What does D2C mean for established manufacturers?

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Everyone’s talking about D2C right now. Ever since the coronavirus pandemic, it’s been on the agenda of every medium-sized business. It’s sure to be a hot topic again in 2022. Stefan Hövel and Ralph Hübner are experts in this field and share valuable insights with us.

Why is there such a D2C trend right now?

There are at least two main reasons for this: on the one hand, many companies are now discovering its potential. On the other hand, it’s quite a demanding and complex task area – particularly for manufacturers – which isn’t just capital-intensive, but also requires a lot of detailed work and foresight (i.e. management attention). In other words, there are numerous perspectives, opinions and motivations as well as procedural and systemic challenges that need to be understood and discussed.

We’ve followed a D2C strategy for over ten years now, in various roles and industries. Even if sales opportunities, technologies and tools have changed, the questions and challenges always remain the same. The most important and exciting questions we’re currently discussing with companies and their stakeholders at the moment are:

• What even is D2C?
• What are the current trends in D2C?
• What challenges do established manufacturers face in terms of building their D2C sales channels?
• How will the D2C market develop in the coming years, especially with regards to the countless D2C start-ups?
• Will classic ecommerce retailers (pure players) die out?
• What benefits does the consumer have when purchasing D2C from a brand in future?
• What must a shop system provide to suit D2C?

What even is D2C?

However trivial this question may seem initially, it isn’t when you take a closer look. On the contrary. It’s fundamental for the company to ask itself at the beginning what this “direct approach” can and should achieve. In addition to selling to the consumer directly, many manufacturers nowadays also focus on generating their own consumer insights or a working customer retention strategy (CRM aka recurring revenue). Manufacturers don’t (just) want to become more independent from retail, but they also want to learn how to make their brand, product range and services more customer-focused to stay relevant in the first place. In other words, many manufacturers are working assiduously on their D2C approach because they believe that’s the only way to keep up with the times and set themselves up for the future.  

It’s also important to discuss what the “C” in this term even means. You’ll commonly hear and read “direct-to-consumer”. This is certainly correct because so far, use cases by consumer brands such as Nike, Adidas, Bosch or several well-known FMCG bands (fast-moving consumer goods) are frequently discussed. In fact, the term “direct-to-customer” is just as correct and possibly even more exciting from a technology and agency perspective. That’s because many B2B manufacturers also strive for a direct approach when it comes to better serving their tradesmen, service providers and other users and buyers.

What are the current trends in D2C?

Marketplaces and social commerce are certainly the most widely talked about trends on the market. That’s why many brands are already taking an in-depth look into how they can use the well-known platforms, as well as many new ones, for their D2C approach.

This year and especially during lockdown, however, many manufacturers learned (the hard way) how well or poorly their shop or processes run when subjected to real burden. In this respect, many are now trying to improve in this area. There’s an increased willingness to listen to what it takes and an acceptance of the idea that a sensible product range policy and good usability are important in addition to solid technology. But what the majority have learned, in particular, is that there are issues with the backend and fulfilment structures.

From our point of view, manufacturers that think beyond their “product” in a D2C sense, i.e. those that create digital ecosystems, services or content, are exciting. Peloton is a good example to illustrate this. Implementing this is strategically challenging and technologically quite demanding because there’s no such thing as a modular solution for “specially” configured digital ecosystems yet. This is where true USPs and utilisation innovation still emerge!

What challenges do established manufacturers face in terms of building their D2C sales channels?

The list is long and, of course, each manufacturer has their own individual challenges. But the following aspects are almost always a given:

• Technical solutions and related processes need to be constructed; in many cases, websites are replaced by shops, and content needs to be re-structured
• New consumer insights and data need to be gathered, the customer journey understood, and new mentoring tools are required  
• Existing marketing approaches need to be expanded, new social media expertise created and a CRM needs to be designed with the consumer in mind
• Theoretical and actual conflicts with their own trading (which, mind you, manufacturers still subsist on today) need to be resolved
• The entire D2C buying process, logistics, returns and service level need to be developed, new service providers added and managed

In addition to these “technoid” issues, the company organisation, and thus its culture, needs to change as well because suddenly, you’re “right there” with the end consumer.

How will the D2C market develop in the coming years, especially with regards to the countless D2C start-ups?

We already think there are several developments on the horizon. For one thing, of course, all manufacturers/brands are going “direct” in one way or another. This will cost many businesses lots of effort, time and money, but they’ll do it regardless. In view of constantly increasing CACs (customer acquisition costs) – especially on social media – not everyone will achieve the success they’re after. At the same time, you must realise that the (social) media landscape will look different in two to three years from now – especially on smartphones.

At the same time, manufactures are also upping their efforts on marketplaces, motivated by sales as well as branding and marketing. But here’s where many will need to learn a valuable lesson. It’s much simpler to push and stage an individual product or product group on Amazon or Instagram than a differentiated product range on the website, they way it was previously done.

This brings us to the phenomenon of D2C brands which have already brought us a significant number of new insights in past years. These agile, fresh brands are eating away at the established brands’ considerable market share, some of them quietly and secretly under the market research radar. Even the people in charge within the companies clearly underestimate these brands because the swarm effects don’t become obvious until later. A good example of this can be currently found in the cosmetics industry. New brands surface almost every week und are already bought up by corporations (see recently Beiersdorf or Henkel).

But the fact is that successful D2C concepts are usually copied very quickly (see Casper and its clones). When sourcing conditions are good, the barriers to entry also go down dramatically. If you can sell to the consumer via social media platforms, scaling becomes a great option. And when the overall concept is promising, investors are willing to pump more money into it. While many established manufacturers curbed their advertising spending during the coronavirus crisis, several D2C brands took the opportunity to gain further market shares (cheaply). Great examples can be found in the fashion, leatherware and accessories sectors.

To find out who these companies are and in which industries they’re positioned, go to www.direct-brands.de, the new portal for D2C brands.

Many managers accustomed to the old school business ways rightly ask themselves: are the old marketing rules no longer relevant? How can you suddenly shift all (fixed) costs to a single product and still achieve marketing success? Isn’t the risk for all these investments much too high for a single product group?

Well, the world has rapidly changed in this regard – it’s become more granular and fluid. If (almost) all modules can be purchased “as-a-service”, fixed costs are a thing of the past. Even brands are no longer built to last forever nowadays. They’re merely made to fill a temporary niche on Amazon, a trend on Instagram or an influencer’s 15 minutes of fame. And we’re not talking about Kylie Cosmetics here, but countless other micro brands that are about to enter the market in the coming months.

We’ve been decoding D2C brands’ success patterns for over three years, and what we see should be food for thought for established manufacturers: there are several trends that traditional brand strength and creative advertising claims cannot compensate for.

Will classic ecommerce retailers (pure players) die out?

“Experts” have been predicting this for a while now. After everything that the logics and metrics from the era of platforms and D2C has shown us, it’s certainly more realistic that the well-known pure-player-landscape will thin itself out – which is a pity considering that we’ve just got used to these shops. But marketplaces will grow, and only those pure players that are large or specialised enough to handle real economies of scale or large volumes can compensate for the rising costs of customer acquisition and technology. These vertical champions, however, will increasingly disappear. That’s because there are countless D2C start-ups, drop shippers and other enthusiasts digging their way up, who invest lots of time and little employer’s salary in doing “their thing”.

What benefits does the consumer have when purchasing D2C from a brand in future?

In principle, the service performance is initially identical to that of a retailer. You get a product, you pay for it, and by law/contract, you have agreed service and warranty claims. The price might be higher than in retail, but a few “goodies” usually make up for the premium price point. Soon you will no longer be able to identify significant differences in fulfilment because fulfilment service providers are usually already working for retailers and manufacturers in parallel.

The significant difference – and ideally, benefit – in our opinion is the life-cycle management that simply works better when it takes place directly between the manufacturer and the consumer. If you buy a purse or phone case, you’ll surely be pleasantly surprised when the brand offers you an attractive replacement option two years later. If you buy a multifunctional food processor, you’ll be happy to receive weekly recipes as well, e.g. for the Cookit by Bosch. If you buy digital appliances, you’ll need updates, e.g. for all smart devices. If you decide to buy from a sustainable brand, you’ll likely also be interested in other sustainable products. If you buy FMCG products, you may need a subscription, as with YFood for example. If you have children, you’ll be excited to get age-appropriate toys or clothes – accompanied by truly child-oriented features and sustainability solutions that are more than just marketing stunts, such as Woom Bikes, for instance.

Let’s be honest – only very few retailers have ever sent out a newsletter or offered a service that was so specific to our requirements or the life cycle itself. Manufacturers, however, can do that because they have first-hand customer data. And they should do it to differentiate themselves. And they have to do it to assert their premium price point.

What must a shop system provide to suit D2C?

It’s worth having a look at the shop systems that are currently being used by D2C start-ups: SaaS solutions, cloud-based, flexible and modular, with few barriers to entry and set up in no time (at least the basic configuration). These systems are the alternative concept to previously known shop systems that involved lots of time, money and effort to finally set up after months of conceptualising, only to discard them a few years later when a new release came around. We are, without a doubt, on the cusp of a new era: an era where every D2C start-up can be turned into a unicorn with just a single product. With shop systems that grow to meet users’ needs and whose extended features and marketing solutions can be added hassle-free with a visit to the app store.

But we still can’t overlook the fact that established companies certainly are somewhat sceptical about using an almost free SaaS shop in addition to SAP and Salesforce. This may hurt our self-image, it questions budgets and automatically raises the question: why does everything else take so long in the first place?

That’s why we see a tremendous opportunity for novel ecommerce solutions such as Shopware 6. They build a bridge that has never existed before. These shop systems will enable us to learn from small, agile brands to then conceptualise D2C solutions that best suit the existing requirements of an established company.

In principle, what must a shop system provide to be able to handle D2C from a manufacturer’s/brand’s perspective? From our perspective, it needs to provide a stage (such as a website) for the brand, it should textually describe product groups and also consider other specific aspects to do with products and services. In addition to pure product range features (like filters), it needs to contain valuable, specific navigators, selectors or even configurators. So basically, features that retail usually cannot offer. Last but not least, the shop system should enable real-time customer dialogue (chats), seamlessly connect with the CRM process and be a full-featured service hub.

If these criteria aren’t met, the brand (= manufacturer) misses out on the opportunity to differentiate itself and it becomes less competitive when compared to ecommerce pure players (= retailers). The same, of course, also applies to marketplaces which keep upgrading, but aren’t able to provide product group specifics.

Conclusion

For brand manufacturers, the D2C trend will be crucial in the years to come. That’s why many of them are going to (once again) set out to find a new approach in this realm. And it won’t be the same as it was before: technology and strategy are now equal disciplines in D2C play. Technology needs to not only enable but, in fact, promote a mapping out and flexible development of business models. In this context, D2C certainly doesn’t mean that you’re “selfishly playing a singles game with the consumer”. D2C means having a strong sense of cooperation with different partners and platforms all involved in the value chain. D2C isn’t a trend, it’s the logical development of what’s technologically possible and strategically doable. And it meets the needs of today’s consumer.

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