Why now is the time for established brands to invest more in DTC e-commerce
Over the last ten to twelve years, native DTC startups have had the biggest impact on the e-commerce space. They’ve been massively outperforming most established consumer brands, both in terms of their customer growth and improvements to customer experience. But there are many strong signs that the landscape is shifting in favour of established brands.
While a lot of the immediate pandemic effect on online shopping adoption has started to fade, many consumers have become more willing to shop directly with brands. In the US, 26% of consumers feel more likely to shop directly with the brands they already buy in the ‘offline world’ in the coming months (1). And it’s showing in the results of those brands that already took the lead on scaling their DTC operations years ago: Nike reached over 50% DTC sales in 2021; Adidas is close with 40% and its CEO Kasper Rorsted expects 80% if the company’s net sales growth to come through its DTC business in the coming 4 years (2). While there are some more examples of incumbents leading in DTC e-commerce (e.g. Columbia Sportswear, Wilson, L’Oreal), most brands still have enormous headroom to invest more in DTC growth.
For many years, DTC startups had an edge over incumbents. They were usually set up and run by digital native generations, much more bought into targeted digital advertising than the more traditional above-the-line routes. And those ads happened to be incredibly cheap. Those startups also didn’t have to think about any conflicts with retail partners as they started fully online only. They could be very agile and quickly test different products and markets. And of course there was a boom in venture capital funding in general which overfunded consumer products startups compared to their longer term potential. All of these made it difficult for incumbents to compete immediately.
But we’re seeing three major shifts in the e-commerce landscape that we believe now give incumbent brands an edge, if their strategic focus is right.
1) Higher acquisition costs favour incumbent brands
The cost to acquire customers has gone up for all brands. In the last year alone Facebook Ad costs went up by 38% (3) and this is going to continue. With Facebook usage stalling the company will have to generate revenue growth by raising prices further. Many brands will move their spend to other channels, pushing up those prices for other social media and search advertising, as well as influencers and TV. Acquisition has also become harder because of the sheer amount of competition in most categories of consumer products.
However, incumbent brands with an established wholesale or retail business can compensate for those higher costs. They can offer a multi-channel route to existing customers which can increase their overall lifetime value or improve the profitability of their purchases. It’s much easier to nudge an existing customer to switch sales channels than to convince someone from scratch about the quality of your product and brand. Then the key techniques are to increase the customer relationship with personalised education, content and community building.
2) Tight margins on DTC alone benefit those with an omni-channel operation
Contrary to a decade ago there is now intense competition in e-commerce on almost all categories. While the right positioning can still lead brands to success, in most cases the margins for e-commerce businesses have been under pressure. Brands with an existing wholesale or retail business can create synergies between their DTC and their other sales channels. Using the insights generated from their direct channels can massively increase their operating margins across the company as a whole.
DTC gives brands the chance to build analytics of their customer’s behaviours and preferences much more effectively than through wholesale or retail channels (at least for medium-sized brands that don’t have major analytics functions). These should be used directly to improve campaigns and customer journeys on the e-commerce side of things, but also to drive more retail and wholesale sales by improving partner selection, running better campaigns in shopper marketing and streamlining new product development. So by integrating DTC into the existing sales channels, brands can take a more strategic and long-term view on building their direct customer base.
3) A changed venture funding landscape for DTC startups gives incumbents the opportunity to own their niche
There seems to be a general shift in interest from consumer and e-commerce investors. Most e-commerce funding is currently going into the tech platforms supporting merchants. However, there are still significant amounts going to product brands themselves, but investors are expecting smaller exits (trade sales or PE in the $100-500m range) from brands that successfully dominate a clearly defined niche. With investors expecting lower absolute returns, they’d be looking to reduce the risk of those deals by selecting brands with strong existing traction in their chosen sub-category of the market, and strong defensibility through product IP or community access.
What does this mean for established brands pushing into DTC? In previous years it seemed daunting or impossible to compete with heavily funded startups looking to dominate entire categories. Now, however, it’s possible for many brands in a category to co-exist successfully by targeting a sub-segment of that category. This gives existing brands the chance to build out the foundations of their DTC offering in a very specific category, and potentially expand beyond this niche in cascades, building on their increasing strength of brand and e-commerce expertise.
For example, Wilson has been making a shift towards investing more in its DTC business, improving the experience of their e-commerce and opening physical stores. They can continue to dominate their niche of racquet sports and co-exist with plenty of other online sportswear brands.
While there is a strong case for many wholesale or retail brands to invest more in DTC, there are some notable exceptions of products and categories that are notoriously difficult to make work in e-commerce.
Some exceptions of products and categories where the case is less strong
Fresh food & drink
Low priced food & drink unless it’s very niche and inaccessible in mainstream shops (e.g. spices from foreign cuisine, some dietary alternatives)
Low-priced personal care items (under $10-15/item)
Accessories
Any of these can work, however, if they’re presented as a compelling subscription offering. For example, coffee bean subscriptions, craft beer in larger quantities at price discount, toiletries basics subscription along the lines of Dollar Shave Club).
So what’s currently holding established brands back from capturing more value from DTC?
User experience: Compared to native DTC brands, many incumbent brand websites struggle to keep up in terms of the experience for the customer. Easy to navigate online shops, a streamlined check-out funnel with several payment options and plenty of reassurance and validation in the form of security certificates and customer reviews (e.g. Trustpilot). Many wholesale or retail brands lack some of the internal expertise to streamline digital user experience, and struggle to choose the most appropriate external partners, which is a major obstacle.
Driving purchases instead of customer lifetime value: DTC offers much more flexibility to strengthen customer relationships, but that makes it an absolute requirement in order to compete with native DTC brands. High acquisition and fulfilment costs for e-commerce make it essential to invest in retention activity. This requires a mindset shift, from driving purchases to driving customer lifetime value. This needs sophisticated CRM and personalisation, as described below.
Trying to please both retailer partners and customers at the same time: The conflict, or perceived conflict, between retail and DTC channels, leads to compromising on the customer experience. It’s hard to please retail partners and customers at the same time. In fact, in most cases there likely isn’t a trade-off - if the retail experience matches the brand, a well-executed DTC marketing campaign increases overall brand awareness and opens up new audiences, which will benefit retailer partners in the long run. If retailer partners struggle to present the products the way the brand intended, it’s best (if hard) to cut those relationships to strengthen the brand long-term.
A siloed approach to DTC: As DTC requires a different skill set it’s often treated as a separate part of the business, while still facing some of the constraints of a bigger, more grown bureaucracy. Brands might be missing out on the synergies between wholesale and DTC, and the way it improves the business case.
What should incumbent brands do to strengthen their DTC offering?
1) Invest in zero-party and first-party data collection, to improve customer journeys
Brands need to set the primary goal to improve customer lifetime value. This is most effectively done by creating personalised content, and through carefully crafted email and text automation. The foundation of these need to be insights into customers’ preferences and behaviours, which requires a strategy to collect both zero-party and first-party data. With increased privacy regulation brands cannot rely solely on tapping into ad platform and publisher data. Those brands relying too much on for example Facebook Ads have seen a massive drop-off in growth over the last year.
Zero-party data comes from customers volunteering information about their shopping and product preferences or demographics, with an understanding that they’ll get better product offers and recommendations or useful content in exchange. The main tactics are email signup surveys, quizzes or product finders, or post-purchase surveys.
First-party data is collected and analysed at scale, using analytics platforms for website behaviour, ad platform results and CRM campaigns. Especially when building on platforms like Shopify, there is a range of highly sophisticated analytics tools that have become accessible to any medium-sized brand which would have previously required a corporate-scale analytics function. These sources should be complemented with regular customer research through surveys, observation and interviewing, done by an experienced insights expert.
Data and customer insights are the main source for competitive advantage in e-commerce today. They’ll make or break digital advertising campaigns and improve conversion rates throughout the funnel.
2) Diversify beyond Facebook and Google ads as soon as possible
While Facebook and Google should still represent a large share of customer growth (30-50% of new customer growth depending on growth stage), it’s crucial to diversify into 1-3 key alternative channels. The most promising routes today are influencer and affiliate marketing, which still offers relatively low rates and has become more scalable when using specialist agencies or platforms. Also, above the line campaigns have become more targeted through smart TV and streaming technology, as well as podcast advertising as a relatively new format.
Beyond paid marketing, brands should aim to generate at least 30% of growth from email and text marketing, and to drive customer referrals through incentives or community building.
3) Integrate DTC and wholesale/retail more closely
Once brands have built a strong analytics and insights framework, they should break down silos and look to use those insights to improve their wholesale and retail businesses. Insights should support the targeting and messaging of shopper and retail marketing campaigns. Customer data can strengthen the selection of new retail partners based on their overlap with the brand’s customer base, and strengthen the pitch to that partner with hard data on expected demand. Product development can be streamlined with a DTC insights function by capturing granular demand data online before creating new products, and by refining them by running small tests with online customers before pushing into the retail channels.
A focus on building expertise and making incremental improvements
The main learning for incumbents from the success of native DTC startups is that an agile, incremental approach can work very effectively in the consumer products space, which has traditionally been dominated by top-down planning. Brands should focus on building their expertise around digital customer experience and making use of new software tools to generate customer data very quickly and without much upfront investment. This, combined with a strong focus on a market niche will drive very quick results in DTC e-commerce. Brands can use that momentum to increase investments in new marketing channels and build a strong DTC business, which will directly support all sales channels in turn.
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