Negotiations have not only become tougher with Edeka. In 2019, Kaufland delisted almost the entire Unilever range. A total of 480 Unilever products and brands were no longer available at Kaufland in the meantime (Supermarkt-Inside, 2020).
One of the reasons for the tough negotiations could be that brand manufacturers are no longer living up to their role completely. In the eyes of consumers, branded products have become replaceable. According to a study by Oliver Wyman, only 23% of consumers are bothered when branded products are missing from the shelf and three out of four consumers don’t even notice it (Handelsblatt GmbH, 2019).
Another reason could be that brand manufacturers are sometimes considered weak in innovation within the industry (Leitherer, 2019). In order to compensate for the innovation deficit of traditional consumer brands and still be able to offer customers new innovations, retail chains are increasingly giving food startups such as Ankerkraut, Little Lunch or Just Spices the chance to prove themselves (Handelsblatt GmbH, 2019). In some cases, retail chains even buy up startups themselves at an early stage in order to present them as exclusive brands. For example, the drugstore chain dm with the brands “Langhaarmädchen” (Brecht, 2018) and “Seinz” (Rondinella, 2019).
It’s a paradox. The reasons for the strained relationship between consumer brands and retail partners seem to lie, among other things, in the fact that brands do not manage to retain end consumers in the long term and a lack of innovation.
At the same time, consumer brands are reluctant to implement a D2C strategy for fear of further damaging their already battered relationship with retail partners.
But their problems with the retail trade could be improved precisely by a D2C strategy. A D2C strategy transforms internal processes at consumer brands to establish closer contact with consumers. This results in greater loyalty (shopify, 2020) and accelerated innovation processes (Bashkin et al., 2017). Direct selling to consumers may or may not be included in such a D2C strategy.
From this perspective, implementing a D2C strategy does not weaken the relationship with retailers at all. Quite the opposite is the case. Brands establish a unique value proposition for consumers through a D2C strategy, thus becoming more important for retailers while establishing their independence from them. Brands without a D2C strategy are in danger of being replaced by competitors or private labels in the mid-term and thus disappear from the shelves and from our minds. The recent past shows: A brand does not live through its connections to retailers but above all through the conSpices the chance to prove themselves (Handelsblatt GmbH, 2019). In some cases, retail chains even buy up startups themselves at an early stage in order to present them as exclusive brands.
- Changing market conditions and digitalization are causing the traditional growth model of consumer brands to stagnate, while D2C brands are becoming increasingly popular.
- Traditional consumer brands shy away from D2C strategies for fear of risking existing trade relationships.
- However, this fails to recognize that D2C is more than just a sales channel and offers brands the opportunity to transform into the digital world.
- D2C leads to a better understanding of target groups, changes how brands develop products and tightens the relationship between brand and customer.
For example, the drugstore chain dm with the brands “Langhaarmädchen” (Brecht, 2018) and “Seinz” (Rondinella, 2019). It’s a paradox. The reasons for the strained relationship between consumer brands and retail partners seem to lie, among other things, in the fact that brands do not manage to retain end consumers in the long term and a lack of innovation. At the same time, consumer brands are reluctant to implement a D2C strategy for fear of further damaging their already battered relationship with retail partners. But their problems with the retail trade could be improved precisely by a D2C strategy. A D2C strategy transforms internal processes at consumer brands to establish closer contact with consumers. This results in greater loyalty (shopify, 2020) and accelerated innovation processes (Bashkin et al., 2017). Direct selling to consumers may or may not be included in such a D2C strategy. From this perspective, implementing a D2C strategy does not weaken the relationship with retailers at all. Quite the opposite is the case. Brands establish a unique value proposition for consumers through a D2C strategy, thus becoming more important for retailers while establishing their independence from them. Brands without a D2C strategy are in danger of being replaced by competitors or private labels in the mid-term and thus disappear from the shelves and from our minds. The recent past shows: A brand does not live through its connections to retailers but above all through the connection to its customers, to whom access is impossible without a D2C strategy.
Direct-to-Consumer is More Than Just a Sales Channel
Those who view direct-to-consumer as a pure sales channel will be disappointed very quickly. Especially for consumer goods with rather low-priced products and low margins, it is not enough to generate maximum attention via old patterns and then hope that consumers will find the online store and fill the shopping carts (Bashkin et al., 2017). A successful D2C strategy requires a holistic plan to costeffectively acquire (Arora et al., 2020) and subsequently retain consumers: consumer journeys (shopify, 2020).
Such a plan currently has no place in the organizational structure of traditional consumer brands. The entire organization is designed for sequential value creation (Strauß & Schmidhuber, 2020) in order to serve retail partners as customers.
Market research and product development often take place on a global level in cooperation with external providers. Marketing and, depending on the size of the company, brand management has the task of building the brand and making it known primarily through mass media. The primary key figure here is reach and brand awareness. Finally, sales take care of the contracts with the retail partners (Fränzer, 2019). The consumer does not really appear in this sequential value chain.
The up-and-coming, innovative direct-to-consumer brands work quite differently. They place their customers at the center of their actions. The market research panel used to develop new product lines is made up of the customers who will later buy the product. And conversely, existing customers are the starting point for developing new product lines, building up marketing, and acquiring new customers. (shopify, 2020) (Deloitte, n.d.) This results in a very efficient cycle that creates high-quality customer experiences, ensures customer satisfaction and drives brand growth. Figure 1 illustrates the difference between the traditional value creation model and the value creation in the direct-to-consumer model.
In the direct-to-consumer model, a strong community of loyal customers develops as the customer base grows. The community can be contacted and activated at any time for various purposes. At the same time, this model is a threat to large, established brand manufacturers, as the example of Lillydoo shows. Three out of four parents in Germany already know Lillydoo as a brand, and the startup has access to 110,000 active community members across Europe (Hüsing, 2020).
Another example shows the impact that a brandowned community can have on important business decisions. The community of personal care brand LUSH is so strong that the startup is taking a surprising step. LUSH stops paid social media advertising and instead focuses more on its own channels, such as live chat, email or its own online store. Via Facebook, Twitter, and Instagram, the company justifies the move as follows: “Increasingly, social media is making it harder and harder for us to talk to each other directly. We are tired of fighting with algorithms, and we do not want to pay to appear in your newsfeed.” (Benjamin, 2019)
This makes it clear once again why direct-toconsumer is more than just a sales channel. Directto- consumer means perceiving and serving the end consumer differently. The entire organizational structure is focused on the needs of one’s customers.
How Direct-to-Consumer Strategies Are Transforming Traditional Consumer Brands
Summarizing, it can be concluded that various factors and evolutions are putting traditional consumer brands under massive pressure to transform a business model that has made them successful for decades in order to remain competitive in the future.
While the siloed processes of traditional brand manufacturers make it very difficult to focus on and optimally manage customer experiences (Strauß & Schmidhuber, 2020) this is exactly a major strength of D2C brands such as DollarShave- Club, Glossier, or Warby Parker (CBInsights, 2020). This results in decisive advantages for D2C brands in direct comparison to brands of traditional manufacturers: Contrary to many assumptions that D2C is a pure sales channel, D2C brands focus primarily on building direct and high-quality customer relationships as well as own data via digital channels and seamless consumer journeys (Katrijn & Steenkamp, 2019). As Figure 2 shows, the brand-owned website acts as a central platform for creating customer experiences, gaining direct consumer insights, driving innovation, and as a hub for customer acquisition. Direct sales to the end consumer may or may not be part of a direct-to-consumer strategy (Bashkin et al., 2017). Even without direct selling, a D2C strategy enables traditional consumer brands to completely resolve some of the biggest challenges: Lack of understanding and knowledge of the target group, lack of proximity to their own customers, and lack of data expertise and strategies (Fränzer, 2019).
These are precisely the aspects that many brands miss out on (Schögel & Lienhard, 2021). Establishing a D2C approach as another silo within an omnichannel strategy has therefore little chance of success. Instead, traditional consumer brands should use direct-to-consumer as an overarching platform to focus existing silos and existing objectives on what really makes brands successful in the 21st century: building brand equity by creating true customer relationships (Haddad, 2016, S.6).
The key is to build seamless consumer journeys and create a centralized data strategy around them. As can be seen in Figure 3, consumer journeys enable brands to convert anonymous advertising contacts into identified consumers with names, preferences, and addresses, gradually develop them into customers and loyal repeat users, and ultimately turn them into brand advocates for the brand, so that they can again influence other consumers in their purchasing decisions through user-generated content such as reviews. Along these consumer journeys, brands can collect and build their own data to optimize media spendings and channels, drive product innovation and development hand-in-hand with the target audience (Bashkin et al., 2017), or place personalized, channel-independent sales promotions and offers. (shopify, 2020) (Deloitte, n.d.)
Consequently, from the perspective of traditional consumer brands, the first step towards directto- consumer would be to transform simple brand websites into central platforms that can create customer experiences, serve as a hub for insights and innovation, and convert consumers. (Bashkin et al., 2017) Existing marketing measures and objectives in the organizations must be designed to establish effective consumer journeys and to supply these with traffic. This will allow brands to build up their own data along these journeys as well as sustainable relationships with consumers through a brand community and in combination with a CRM. The CRM acts as a “system of records” to work with data and insights across teams while the brand community acts as a “system of activation” to further serve and activate consumers along their consumer journeys.
- Brands need to use direct-to-consumer strategies to focus much more on new and existing customers and align existing activities accordingly.
- Classic brand websites must become central platforms that create customer experiences to establish direct customer contacts. This immediately creates new customer relationships and increases the loyalty of existing customers.
- Brands need to focus on building seamless consumer journeys and generate sufficient traffic for them, enabling them to build their own community and data strategy.
- This enables personalized communication with the target group, the creation of individual customer experiences, gathering of consumer insights, and activating existing customers according to specific goals.
Whether and when direct selling via brand-owned channels makes sense must be assessed on a case-by-case basis and on the basis of economic factors. (Arora et al., 2020) However, a strong community and sufficient direct relationships with customers give brands the constant option to realize direct selling quickly and, above all, efficiently at any time - be it due to tough price negotiations and (temporary) delisting from retailers or the next pandemic. For example, Lindt & Sprüngli launched its own D2C store in Canada within five days when its own stores had to be closed due to social distancing (shopify, 2020). Last but not least, a D2C strategy should also increase the bargaining power of traditional consumer brands towards retailers. The fact that some retailers are increasingly working with popular individuals from public life, such as social media influencers (Leitherer, 2019), suggests that retailers have a strong interest in listing brands with their own high-reach communities, as these also generate more traffic on the shelves.
Ultimately, it can be concluded that considering D2C as a pure sales channel would fall short. D2C is more than just another sales channel in the omnichannel strategy. D2C also has the power to transform parts of brands’ value creation models, and changes how brands ...
... analyze and understand markets and target groups
... develop new products
... communicate with consumers
... manage and personalize consumer journeys
... generate and use first-party data
... optimize media spendings
Accordingly, beyond opening an online store, there are numerous valuable opportunities to build and monetize a D2C strategy. D2C is the fuel for the transformation of classic brands into the digital world.