Chapter 3: Direct-to-Consumer (DTC) Strategies Are Becoming Essential for CPGs
Direct-to-consumer, or DTC, is a CPG e-commerce strategy transforming the industry so quickly that the trend deserves its own chapter. The DTC market, known for subscription services or fast shipping and “hip” marketing, includes everything from mattresses to sneakers. It also includes many CPG startups, which jump-started the trend of buying these products online in the first place.
In the face of small, direct-to-consumer CPG products being sold online in dedicated e-commerce stores, conventional CPG brands are adapting. They’re complementing their status as household names with innovative DTC offerings and customer-centric solutions for omnichannel retail.
What Is a Direct-to-Consumer E-Commerce Strategy?
A direct-to-consumer product is something your brand sells straight to customers, without intermediaries like wholesalers, retailers or online marketplaces. CPG DTC startups like The Honest Company for beauty and baby products, Dollar Shave Club® for razors and Blueland for household cleaning products have disrupted the traditional CPG industry.
Instead of finding placements in physical retail stores, these brands adopt a digital-first approach. They advertise online via social media and ship directly to their end customers through their e-commerce stores. DTC brands that sell CPGs often use a subscription model, which helps them retain their customers with these frequently replenished products.
These brands have grown so popular thanks to the advantages of e-commerce and online advertising in general. The relatively low cost of internet marketing combined with a focus on modern branding lets them gain a following quickly. It also helps them cater relentlessly to their customers. Their digital presence lets them gain customer data and a deep understanding of their base that many CPG brands lack in the retail environment.
While DTC brands were once the disruptors, the successful ones now recognize the necessity of the omnichannel approach, and shoppers can now find many of these digital-native brands at big-box retailers. Likewise, traditional CPG brands, which have long dominated brick-and-mortar retail, are expanding into the DTC market with great success.
The Rise of DTC and How DTC Startups Are Disrupting the CPG Industry
In 2017, a total of 55.9 million internet users purchased from a DTC brand. By the end of 2021, that number will rise to 95.4 million. During that same period, DTC sales will increase from $6.85 billion in 2017 to $21.25 billion in 2021. Meanwhile, as far back as 2018, 40% of consumers expected more than 40% of their purchases to come from DTC brands.
It’s clear from these trends that DTC is a major opportunity for CPG companies, and many brands are jumping in. A 2019 study of consumer brands found that 67% of beauty brands have a DTC website, alongside 60% of consumer electronics companies. While food and beverage companies lagged at 16%, the popularity of online grocery shopping is slowly bringing this sector to DTC, too.
How Are Traditional CPG Brands Adopting DTC Strategies?
Established CPG brands see a significant opportunity in entering the ring with their digital native DTC counterparts. We are now firmly in the “second wave” of DTC, as conventional CPG giants follow in their disruptors’ footsteps, with plans to do things even better than before.
Some of the benefits and opportunities CPG brands see in the DTC market include:
- Better customer data: Because CPG brands sell through third-party retailers, they often have significant gaps in their customer data. Once they have their customers’ contact information and purchase histories from their e-commerce site, they can personalize ads to individual shoppers and gain a 360-degree view of their customers. This can help them sell more effectively in both retail and online markets.
- Increased agility: Increased customer data gives CPG research and development teams more information on the customer journey to drive new products. By selling to customers directly, these brands are also more likely to get direct feedback, which helps them improve. Selling online lets companies start with a small number of products to see what is most successful and optimize marketing strategies with A/B testing. All this ensures a faster time to market and a more successful launch.
- Higher margins: DTC brands often sell directly to consumers from their owned factories at retail prices. Without retailers and wholesalers taking their share of the profits, this strategy offers higher margins.
- Shorter supply chain: When products ship to wholesalers and retailers, it adds links to the supply chain. A longer supply chain increases costs and the chances for delays, shrinkage, shortages and overstocking. When a brand sells directly to customers, products pass through fewer companies and individuals before they arrive at the end user. Items are less likely to become damaged or lost, and the supply chain is easier to manage.
Examples of DTC Strategies From Top CPG Brands
All these advantages translate into success for some of the biggest CPG products going DTC. Here’s how some of the CPG companies innovating with DTC strategies are implementing the new channel:
- PepsiCo: In May 2020, PepsiCo quickly pivoted to digital with two DTC websites, Snacks.com and PantryShop.com. Snacks.com sells snacks from PepsiCo’s hundreds of brands and even offers the option for shoppers to build their own variety pack. PantryShop.com leverages the rising trend of at-home meal kits for bundled pantry kits, grouping everything from breakfast foods to classic family snacks. These DTC sites have allowed PepsiCo to learn more about consumer preferences, like what specific customers like to buy and pair together.
- Nestlé: Nestlé created a differentiated DTC strategy when they launched the KitKat Chocolatory in select global markets, including Japan, the United Kingdom and Canada. It’s a DTC site that offers premium made-to-order chocolate bars with unique ingredients and custom packaging. It’s seen great success for holiday gift-giving and allows the brand to test new flavors. Offering products totally distinct from the KitKats available in stores, Nestlé carved out a successful DTC segment without detracting from brick-and-mortar.
- Colgate: Hum by Colgate is a smart electric toothbrush that rewards users with in-app prizes like new brush heads. It’s marketed online through influencers, social media and other digital channels and leverages an omnichannel sales strategy. The tech-forward design allows the brand to connect with their customers in a way they might not have with traditional retail alone, growing loyalty.
- Gillette: Proctor & Gamble’s Gillette® had a false start with their DTC Gillette® Shave Club before working out the kinks and embodying a robust DTC model with Gillette on Demand, which launched in 2017. The service offers a traditional subscription plan and also allows customers to text to order refills. This lets them blend the traditional subscription model with single-order purchases.
With the resources of CPG giants, brands like these are taking advantage of the digital moment to create strong DTC offerings that appeal to the modern consumer.
How Your CPG Brand Can Launch a DTC Strategy
When moving from a traditional retail strategy to a hybrid DTC strategy, you can follow these steps:
1. Create an E-Commerce Platform
Brands incorporating DTC need an e-commerce website for their customers to order from. When building your online store, consider your target market. Is it better to associate your store with your mainstay products or mimic DTC startups’ distinct, minimalist branding? Either way, the site should be easy to navigate and purchase from.
2. Find a Logistics Solution
Shipping products to doorsteps directly from your factory or warehouse requires a different logistics skill set. Instead of packaging shipments in bulk, you must have a fulfillment center to package and ship orders individually. You’ll also need a plan for long-haul and last-mile delivery. Meanwhile, e-commerce customers typically expect their orders in two to three days or less, which may be a quicker turnaround than delivering regular bulk shipments to retailers. Look for a logistics provider specializing in e-commerce solutions, alongside some team members to manage DTC logistics.
3. Organize Customer Data
Once your e-commerce orders start rolling in, you will have a wealth of customer data to track. Storing data like emails and shipping addresses enhances the customer experience by letting your shoppers make repeat purchases seamlessly, and it’s also crucial for digital marketing.
Look for a customer data management platform that lets you leverage this information properly. Consider that product development, marketing and customer service departments may all use the data for distinct purposes and will all need access to it.
4. Enter DTC Without Damaging Relationships With Big-Name Retailers
Today, digital-first DTC brands struggle to remain profitable. While DTC sales continue to show strong performance, increasing competition requires more advertising, eating into profits. Many recognize the need to enter the physical retail environment, underscoring the importance of adopting a hybrid DTC strategy.
Established CPG brands still gain a majority of their sales through big-box retail, so it’s critical to enter the DTC market strategically and avoid cutting into your retail partners’ markets. Many CPG brands do this through exclusive digital products, such as online-only bundles or the ability to customize a product online. This helps companies add a new sales channel without cutting into their existing ones.
5. Leverage Retail Displays to Take Your DTC Strategy Omnichannel
Both digital-first and established brands adopting DTC strategies recognize the importance of retail presence. Luckily, many CPG manufacturers increase brand awareness and strengthen sales at brick-and-mortar retail through digital DTC marketing.
Retail displays offer a solution to help differentiate a new DTC product launch in the retail environment. They allow products to stand out in the crowded brick-and-mortar store shelves and attract attention with creative designs and messaging. CPG brands can use them to launch a previously online-only product in stores or as a limited-time promotion to increase awareness for a DTC product.