Direct to consumer (DTC) or Digital sales channel is the biggest growth area currently across consumer goods. Initially championed by consumer electronic companies like Dell and Apple selling directly to consumers to better manage their supply chain or provide a better brand experience, it gained popularity in household consumer products with companies like Dollar Shave Club and its subsequent acquisition by Unilever in 2016. Since then, new DTC brands have been mushrooming everywhere from Beauty, Personal and Home care, Nutrition to Appliances, raising massive funds and taking market share from established brands.
Companies like Harry’s are selling shaving grooming products directly to consumers and giving tough competition to established brands like Gillette. Similarly, DTC pet treats and supplies company, Barkbox has grown to $350m+ in revenue taking market share away from biggies like Mars and Nestle. Furthermore, growing competition from own-label products at major retailers has put even more pressure on big consumer goods companies like P&G, Colgate, Reckitt to Dyson etc to think about their DTC strategy.
Many large household companies have made public announcements about DTC growth ambitions and are making acquisitions and product launches targeted at this channel. P&G has launched the DTC platform ‘Gillette Shave Club’ as an answer to Harry’s and Dollar Shave Club and also heavily pushing subscription services on marketplaces like Amazon. Several market research studies peg the DTC market share between 25% to 40% for household consumer goods by 2025 only. However, while top management, sales and marketing teams are very excited about the prospect of this sales channel, I have found procurement typically indifferent or doing very little in this area.
Addressing the cost pressures
My experience with some of the largest consumer goods companies shows that when they are growing the DTC channel via acquisitions, integration teams look for synergies realisations around direct material purchases, manufacturing footprints or key overhead costs. Consumer-facing digital assets are considered too strategic, local or put in a difficult box for realising synergies. Similarly, if the DTC channel is growing organically, operational or Capex initiatives are led by the markets or brands team where they own the budgets. In this situation, procurement finds the stakeholders set too complex or procurement activity too fragmented to make much impact.
While the DTC channel is promising massive sales growth, it has significant profitability challenges. Looking at some of the DTC companies that went the IPO route or were acquired recently by larger companies shows how hard it is to deliver any profit. The marketing cost for acquiring customers is rising significantly with the dominant position of companies like Facebook (Meta) and Google (Alphabet). The cost of developing and maintaining digital assets like websites, sales force apps or digital analytics is rising due to a shortage of people, growing demand, and a very tactical approach to managing resources across the company.
Ukraine crisis is further compounding the resource problems as there is a significant digital skills resource base in the country disrupted by the war. When we look at other major costs around packaging and supply chain, that’s again under perfect storm due to fuel price increases, packaging material price increases and labour shortages. Overall, this is worsening the existing profitability challenges that the DTC channel faces and questioning assumptions around savings on cutting down the middleman.
Focusing on unique opportunities
There are significant saving opportunities by streaming the purchasing activity on digital assets, supply chain as well as marketing. An area often unaddressed by large companies is BTL marketing or shopper marketing where spending will grow driven by DTC to create more experiential marketing including pop-up stores, events etc driven by local markets. Bringing more structure and looking at synergies across brands and markets can deliver significant benefits. However, such initiatives come with their challenges as brands or markets may see such initiatives as a corporate attempt to interfere in local market activity.
Another big area of opportunity is packaging, where household goods companies usually design packaging based on how it will appear on the retail store shelf. However, in the DTC channel, the focus needs to be on optimising packaging based on the customer experience of receiving the delivery at home. When I recently bought toothpaste from one of the biggest FMCG brands, it arrives in a very nice 4-pack box designed for the DTC channel inside a massive Amazon brown corrugated box. However, what was even more disappointing was to see toothpaste tubes in retail carton packaging inside the DTC box. I can see the opportunity here not to just optimise the cost of that packaging but improve customer experience as well as shout about improving carbon footprints.
Procurement is in a unique position to bring insights from the external market and the ability to collaborate across the functions and brands on such initiatives. However, progressing any of these initiatives will require recognition at the top of the procurement leadership about the importance of this fastest-growing channel and its unique challenges and opportunities. As a starting point, putting in some dedicated procurement resources for identifying opportunities to support DTC can go a long way. Investment for such resources shouldn’t be too difficult to find if your business considers DTC a strategic area to grow.
If you like to talk more about the challenges in the DTC channel and how procurement can help, please contact Robin Agarwal, the author of this article who leads the consumer household sector or Gavin Bowen-Ashwin the partner leading the consumer and retail sector at 4C.