Should you sell direct to consumers (D2C) and, if so, how?
“Should we sell direct to consumers (D2C)?” asked a consumer product goods (CPG) client in a growth vision workshop this week. Many companies are asking us the same question. And you can see why. Although e-commerce remains a niche channel for CPG in most regions (c.2% of sales in US and 6% in the UK, for example), sales are growing like a rocket: US online sales grew at an average 30% between 2015 and 2018, versus a measly 0.7% for offline sales1 . The success (at least in revenue terms) of brands like Harry’s and Dollar Shave Club has added fuel on the fire of excitement about D2C, with the latter being bought by Unilever for a juicy $1billion, as we posted on here.
However, D2C is not a route to take without a lot of careful thought. As a recent McKinsey article2 says, “There have been many misses and only a handful of hits among CPG companies’ forays into D2C.”
In this post we explore whether you should take this path to growth and, if so, how.
Step 1: SMS (sell more stuff) in existing online retail channels
Before rushing into D2C, we recommend that our CPG companies first optimise and amplify sales in their existing online retail channels. This includes online supermarkets, such as Tesco.com or Walmart.com, and of increasingly Amazon.
Why start here? Simply because online retailing is the core business of online retailers, whereas it isn’t for most CPG companies we work with. Amazon generate massive traffic to their site, whereas you would have to invest heavily to get even a fraction of this. In other words, we suggest you start by ’fishing where the fish are’.
P&G’s Tide is a good example of this strategy in action. Tide leads US online sales of laundry detergent with a 48% share, well ahead of the brand’s offline share of c. 38% (IRI, 52 weeks to Dec. 27)3 . This success reflects Tide being one of the first brands to use Amazon Dash buttons that allow you automatically order product when you’re running out.
Other ways to amplify online sales include ‘digital point-of-sale (POS)’, by optimising pack shots and text, search engine optimisation (SEO) and exploring the use of video to active your brand online. You can also explore being part of Amazon’s ‘Subscribe and Save’ program, where shoppers can set up recurring orders of items they regularly buy.
Step 2: Why would anyone buy?
Having optimised existing online retail channels, we then move on to the question of D2C.
The first critical question we ask clients is, “Why anyone should buy your brand’s D2C site, instead of using their favourite retail website?” If you can answer this question, a further consideration is channel conflict. You need to weigh up potential gains in D2C sales against potential losses from pissed off retail partners who don’t like you diverting sales from them.
We use a few criteria to help evaluate the potential of a brand in D2C:
- Frequency of purchase: D2C works better of your brand is bought on a regular basis, allowing the opportunity for a subscription-based service like Gillette’s Shave Club, that we posted on here
- Category involvement: people may want to spend time on your D2C site if you are in a high involvement category, with people wanting to spend time immersed in ‘the brand world’
- Personalisation: how big is the demand to customise/personalise your product?
- Product range: D2C makes more sense for a brand with a large product range, allowing people to buy multiple products in one visit, rather than a mono-product brand
- Basket size: the bigger the basket size, the more likely you can create a viable business model that delivers orders to customers without having to heavily charge for delivery, or at all
These factors help explain why only 2% of US internet users shop from CPG brands’ D2C sites4, a fraction of that seen for other higher involvement categories with wider ranges and higher basket sizes: see below. These numbers have of course been increased by the effects of Covid-19 enforced lockdowns. But the relative sizes are likely to stay the same (i.e. CPG much smaller).