The digital age paved the way for an explosion in direct-to-consumer products. Before the Internet, startup brands had to fight for shelf space in retail outlets against established companies who dominated the field, or they could open their brick-and-mortar stores and take on that overhead. Neither option was viable for emerging brands. But e-commerce placed their merchandise at the customer’s fingertips. By cutting out the middleman, direct-to-consumer (or DTC) brands could offer quality products at competitive prices. Although these companies had to assume the roles of marketer and retailer, many—such as Allbirds, Dollar Shave Club, Glossier, Harry’s, Rent the Runway, and Warby Parker—were able to penetrate their markets and establish their brands as legitimate contenders against the corporate giants. Recently, the pandemic disruption of the past few years has presented numerous challenges to commerce, both traditional and digital. How has DTC been impacted and what must DTC brands do to adapt and maintain their hard-won market share?
How DTC brands succeed in the global market
The formula for a successful DTC brand has many elements. DTC means a product or line of products whose producer exercises full control over production and sales across all channels. The DTC company can make its goods available exclusively online, or at its own branded stores as well. DTC companies don’t do everything in-house; they generally outsource manufacturing and might consult experts for marketing, but DTC companies control the sales process, capturing valuable consumer data along the way.
In the DTC universe, data is king. Consumer data—everything from email addresses and credit card numbers to demographics and buying habits—gives the DTC company greater access to buyers and more opportunities for direct sales. But having such a close relationship with each consumer imposes greater responsibility for secure data storage as well as responsive customer service. DTC brands that succeed guard against data breaches that put customer information in jeopardy. They also develop efficient channels for returns and refunds. With the advent of Covid-19, “reverse logistics” became a key differentiator, as companies invested heavily in enhancing this aspect of the customer experience, which is so critical to building brand loyalty.
How Covid disrupted the DTC process
DTC companies initially benefited from the Covid lockdowns. People either couldn’t or didn’t want to go out shopping at traditional retailers. The early weeks and months of Covid were a boon to DTC brands because consumers expanded their online shopping habits to include items they would previously only buy in person. Consumers also did more comparison shopping online, which helped upstart brands win over new customers.
The boom in DTC buying was too much of a good thing for many brands, who didn’t have enough products in stock and couldn’t get orders filled fast enough because the supply chain started to break down. The combination of high consumer demand, overseas and domestic labor shortages, and port congestion on both ends, soon mangled the global supply chain. DTC companies do not rely on retailers to keep their products in stock, they can’t count on a customer blaming the retailer when the item isn’t available. The burden of fulfilling customer orders falls squarely on the company. Therefore, when Covid disrupted supply chains, DTC brands felt the pain.
Lessons learned from Covid for DTC brands moving forward
Covid was a teaching experience for DTC companies who learned some hard lessons. There are costs to being too heavily reliant on one supplier, as well as being unable to predict customer demand or supplier readiness. Many DTC brands are looking at solutions that include:
- Resiliency in the supply chain — Many companies have developed plans for moving at least some of their manufacturing closer to the markets they serve. They are wary of over-dependence on a single nation, which could be subject to work stoppage if another health emergency breaks out. Many companies are taking a closer look at Vietnam, India, Mexico, Canada, and even the United States.
- Circular economy principles — The circular economy is a model designed to reduce the negative impacts of the industry by recycling and reusing materials. Companies that can “recapture” assets are not as dependent on the supply chain. For example, if a company that sells liquid products can incentivize customers to send back containers for refills, the need to manufacture containers is reduced significantly, saving expense and sparing the company’s reliance on the supplier.
- Better methods of predicting demand — DTC companies do not want to run out of products, but they also don’t want to spend gross amounts on the storage of inventory. DTC commerce works best when the product moves swiftly through channels from manufacturer to consumer. Many companies are becoming heavily reliant on enterprise asset management (EAM) systems with artificial intelligence built in. These programs can predict when companies might need certain components or a certain number of finished products.
- Unit economics — Many startup brands were willing to risk great stores of capital on growth to capture a segment of their market. Unfortunately, many found that while they could make an attractive product and garner impressive sales, they were not profiting sufficiently to remain viable. DTC companies that didn’t factor in all costs to the unit price must now take a much more conservative approach and hope that brand loyalty gives them staying power.
There’s also an interesting phenomenon going on in the market where traditional brands are entering the DTC space, while DTC brands are starting to open their physical retail outlets. With the decline of brick-and-mortar, it was only natural that established companies would dedicate resources to building an online presence. But can DTC brands successfully play tit-for-tat by opening their storefronts? Time will tell.
