The rise of direct-to-consumer brands
Over the last decade, the sophistication of technology and increasing globalisation have made it easier for budding entrepreneurs to create and launch a brand or product, and sell it via a direct-to-consumer (DTC) model. Brands and their founders can use technology to manage the process from ideation to delivery. They can use a variety of solutions to build and manage their websites, connect with partners all over the world to create and manufacture products, access almost any operational requirement from finance to fulfillment, and run their own marketing and communications activity. As a result, DTC brands have disrupted the traditional retail model by challenging the need for an intermediary, and played a role in reshaping the expectations of the modern consumer.
Arguably, the most well-known DTC brand success story is that of the Dollar Shave Club, which was bought by Unilever for $1billion in 2016. Dollar Shave Club was one of many beneficiaries of an environment that presented itself in the early 2010s, when it became easier to start and launch businesses via digital channels, the addressable market for eCommerce was growing rapidly, and competition was still relatively low.
Importantly, as a result of the relatively uncluttered competitive market, digital advertising inventory - the primary lever for growth for these DTC brands - was relatively inexpensive. DTC brands deployed marketing strategies that focused their investment almost exclusively on conversion (sales driving activity) via social media platforms and search engine marketing (SEM). Leveraging the intelligent and sophisticated algorithms of Facebook and Google, these early DTC brands targeted their ads to reach audiences that were most likely to buy their products. Inevitably, they sold products, collected customers’ data, and then used their own channels to continually engage them - all the while, investing in the algorithms to find new customers, sell them products, collect their data… and the cycle continued.
The model worked, because the barriers to starting a business were lowered, and the ability to scale these businesses was not impeded by a swathe of new competitors threatening to both dilute a brand’s market share, and drive up the price of the key lever for growth; advertising.
The current state, and COVID-19’s impact on online retail and the DTC market
Fast forward to 2020, and brands and founders the world over were faced with an almighty challenge: COVID-19. The onset of the pandemic and the subsequent extended lockdowns spurred the acceleration of digital behaviours, including both consumption of digital platforms and services and growth in eCommerce, while also providing the impetus for some of the more “traditional” incumbent brands to get their digital infrastructure and operations sorted.
> The acceleration of digital consumption and behaviour
Australia Post’s report “Inside Australian Online Shopping 2021“ found that:
- In 2020, 82s% of Australian households shopped online, a year-on-year increase of 75%;
- Online retail amassed over $50 billion in consumer spend, a year-on-year increase of 57%;
- Online share of retail spend reached 16.3% in 2020, bringing Australia’s online share of the retail market on par with leading western eCommerce markets such as the UK and the US; and
- While there are more online shoppers than ever, they’re also buying from more retailers and categories.
While not all of this growth has been in DTC brands, it’s certainly a market that is growing. While there is little data available for the Australian market, eMarketer valued the US DTC market at USD$111.54billion for the year 2020, having experienced 45.5% year-on-year growth.
The acceleration in digital behaviours is an exciting prospect for DTC brands. Across the board, the mass addressable market - consumers who buy online - is not only vast, but increasing. Initial data indicates that this online shopping behaviour is likely to stick, with many of the new online shoppers now regular online shoppers. But as the market grows, so too does competition.
> The increasingly competitive landscape
Alas, necessity is the mother of invention. A combination of these accelerated behaviours, and the inability for consumers to buy within physical retail environments, sparked a harsh reality check for many established retail brands that exposed prior underinvestment in the vital digital infrastructure required, and indeed expected, by the contemporary consumer. As a result, many invested more heavily in digital infrastructure and technology solutions, and concurrently, in data capabilities (especially as Google announced its intention to move away from third party cookies).
Even ahead of the pandemic, legacy brands were enticed by the hype of DTC, with the likes of Nike and L’oréal adopting an omnichannel model. Nike is a leading example of a brand that previously favoured wholesale retail arrangements and is increasingly adopting the DTC model – a transformation that has been in the works for the last decade or so, but was supercharged as a result of COVD’s significant impact. Nike’s DTC sales (via both physical stores and online channels) accounted for approximately 39% of their total sales last year, up from just 16% in 2011, and something is clearly working; their share price increased in 2020, and the momentum has sustained, having hit another all-time high on the 5th August, 2021. FMCG brands including PepsiCo and Kraft Heinz have also dipped their toes in DTC in the global market since the pandemic hit, though their appetite to double down on these revenue streams pending “COVID normal” is to date unclear.
The entrance of new DTC brands and the increased digital sophistication of the incumbents has ramped up competition, in turn, driving up the cost of and reducing brands’ share of voice in what has traditionally been the market’s core lever for growth; digital advertising. In the words of Neil Blumenthal, CEO of Warby Parker, “It’s never been cheaper to start a business, although I think it’s never been harder to scale a business.”
Maintaining momentum for DTC brands
There is no time like the present for Australian DTC brands to review and optimise their brand and marketing strategies to capture their share of what is both a growing and incredibly competitive market. While the below list is by no means exhaustive, we have outlined some considerations for DTC brands as they continue to map their paths to growth.
- Ensure a two-speed approach to marketing activity, increasing awareness via mass targeting, while also driving conversion amongst in-market audiences
Many DTC brands, in their relentless pursuit of sales activation, have neglected to build brand equity via activities that drive awareness. A key driver of this has been a focus on short term revenue, rather than one on long term profit - a consequence of a market where many venture capital and private equity firms focused on the former in their valuation of businesses.
To sustain long term growth and realise profit, DTC brands should focus a sufficient portion of their marketing and advertising effort and resources on building the brand, through activity that drives mass awareness. This is important because it ensures that these brands are not only present or available when a buyer is actively seeking to buy, but that they readily come to mind when a buyer begins considering a purchase. Importantly, investing in brand-led communications does not necessarily mean abandoning digital channels in favour of traditional channels, as both have proven themselves capable of building a brand (look no further than Zoe Foster Blake’s Go To for proof), and many digital channels have higher reach than any other in a marketer’s toolkit.
When planning channels, remember: - multi-channel plans are proven to be the most effective, with the important (and often forgotten) caveat that additional channels must drive incremental reach; and
- where the activity’s objective is to drive brand awareness, the activity must be measured as such. Plan and buy channels that deliver reach against the target audience, and measure both awareness and, where practical and possible, attention.
- Leverage and exploit owned channels to drive loyalty and customer retention efficiently
A focus on awareness and brand building does not mean that there is no role for activity targeted at the bottom of the funnel. Sales driving activity certainly plays a role, and the opportunity for DTC brands’ “owned channels” (such as their website, email database, and social media communities) cannot be underestimated in this regard.
A benefit of having built themselves in the digital world is that many of these DTC brands now have reams of first party data at their disposal, and they can use this to extrapolate the subsequent relative value and contribution of their owned channels. Their ability to access and use this first party data in a way to identify real insights and directly target their customers to drive sales and brand growth is a topic that deserves its own article.
For DTC brands, a strong marketing strategy values these owned channels, acknowledging that their role is to engage, communicate with and retain customers who have already been acquired, and thus drive loyalty. - Don’t underestimate or discount the role of physical retail in driving growth
The “traditional”, incumbent retailers have moved into the digital space, ultimately increasing their reach and distribution network. There is no reason why DTC brands can’t move into physical retail, too.
Physical stores play a dual role; both as a vessel for brand awareness and experience, and an incremental revenue stream. Commbank’s “Consumer Insights” report found that while online shopping has increased throughout the pandemic, and the behaviour is likely to stick, it is an “and”, not an “or”. In fact, physical retail stores remain the preferred method of shopping in almost every category. Modern consumers prefer and expect choice when it comes to the way that they interact with and purchase brands. - Leverage the trend towards local
Australians’ collective efforts to suppress the grip of COVID-19 have come at significant personal sacrifice and cost. While these sacrifices have many negative impacts, they have shown that on our best days, we are a collectivist culture, with community at the heart of our values. The range of “shop local” movements that resulted from this dual tragedy of fires and pandemic is a good thing for the local economy, and rewarded those retailers who had thought ahead to ensure they had an omnichannel approach ready to go. Commbank’s research found that the volume of purchases from online retailers located in Australia increased, and of the 49% who chose to support domestic businesses, more than half said that this will continue through to 2021.
The opportunity for local DTC brands is to differentiate from many incumbent retail brands by leveraging and communicating their local roots, their relative “smallness”, and what this means for Australians. This can be done in a variety of ways, such as through visual identity, tone, and through marketing campaigns and tactics, including partnership with other local brands and media. Many DTC brands have proven themselves masters of authentic storytelling, and stories focusing on locality and community – whether that be through profiling the founder, the land upon which the business works, the financial support of local community and initiatives, or having a voice on key societal issues – are powerful tool for positioning and differentiation from much of the traditional competition. - Proactively manage and prioritise the customer experience
A considerable challenge facing many eCommerce brands in the current climate is the number of things that are currently out of their control, including global supply chain blockages and overwhelmed delivery services, both of which stand between the paying customer and the receipt of their product.
In this environment, frequent and proactive communication with the customer is key, and the opportunity to treat a customer, or thank them, should not be missed. DTC brands have the benefit of the direct relationship with the end buyer, and thus can ensure that communications are frequent and personalised. Bed Threads are a great example of what many DTC brands are getting right. Customers who purchased a product during their recent 15% off birthday sale received a proactive email a couple of days later, which provided an update on the delayed status of delivery due to factors out of their control. Their communications were both transparent and helpful (including a reply address!), and grateful for the recipient’s custom. Customers appreciate transparency, and are often more forgiving when it’s proactive.
There are other ways to nurture and prioritise the customer experience, too, many of which are easier to execute by DTC brands who have more control over distribution, including free returns, personalised packing notes, product samples in packages, and superior tracking options.
- Finally, but perhaps most importantly, be focused, and have discipline
Perhaps the most significant barrier to growth and profit for small brands with big ambitions is a lack of clarity regarding the strategic ambition and commercial goal, and a plan to get there.
Be purposeful and consistent in everything that you do - in how you behave, communicate, look and sound. Focus your resources on fewer, better things. After all, brands are built through consistent and authentic behaviour and messaging over time.
As the eCommerce market continues to grow, and competition in the online retail market ramps up, there is no better or more important time for DTC brands to double down on brand and marketing activities to drive sustained momentum and profit.
1. https://auspost.com.au/content/dam/auspost_corp/media/documents/ecommerce-industry-report-2021.pdf
2. https://www.emarketer.com/content/what-you-learn-disruptive-d2c-brands
3. https://qz.com/2025862/nikes-direct-to-consumer-sales-are-taking-off
4. https://www.nytimes.com/2020/01/23/business/Billion-Dollar-Brands.html
5. https://www.commbank.com.au/content/dam/commbank-assets/business/insights/docs/consumer-insights-report_may-2021.pdf
6. https://www.commbank.com.au/content/dam/commbank-assets/business/insights/docs/consumer-insights-report_may-2021.pdf