Direct-to-Consumer Brands: Unstoppable Startups?
June 25, 2019
Promoters would bill it as an epic battle – a David versus Goliath cage match. That’s what’s playing out in the consumer packaged goods (CPG) sector as small, born-online startups trounce multi-billion dollar, global CPG brands in sales and customer loyalty. What’s behind the threat to traditional CPG brands? Answering this requires a primer on the direct-to-consumer (D2C) opportunity, including characteristics of companies, why and where D2C works, the role of social, and more.
Digitally native startups, also known as “direct-to-consumer” brands or “D2Cs” have altered consumer expectations through design, marketing, and distribution of consumer packaged goods, steadily eroding the market share of traditional brands.
- More than 100 “bed-in-a-box” companies like Casper, Leesa, and Purple doubled U.S. market share between 2016-2018, to about 10%, as traditional brand Tempur Sealy saw sales decline 4.6% in the first half of 2018 and the largest U.S. retailer, Mattress Firm, declared bankruptcy.
- U.S. personal care and beauty product sales grew 4.5% in 2018. Online personal care and beauty sales grew 24%. Direct brand SiOBeauty tripled sales in 2018. Kylie Cosmetics generated $420M in revenue in its first 18 months.
- One third of U.S. consumers plan to do at least 40% of their shopping from D2C companies in the next five years.
The number of D2C brands in North America has mushroomed. This has had a profound impact on the CPG sector. D2C brands are reshaping the corporate landscape, disrupting how products are sold, how companies approach markets, and how consumers interact with brands. For CPG brands, the message is this: Ignore D2C at your peril. This is not a passing fad or trend; this is an evolution of the CPG space. A shift in the digitalization of both commerce and consumption has put the customer at the center of business decisions.
Direct sales of perishable goods – cutting out the middle-man – are nothing new. Nespresso has been trading with its capsule subscriptions since 1986, while mail-order clubs such as the Wine Society have been around a lot longer. So has the Avon seller offering cosmetics direct to people’s homes. D2C, in the 21st Century, has evolved from direct mail and marketing, reborn for a digital age.
What’s changed is that it’s never been easier to manufacture a new product and distribute to customers directly, at competitive prices. Companies do not have to rely on brick-and-mortar retailers and their mark-up, eating into profits and prices. Or online marketplaces for that matter.
At the same time, these digitally native vertically integrated brands (DNVBs) appeal straight to the heart of consumers, particularly millennials, via the Internet. They quantify the customer relationship through complex data analysis. Many D2C brands aren’t household names yet, but they’re moving fast. They’re agile, re-engineering new products and offerings to surprise and delight customers.
Digitally Native, Vertically Integrated Brands
It’s worth understanding the characteristics of DNVBs. Many of them refer to themselves as the ‘Uber of X’ or the ‘Dollar Shave Club of Y’ – from food to cosmetics, cleaning products to beverages. Their products are financed, designed, produced, marketed, distributed, and sold under the banner of one company.
The aim is to go straight to the consumer and in the process slash the mark-up that goes to retailers and wholesalers. The savings can be used to offer exceptional product design, quality, and customer service at lower prices. Primarily they live online, born on (or reinvented for) the web, D2Cs are devilishly focused on eCommerce and rarely use brick-and-mortar stores, though some brands are adding physical stores or partnering with traditional brands for floor space. Optical brand Warby Parker has opened close to 100 stores throughout North America, while mattress supplier Casper teamed with Nordstrom for in-store sales.
What It Means To Be D2C
They tend to be niche, concentrating on one category with a fine-tuned proposition – good value cosmetics, craft beer, quick meal kits. The aim is to control their own destiny with a direct-to-consumer relationship, co-creating products through a conversation with the consumer. The idea is to maintain end-to-end control over the product lifecycle.
An school of ‘piranha’ D2C startups are now taking small, but not inconsequential bites out of the toes of the traditional global CPG brands. They’ve had a meteoric rise in popularity and attract a lot of attention from the media. At the moment, many are small fries in vast markets. But being nibbled to death by a multitude of little piranhas is the biggest concern for the big CPG brands. Piranhas are quick and agile, while big CPG brands are slow and ponderous. But that’s starting to change.
Established CPG brands are finally figuring out what they can learn, exploit, and foster when it comes to D2C. When big corporations are acquiring D2C startups en masse, you know the market is changing. They’re incubating, nurturing, and testing D2C brands now.
The savvy CPG giant will take the rule book from agile D2C digital natives and use it to change mindset, and rethink its portfolio of consumer goods. It will realize that it can breathe life into smaller, niche brands using a D2C digital-first mentality. It can approach the market in different ways, listening to millennial trends and quick shifts in 21st-century markets.
Where D2C Works
If Airbnb and Uber are the poster-child disruptors of the travel sector, then Dollar Shave Club and Beauty Pie are attempting a similar heist in CPG. They epitomize the rapid evolution in digital commerce and consumption. And D2C is proving fruitful in a great variety of lines within CPG.
In fact, 87% of retail brands in the U.K. and the U.S. have said they plan to launch a D2C channel at some point in the future, while 23% said they will do so within the next 12 months, according to research by Brightpearl. And SAP found that 90% of consumers would rather buy directly from a brand.
Key CPG sectors where D2Cs are making inroads include:
- Non-alcoholic beverages
- Beer, spirits, and wine
- Fast fashion
- Meal kits
- Men’s grooming and toiletries
- Cleaning products
- Women’s toiletries
The Role Of Social
D2C works because of the power of the Internet. Instagram, Twitter, Google, and Facebook enable any brand to reach customers at incredible scale, for a relatively low cost. Take Rothy’s or Glossier, two big names in D2C. They were born on social media, and are savvy operators in this space.
Most customers learn about a D2C brand on social media, and many of these millennial-driven companies are more advanced in terms of their digital and social strategies. They are hot on the power and strength of social and influencer campaigns. They target the younger generation of digital natives. They speak their language and the customer listens.
This represents a group which would have been the future demographic target of traditional CPG brands. Yet they are very much the here and now, and are tuning into something different from traditional marketing methods. Social media now allows the smallest D2C minnow to have the reach of a global firm, without the overheads.
Are You Ready?
Download LiveArea’s white paper, Selling Direct in Consumer Packaged Goods. We identify unique factors at play in CPG, and explore how brands can embrace digital, and become more authentic and agile in the way they sell direct to consumers.