Why ‘direct to consumer’ brands are dominating in retail

Everyone in business is looking for ways to cut out the middleman to save costs and the internet has made it easier for companies to go directly to the consumer. Now there are billions of smartphone owners who have a computer in their pocket and can demand services and goods instantly.

For those companies that have embraced direct to consumer (D2C) as a way to do business, there are major opportunities. They can serve customers better and know more about them because of digital data about purchasing habits, personal information, online behaviour and so on.

Once a consumer has downloaded the company’s app or logged into its website, the entire experience takes place in a digital, walled garden and can be highly personalised

The implications for marketers are seismic. Companies used to invest in advertising and brand-building to raise awareness and drive sales in physical stores. A new breed of ecommerce companies such as Amazon and Uber own the whole customer experience from start to finish, or end to end as some marketers put it.

Once a consumer has downloaded the company’s app or logged into its website, the entire experience takes place in a digital, walled garden and can be highly personalised. And, as the company gains more data and learns to serve the consumer better, it creates a virtuous circle, which makes it harder for a competitor to challenge the role of the incumbent company.

This explains the winner-takes-all nature of the internet landscape, where only a relatively small number of players are hugely dominant globally.

Legacy companies, particularly in the manufacturing sector, are at a huge disadvantage because they have not had a direct relationship with consumers. Instead they are used to investing in advertising and marketing to build their brands, and rely on third-party retailers for sales.

Consumer packaged goods companies, which include the world’s two biggest advertisers, Procter & Gamble (P&G), the maker of Pampers and Always, and Unilever, the owner of Dove and Ben & Jerry’s, are among those facing the biggest challenge. Not only do they have to build D2C relationships virtually from scratch, but also they have to restructure their legacy operations in the glare of the stock market where shareholders demand rapid results.

The shift in our media consumption to smartphones poses a further problem because the small screen is not well suited to advertising. In fact, the personal, intimate environment means marketing messages are often unwelcome and intrusive. Traditional, 30-second TV commercials no longer work as well when smartphone users are probably swiping through their social media feed and the sound may be off.

“The smartphone has changed behaviour and is now changing advertising,” says Nick Manning, chief strategy officer at Ebiquity, a consulting firm that advises advertisers on their media spend. “People use smartphones for communication, information, entertainment and transactions, with advertising struggling to find its place in an app-led world. Intrusiveness leads to ad-blocking and skipping.

“But it’s not just smartphones. We have now genuinely reached an era when multi-channel, multi-device marketing is a reality in all sectors of business, and companies need to manage a complex set of channels and content on a continuous basis.”

The men’s razor market is an example of how the traditional supply chain has been disrupted.

Startups such as Dollar Shave Club and Harry’s Shaving sell razors online at a fraction of the price of legacy products such as P&G’s Gillette.

Harry’s Shaving, which was founded in 2013, trades on the fact it sells its wares direct to the consumer with the marketing slogan “Great shave, no middleman”. Dollar Shave Club, which launched in 2011, has a similar ethos. Unilever responded by paying $1 billion for the company last year and is using the D2C razor business as a catalyst for change within the group.

“It is starting to permeate into other parts of our business where we are leveraging the benefits of direct to consumer,” Paul Polman, chief executive of Unilever, told shareholders this summer.

P&G’s Gillette has been forced to make what it calls “meaningful price reductions” to cope with these new competitors and launched Gillette Shave Club this year.

However, David Taylor, chief executive of P&G, has warned that consumers are not going to want to buy everything on a D2C basis because it would be impractical. “I get asked a lot ‘Should P&G go direct to consumer?’” he told investors, explaining how it is testing D2C with some of its other brands such as Olay Skin Adviser. “But certainly our belief so far is that most consumers do not want to have a lot more accounts for narrow parts of their daily or monthly needs.”

In contrast to manufacturers, most retailers already have a D2C relationship, but it still requires a transformation to move from being an analogue, offline operation into a data-driven, digital-first business.

Domino’s Pizza Group is an example of a company that has gone digital. Three quarters of its sales are now made online, compared with only a third in 2010, although it also has a growing estate of 1,000 physical stores to serve its customers.

Going D2C has drawbacks. Marketing experts have warned that some companies are becoming obsessed with generating a “direct response” by using advertising to drive short-term sales and are in danger of forgetting the value of long-term brand-building, particularly to win new customers.

Enders Analysis published a report this year in association with Magnetic, the UK trade body for magazines, which found 70 per cent of growth in ad spend has been in direct response since 2001.

“Mounting evidence suggests a focus on quick returns and cheap media at all costs is hurting marketing effectiveness, measured in long-term return on investment, brand equity and consumer satisfaction,” Enders says.

Part of the problem is it’s easier for an advertiser to measure online performance and sales in the short term, rather than look at the impact of other traditional media channels and examine longer-term factors that might contribute to business success.

Enders cites John Lewis’s campaign for its home insurance business as an example of how investment in brand-building worked in a category that has been commoditised by aggregator price comparison websites. The department store chain used TV, print and other traditional quality media channels to differentiate itself as a premium service, rather than just use online targeting.

“A digital-only campaign, or a campaign centred on consideration and activation, would not have supported the business and marketing objectives,” Enders says. “It was brand marketing, chiefly in TV and print, that communicated the message to a broad target audience, delivered John Lewis’s price and quality premium, and made the consideration and activation activities efficient and effective.”

Smart ecommerce businesses such as Just Eat, which became the sponsor of ITV’s X Factor this autumn, have invested in brand-building as well as direct response.

The need for companies to invest in their brand is set to become more important because we will depend more on technology and artificial intelligence to make purchasing decisions, for example if a consumer asks Amazon’s voice assistant Alexa to recommend and order a product.

As companies look at the whole customer purchase journey, they are increasingly thinking about an end-to-end solution that goes far beyond marketing. It might start with new product development, then there’s the design and user experience, building awareness through advertising, driving a purchase and, finally, distribution of the product.

Marketing, in this context, is just one component in a world where everything is inter-connected because of digital technology. That is why management consulting firms such as Accenture and Deloitte and software companies such as Salesforce and Cognizant are moving into marketing services because they can see clients want help with every step of the way. Traditional advertising groups such as WPP need to transform themselves and broaden their capabilities if they are to keep up in this fast-changing market.

In the age of D2C, brands need to make the customer experience as seamless as possible because consumers are in charge and, if they encounter friction, they will shop elsewhere.