THE DIRECT-TO-CONSUMER BRAND REVOLUTION
This article is part of a series exploring an evolving retail landscape and follows on from our post ‘The Demise of the department store.. The end of an era, or can we stop the rot?’, if you missed it, you can find it here.
In our recent study of the future of the multi-brand retail, we concluded that the decline of traditional high street retail is directly proportional to the insurgence of brand; That physical department stores need to build a more targeted and stimulating brand environment in order to reconnect with their consumer; and that they need to hit reset if they want to compete with the dominance and the authority that their more confident brand counterparts are monopolising. Where department stores once prided themselves on their customer service, convenience, and wide range of products, shoppers now turn to more fluid and individualistic ways to shop.
Enter direct-to-consumer brands, or more specifically DNVB’s – Digitally Native Vertical Brands (DTC will do!). While the ‘online first’ business model is now far from a new phenomenon, these brands are born of a very current kind of marketing, in a world where consumers perpetually seek shortcuts to better convenience, richer and more direct brand experiences and better customer service. These models are also stealing market share at an alarming rate too. Although not digitally native, according to Statista, Nike is investing heavily in it’s DTC channels, their revenue has grown from $3.5b in 2012 to $11.7b in 2019, and their own forecast is to see $16b by 2020.
Few will know the term DNVB, but most will be familiar with at least one of its success stories: Peloton, Quay Australia, Made.com, Harry’s, Warby Parker, Birchbox, Casper, Patch, Brosa, Graze, July…… this list goes on.
SO WHAT IS A DIRECT-TO-CONSUMER BRAND?
In simple terms, a direct-to-consumer brand is one that focusses sales of its own products or services direct to their consumer, not through a retailer or franchisee. By doing this, they effectively cut out the middle man and have much greater control over manufacture, supply & distribution and customer service.
Typically, DTC is most present solely as an online model (a DNVB is an online-first brand). This means these brands cut out both the retailer associated with indirect distribution, and the hiked rents associated with a dedicated physical store. By doing this brands can afford to offer a better quality product, with better design and better customer service, at the same competitive price.
But the real appeal for DTC is that by cutting out the retail middleman, brands are afforded a much more direct relationship with their consumer. They can build a much more targeted and fluent marketing strategy across their entire service platform. This is especially important now, at a time where accessibility, and diversity of product is such that variation on price alone is becoming slight. Consumers are beginning to affiliate with brands based not only on cost and convenience but on values and personality. They favour those with purpose and substance and expect great customer service; these are becoming the new competitive advantages.
What’s more, when using wholesale channels, there is less control over the way product is displayed, or how the customer experience will be in that particular store on that particular day. So there’s no way of controlling the consumer experience. In a DTC model, because the transaction is usually contained within a much wider UX journey, built around a digital platform, brands have a greater control over this relationship from end to end. They can build added value through a personalised dialogue and nurture with ongoing after-sales support. DTC then provides a wealth of digital data through it’s online advertising streams allowing brands to target their consumer demographic and then learn from shopping habits at a detail traditional retailing simply can’t match.
If a brand can do all this and provide a much more authentic and pure brand experience to its consumer, they’ll effectively under-cut the long established giants in their sector.
Think back to the last time you used social media, most will be familiar with an advert that popped up – likely a design led brand like Casper or Birchbox – pushing bold, no-nonsense language about a revolutionary product set to disrupt a stale and untested market. These brands appear tailored to your personal cookie profile. In most cases, these brands hit home amongst the 20 to 30 something Millennials; Digital natives with buying power and no particular sentiment toward the department store or the big box high street retailer. DTC brands speak to them in their own language, through experiential marketing and pure brand storytelling. It’s less about the actual product, and more about the way its packaged up.
It’s fair to point out that the emergence of these insight driven product design success stories perhaps wouldn’t have come about if it wasn’t for changes in the way retailers have positioned themselves in a drive for lower prices. This has ultimately led to a neglect for the consumer and transparencies in the bid to compete with stack ‘em high, sell ‘em cheap sales strategies.
A NEW RETAIL BOOM
Traditionally DTC brands have acted upon reduced overheads in a response to consumer demands for speed and convenience. However, with a shift now moving towards a more enriched customer experience and a focus on customer service, this is now changing; proving that retail is still a relevant and profitable touch point for brands with purpose and a consumer-centric directive.
Where DTC startups once set out to reduce costs through streamlined digital only models, they are now being challenged in their ability to attract customers because of increased digital marketing costs in saturated marketing streams. Instead of paying high rent prices, they pay high marketing costs associated with social media and Google. They now no longer have competitive advantage here and are being forced to rethink their very core business models – much like their traditional retailing counterparts.
Analysis by AdStage shows the Cost per Mille (1000 ad impressions or news feed views) rose 171% in 2017, and then a further 91% in 2018. While this trend has slowed in 2019, its clear that this will have significantly impacted the DTC value advantage and eaten into profit margins. Along with a focus on product design, customer service, and with shipping you can see why brands are being forced to rethink the future of this model.
Its also probably worth suggesting that whilst the world of retail is changing, its a long established industry and it would be foolish for brands to place all their eggs in one basket. The now somewhat dated term ‘Omni-Channel’ and its approach still rings true – for most, now more than ever. Brands must be accessible and provide a convenient path to purchase, but ultimately brands must adapt to their consumer’s values and shopping habits. Harry’s relied heavily on its investors before making considerable profits through its Wallmart and Target distribution streams. The brand has now stolen as much as 2% of the shaving market – around $2.8 billion since forming in 2013 (CNBC).
‘Just a few years ago, retailers—especially those that thrived before the digital age—were obsessing over e-commerce, which includes desktop and mobile shopping. Today however, both traditional retailers and e-commerce sites are realising the importance of offline sales.’ (Vision Critical, 2019)
Arguably one of the founding DTC brands Warby Parker claims to have made more sales from its stores last year than it did from its website (Inc. 2019). Many others too are finding success in physical retail where customers want to visit stores to experience the product and brand first hand, then talk to the specialist store staff about the product.
Meanwhile in the UK, brands like Swoon are moving in on concession spaces in department stores like Debenhams to provide a more tactile experience for shoppers to test out their products. As Nicki Lynch, CCO at Swoon Editions emphasised: “Our home-obsessed customers are increasingly requesting that they want to see our furniture in real life. In an online-only world it is harder to bring people into your brand in the same way you can with a physical store’’
With a host of other Brands such as Casper, Quay, Barkbox, and Peloton now also ever-present in the physical retail space, and with costs becoming ever more marginalised, what is left to differentiate brand from retailer? What’s the difference that is carrying consumer momentum in the shift towards brand?
To start with, DTC brands have had a head start, customer data provides a live analysis of their consumer behaviour and shopping trends thanks to the digital-first launch strategy.
We’re now starting to see an unlikely partnership between brand and retailer, online and off-line. Brands like Quip and Harry’s are partnering with Target to gain an even stronger foothold in the Beauty sector. Both Quip – an electric toothbrush brand – and Harry’s – a shaving subscription service – have built a relationship with Target to drive sales of their refills and subscriptions, online. In return, Target receives revenue from Quip for brand activated sales, and data from Harry’s. Data.. thats important, because in today’s fragmented and non-linear purchase process, data is how brand and retailer are able to adapt to changing trends.
Aussie brand Bailey Nelson too are capitalising on a supportive online / offline combination. Focussing on a simple UX journey built around competitive pricing; frames, prescription, lens options, transaction. Physical stores across the nation mirror this clean and simple purchase process and provide an opportunity for those inclined to shop their own way. Stores also have the added benefit of in-store optometrists who provide eye tests bulk billed through the Medicare scheme. The whole package is wrapped up with one, clean and clear marketing language.
One might be forgiven for thinking we’ve gone full circle. But theres a few key differences here, this time its all about consumer driven marketing, brand values and a concerted approach toward better customer service. And this time they’re getting Omni-Channel right. Its about using consumer driven data to understand where different consumer tribes shop and about being there for them – right place, right time.
SUMMARY – FUTURE PREDICTIONS FOR DTC
The success of DTC tells us one thing, brands and retailers need to put the consumer first, by engaging in a more direct and open dialogue, and with more conviction around brand authenticity. Those with more substance will find more success.
We can expect to see more large brands swallow up smaller DTC brands, not just for market share, but also for consumer data.. P&G now own Native deodorant and Harry’s razors, Walmart owns Bonobos, Unilever has bought Dollar Shave Club.
The department store isn’t finished yet, retail is still a valuable touch point for brands to take on both dedicated and concessional spaces. We expect to see more digital-first brands experimenting in these physical spaces for shoppers to interact and engage, with the support of a heightened awareness of the consumer through data driven online channels.
Expect to see data also being used for brands to understand consumers in more dynamic and discreet ways. Take Nike Melrose for example, where data learned from the NikePlus member scheme and app directs store merchandising to reflect local consumer demands and purchases made through digital channels. An omni-channel that’s built more fluently into the purchase process.
The onus is now on brands to understand changing consumer shopping habits, be it online, retail distributor, or dedicated brand store. Brands must consider online and offline as equal and ensure both delivery a clear and cohesive identity. Physical spaces should provide an opportunity for brands to be experimental, trial new services and transactional styles and agile enough to adapt. They must be humanistic, and speak to the consumer.
Drawing on his global experience in Europe, Asia and more recently in Australia and New Zealand, Ian’s approach to design is first and foremost anchored in the Brands goals. Passionate about how brands are perceived in a physical space, his approach is efficient and refined, while always trying to push the boundaries of what is possible.
Based on the ground in the UK, Ian has lead the design of projects in both Australia, Asia and Europe working closely with our teams in China and Australia, as well as the UK. Ian’s continued commitment to delivery definitely crosses borders!