The traditional retail model of Brand > Retailer > Consumer cannot survive the ever-decreasing margins; pressure from consumers for lower prices, increasing cost of goods as supply prices increase and further cost increases of rent, rates, fuel, logistics, utilities etc.
Retailers looking for profit improvements often seek these from their suppliers, which has become unrealistic as suppliers have no more margin to give and are facing their own challenges of decling margins, caused by the same issues affecting retailers. However, unlike retailers, suppliers can bypass the traditional route to market.
The answer for retail distributors and suppliers of brands is to move towards a direct-to-consumer model, D2C or DTC. However, it is imperative for these brands to deliver this strategy without alienating their current customer base, this being the retail distributors, high st & online retailers that have been their route to market for many years.
Historically, retail brands have developed product through innovative design, sourced quality products through carefully developed manufacturing partners, researched customer demand, built product ranges targetting said customers and spent millions advertising & marketing their brand.
The retailers role in this relationship was the conduit to the end-user, ideally done as though they were the brand guardians. Some retailers do this better than others.
What is D2C, DTC & Direct-to-Consumer?
D2C, or DTC, is the commonly used acronym for selling direct-to-consumers. It refers to the originating manufacturer, or brand, selling to the end-user by bypassing any third-party retail company; traditional high street shops, their online equivalent, concessions, wholesale, distributors etc. In other words, D2C cuts out the middlemen.
Brands like NIKE sell direct through their own transactional website and dedicated NIKE stores, which currently stands at 41 stores in the UK.
Whilst NIKE’s transition to D2C is quite recent, other brands established themselves from launch with a direct D2C strategy, examples being Casper, Eve Sleep, Dollar Shave Club & Harry’s.
NIKE Consumer Direct Offense
NIKE have been quite aggressive in their approach to their direct strategy, naming it, “Consumer Direct Offense“, perhaps they’d prefer it described as assertive instead.
They’ve made their intentions very clear though, “Leveraging the power of digital, Nike will drive growth – by accelerating innovation and product creation, moving even closer to the consumer through Key Cities, and deepening one-to-one connections.” (NIKE press release)
The extent of this direct offense became clearer in 2019 with several announcements; the appointment of tech supremo John Donahoe (ex-eBay CEO) as their new CEO, terminating numerous supply agreements in a selective cull of their retail distribution channels – putting many retailers at risk of losing sales – and the ending of their relationship with Amazon.
Whilst NIKE have recognised the importance of a D2C strategy, others have suggested this to be a bold move. It will certainly improve their margins, deliver better brand experience for customers and improve data capture, aiding customer retention, delivering sustainable long-term sales growth and ultimately increasing profits. It is however a huge blow to many retailers.
NIKE attribute their recent 30 percent share price rise and profit growth to this new strategy, which delivered a 44.7 percent margin, due primarily to higher average selling prices, margin expansion in NIKE Direct and favourable full-price sales mix.
In 2020, the company forecast that revenue from their NIKE Direct division will be $16bn, up from $6.6bn in 2015, and that’s before they really start to grow this channel.
NIKE are undoubtedly masters of their brand, but speaking as a retailer, I cannot help think that they need to bolster their retail management expertise in technical areas of eCommerce, order management & dispatch, customer service and supply chain merchandising to ensure they deliver the very high standards consumers expect.
Selling direct is so much more than adding products to a website and whilst the NIKE brand will take them a long way down the road to success, a quick snapshot of their UK website reveals some technical SEO issues to be resolved, 16s to download a page is poor;
The direct to consumer model is well-established, albeit not widely used in isolation of traditional retail models, and when combined with the technological enablers currently available from AI and Blockchain, we will start to see a more rapid decline of retail companies as we know it.
The risk to retailers is significant and we need to start seeing strategies of how they plan to survive this retail evolution.
This is further accelerated by the increasing dissatisfaction consumers have with the over-monetisation and abuse of their data usage by service providers such as Facebook, Google, Amazon & Apple.
Retail brands that pursue a D2C strategy and reward consumers for access to their data will cement their relationships and win an increasing share of the customers spend, whilst maintaining their margins. The transparency of blockchain technology within this retail environment can help reassure consumers and accelerate further the growth of direct strategies.
Why Brands Are Going Direct to Consumers
Retail is changing. Customers shop online more than ever before, reducing some high streets to ghost towns. Darwin made it clear that to survive, one must adapt and that is what the major retail supplier brands are doing, with other manufacturers following fast. Retailers must also adapt, as they are fighting for survival too.
A recent Barclays survey of 500 UK manufacturers, highlighted that tech savvy companies that adopt a direct-to-consumer D2C sales strategy stand to gain £13bn in revenue in the next five years.
- Three-quarters (73%) have already adopted this trend as part of their business strategy
- Seven in ten (72%) believe selling DTC and cutting out the ‘middlemen’ is good news for both consumers and manufacturers (but not retailers)
- DTC now accounts for 16% of all manufacturing sales in the UK, with sales increasing by 55%
Brands who invested in a DTC strategy said they had benefited from increased revenue, growth in their customer base (38%) and increased speed to market (32%).
Brand Benefits of a Direct to Consumer (D2C) Strategy
There are numerous brand benefits of a direct-to-consumer (D2C) strategy but none favour the retailer.
- Consumers Demanding A Better Customer Experience
- D2C Builds Brand Relationships
- Consumer Data More Valuable Than Oil
- Not Selling Direct Dilutes The Brand
- Decling High St Footfall
- Increased Sales
- Improved Margins
- Speed to Market
- Full Product Range Presented Online
- Selling Prices Controlled
- Dedicated Shopping Environments
Consumers Demanding A Better Customer Experience
As the retail landscape becomes more and more competitive, retailers are upping their game and fighting for every penny. They are doing this by being better than their rivals, delivering better products and delivering a level of customer service that consumers want. Customer experience is the new battlefield and smart technology is the new weapon.
Brands that sell via third-party retailers are reliant on their partners delivering these service levels, and unfortunately, some fall far short of what both the brand and customer expect. Adopting a D2C strategy enables brands to take control of the customer experience, giving the consumer direct access to the brand.
Brands need to be mindful that it’s not just a glossy bag and bold marketing images, it’s also ensuring that products arrive on-time (next day), websites are fast and easy-to-navigate, and every aspect of service is first-class. Good customer service is both pre & post purchase.
D2C Builds Brand Relationships
Having direct access to customers allows brands to communicate in an unambigous manner, much to the delight of the marketing executives who spend hours deliberating over the right tone-of-voice to use in advertising, marketing & promotional messages. They can at last ensure they deliver the exact brand message, in every communication.
Building customer relationships was always the response brands gave to retailers concerned with brands stealing their sales, with the brands replying – often with a straight face – that online sales were not a significant volume. NIKE’s $16bn this year says otherwise and brands can no longer hide the fact that they are going direct, and aim to win.
Consumer Data More Valuable Than Oil
The big data companies seduced us into building their companies by offering us free services; social interaction with people we often don’t know, adverts for products we don’t want and a marketplace to buy them. I exaggerate to belittle consumerism but the truth is we all do it, and we do it a lot.
The combined market capitalisation of the big four data companies; Facebook, Apple, Amazon & Google, is greater than the GDP of the United Kingdom.
Having direct access to this data allows brands insight into how consumers behave, enabling them to target customers and develop strategies to significantly increase the likelyhood of achieving a sale.
We often don’t realise the power of our own data. Consider this example, we browse products pretty much every day, but only buy when we can afford it. For most people this is when we get paid, which is the same time each month. Once brands gain insight into this behaviour, they can target us at the exact time we get paid, increasing their opportunity to secure a sale. That’s powerful insight.
Not Selling Direct Dilutes The Brand
Brands spend millions, if not billions, researching & developing, then promoting & marketing their brands, and despite carefully worded supplier agreements detailing how their brands should be sold, displaye and promoted, the retail industry often doesn’t match the brands’ intent.
Retailers sell numerous brands, and although they work hard towards delivering the supplier’s guidelines, retailers aren’t the brand guardians they should be. The brand is therefore left being one-of-many and sits alongside their rivals in a throwback to a high school dance, with wallflowers adorning the dance hall walls. So sad.
Retail standards vary from retailer to retailer and even store to store, not to mention the presentation online and via social media. It’s a mess.
Brands selling direct can control this with exacting standards, which is one of the key drivers for them adopting a D2C strategy.
Decling High St Footfall
The decline in high street footfall is well-documented and whilst the media tend to focus on the impact on retailers, brands suffer too and their shareholders seek increased value year after year. It is therefore inevitable that they look for ways to replace lost sales from their retail channels by going direct to consumers themselves.
Brands selling direct do so at retail selling prices, not wholesale prices. In some cases this may be an additional increase of £40 for every £100 previously sold.
Brands selling direct via physical locations aren’t restricted to their distribution customers store portfolio, nor to country location restrictions. In the same manner, brands aren’t restricted by product range, sub-brands selection, stock shortages or any other bias the brands may have.
By selling direct, brands retain the margin given to distributors and retailers. This may move their gross margin by anything upto 40 percentage points, which for some brands may double their achieved margin. NIKE’s 44.7 percent gross margin will be pretty rare for a manufacturer, sub 30 percent is more likely.
Being in control of their own selling prices will have a positive affect on their gross margins too, as will decisions around reducing prices and promoting products.
Speed to Market
Cutting out middlemen and going direct saves weeks, if not months of time, and in the highly competitive cut-throat retail environment we find ourselves in, this is a huge benefit to brands.
Having adopted a D2C strategy, brands can reach consumers much quicker than if they had gone through their retail distribution channels. Speed, agility and immediacy of customer reactions allows brands to adjust selling prices, manufacturing quantities and even selling prices.
Customer responses in one market channel or region can influence buying & selling decisions for another. Combine this speed & efficiency with previous data & insight and brands can significantly impact their bottom line.
Full Product Range Presented Online
One of NIKE’s biggest customers in the UK is JD Sports and despite them offering a staggering 1,700 NIKE products on their website, this is dwarfed by the UK NIKE website listing over 5,600 products (men’s & women’s clothing & footwear), a three-fold increase on what JD Sports offers.
Going direct to customers allows brands to present their entire catalogue online. The numbers listed above are only for the core products, it doesn’t include children’s clothing or footwear, let alone the one-off & special collections.
Having a D2C strategy enables product designers the opportunity to test concept products, made in small sample sizes, or maybe not even manufactured, simply offered as a suggested range, seeking customer feedback prior to production. Once again, data & insight obtained direct from consumers without the input or involvement from their retail sales channels.
Selling Prices Controlled
Their are very clear laws in the UK, and other countries, about selling prices and I’m not suggesting anything untoward here but for brands acting within the law, they are able to determine what price they sell their products for.
Brands can choose what the selling price should be at launch, during normal trading conditions, during adverse trading conditions and during promotional periods. Normal factors will of course apply, supply & demand, time of year, end-of-line / discontinued products etc.
Choosing what price to sell products at gives the brands greater control over the flow of sales volumes and of course gross margins.
Dedicated Shopping Environments
Brands that sell through retailers are restricted to the environments of their retail partners. Large brands like NIKE tend to have clear display requirements built into their Supplier Distribution Agreements, and their better partners strictly adhere to these brand guidelines, but this isn’t always the case. If I represented NIKE, I’d be much happier with the presentation of my products in the new Liverpool JD Sports store than the Sports Direct stores in small towns.
The same is true online, where brands compete against their competitors in the plethora of listing options presented. Even where retail partners promise, and even delivery, dedicated pages for the brands, nothing can compare to the brands’ own website.