The four dimensions of Direct to Consumer (DTC) success

The ‘retailization’ of CPG is forcing huge changes in marketing operations. A direct relationship with end customers will boost customer loyalty, create new revenue streams, and improve margins. But the shift to DTC isn’t simply about adopting retail strategies, it is about creating retail capabilities. This blog looks at the four dimensions of DTC success – customer acquisition, personalization, fulfilment, and digital transformation. 

The direct-to-consumer (DTC) market is no secret. It is already huge: it was estimated to be worth USD200bn by the end of 2024, having doubled in size from 2020 (!) and is projected to grow at a CAGR of 24.3% from 2024 to 2029 a CAGR of by the end of the decade (!). It has represented a real threat to established CPG companies with, for example, competitors like Dollar Shave Club and Harry's combining to cut Gillette's share of the US razor market from about 70% to under 50% in a decade (!).  It is therefore no surprise that these established brands are aggressively pursuing the DTC market in several ways:

• Acquisition – the Dollar Shave Club is one of many DTC brands acquired by CPG Unilever since 2015 
• Launch of entirely new brands - P&G’s EC30, an eco-oriented brand of dissolvable, solid-form soaps and cleaning products, is one instance of this. 
• Selling existing brands directly to consumers – for example, PepsiCo launched two new websites (PantryShop.com and Snacks.com) to do just that. 

The attractions of a DTC offering are easy to grasp. It removes the middleman, opening up the possibility of fatter margins and the ability to be nimbler in product offerings. (In doing so, CPG brands are competing with their channels and, while this is not covered here, the disintermediation of retailers is something 19% of CPG leaders recognized as a challenge (!) .) Perhaps more importantly, most DTC offerings employ a subscription model which not only brings in recurring revenues but gets CPG companies closer to the holy grail of turning consumers into loyal customers. 

Embracing retailization

Of course, the shift to DTC isn’t simply about adopting retail strategies, it is about creating retail capabilities: the retailization of the CPG industry extends to the brands themselves as much as the products they sell. To successfully deliver on a DTC strategy, brands must develop in a few months the same competencies that retailers have built up over decades. HFS asked more than 150 CPG executives what they thought were the biggest challenges in adopting a DTC strategy (!):

As the name implies, DTC requires CPG brands to have a much stronger relationship with the end customer than has traditionally been the case. So, it is no surprise that setting up and running an effective customer services function is seen as the main challenge. Gaining those retail-like operational capabilities – handling returns, providing aftersales services, and competing in order fulfillment times – also scored highly. And technology issues –integration with legacy IT infrastructures and implementing a state-of-the-art e-commerce platform were also top of mind.

The Four Dimensions of DTC Success

In describing the challenges that CPG brands face in operationalizing their DTC strategies, there are four key areas that need to be addressed: Customer Acquisition, Personalization, Fulfillment, and Digital Transformation.

1. Customer Acquisition

CPG brands have traditionally focused on demand generations and relied upon their retail channels to fulfill that demand. DTC requires these brands now to find cost-effective ways to identify, reach, and engage their target audience. This implies a shift from mass advertising to highly targeted acquisition with a greater emphasis on social media channels.

This is fundamentally a data challenge. Brands may not have the same direct access to customers that retailers have always enjoyed, but there is no shortage of data available to CPG companies. It is however scattered across the digital landscape – on social media, in first-party data gained through loyalty cards or other interactions with the customer, or in the shape of point-of-sale data or distribution statistics provided by retailers and distributors. The challenge is to bring all of this together to create a single view of the customer and provide a platform for actionable insights and personalized interactions.

A Customer Data Platform (CDP) centralizes customer data in real-time from a variety of sources to build a single customer profile, providing a comprehensive view of the customer's journey, behavior, preferences, and interests. The advanced analytics and automation built into a CDP allow CPG brands to generate the insights necessary to support the personalized marketing campaigns that will fuel customer acquisition strategies. A CDP also leverages customer consent and identifies customer preferences to deliver a robust, secure platform that is compliant with data privacy regulations like GDPR and CCPA. You can learn much more on this topic in our companion blog,” How a Customer Data Platform uses real-time customer data to deliver greater marketing ROI”.

2. Personalization

One of the corollaries of a customer sharing lots of information with a brand is that many of them, particularly those taking up subscription offers, expect a high degree of personalization in return. This can and should take several different forms.

Firstly, it often creates a demand for unique configurations, limited editions, or custom packaging. For example, of the million dog food care boxes sent out by Barkbox every month, there are around 120,000 different varieties based on the size and breed of the dog and things like allergies (!). Traditional mass production lines are not flexible enough for this level of customization and CPG companies should invest in modular production lines that can switch between product variants quickly and, where practical, investigate 3D printing and flexible automation for custom orders.

Solutions like a CDP also enable extensive personalization of the customer experience and the ability to dynamically align product offers with customer needs. It should also enable CPG companies to contextualize the buying journey to enhance conversion by, for example, sharing recommendations from similar consumers.

3. Fulfillment

Traditional manufacturing supply chains are optimized for bulk shipments to retailers or distributors but moving to DTC means managing a fragmented, multi-channel distribution model with thousands of individual consumer orders. It is a model in which the responsibility for handling customer inquiries, complaints, and returns (these can run as high as 20-30% in industries like apparel) falls to the manufacturer, rather than the retailer. It also involves fulfilling thousands of small orders instead of orders which creates higher logistics costs and requires sophisticated order management systems. DTC also requires real-time inventory visibility across multiple fulfillment centers rather than a reliance on wholesale forecasting.

Data-driven analytics and intelligent factory automation have a critical role to play in addressing many of these issues. Real-time demand forecasting using AI can enable the development of an agile, demand-driven production model that will limit the risk of inventory imbalances with some locations overstocked while others face shortages. Automation (e.g. lights out factories) and Integrated logistics software that tracks individual shipments should ease fulfillment concerns. Implementing AI-driven chatbots into your contact center will improve the accuracy of processing returns and, in conjunction with reverse logistics and regional return centers should increase the efficiency of the process.

4. Digital Transformation

Many CPG companies have simply never needed to implement the kind of sophisticated e-commerce infrastructure that DTC requires and find the challenges of setting up such a system severely challenging.  This requires seamless integration between the e-commerce platform and traditional enterprise IT systems such as CRM (Customer Relationship Management), and ERP (Enterprise Resource Planning). It also involves using Manufacturing Execution Systems (MES) as a connecting layer between these systems and the OT (Operational Technology) systems that monitor, track, document, and control all phases of a production process. It is also necessary to ensure real-time data collection across sales, inventory, and supply chain operations.

Industry 4.0 solutions such as IoT-enabled smart factories and the use of blockchain technology for transparent supply chain tracking both hold great potential for the successful implementation of a DTC strategy. However, this requires deep domain expertise across both IT and OT environments and there are challenges relating to the highly dispersed locations in which these devices are used. Most CPG companies will find that their selection of a transformation partner will be crucial to their success in delivering on their DTC ambitions.

On the front foot

Adopting a DTC strategy has the hallmarks of a defensive, “If you can’t beat them, join them’ strategy – and this has doubtless been the motivation for some CPG companies’ entry into this market. However, it can be used to get on the front foot and take the offensive against challengers that are eroding the competitive position of established brands. There is no doubt that the shift to a DTC requires a shift in focus, significant investments in technology, and a strong understanding of consumer behavior, but it is worth the effort. By initiating and fostering relationships with their customers, CPG brands can increase their relevance and enhance their long-term prospects.