Cutting the Middleman: The Growth of Direct-to-Consumer

As supply chains evolve and grow, products are often passed between dozens of hands at factories, shipping vehicles and pallets, distributor warehouses, retail warehouses, shop floors, delivery fleets. They often travel thousands of miles and go through multiple intermediaries, something which has an impact not only on the profit margins, but also on the brand’s ability to connect and communicate with their customer.

With revenue growth remaining a challenge, almost half (48 per cent) of manufacturers are racing to build Direct-to-Consumer (DTC) channels, with almost all of them (87 per cent) seeing these channels as relevant to their products and consumers.

Leading brands that once upon a time relied solely on partners to distribute their products are now embracing Direct-to-Consumer sales, which can be a powerful distribution channel with the added benefit of full control over the supply chain, and therefore also in full control of the overall brand experience. The evolution of digital technologies, and in particular the boom of e-commerce means that brands can relatively easily set up an online store and work with delivery partners if they don’t have their own delivery fleet, or if they need to supplement it.

As brands, companies and manufacturers become more comfortable with selling direct to customers this trend will only grow. What’s more, customers also often prefer to buy directly from the source when possible – with the understanding that they will get the best brand experience by ordering directly from the brand itself. According to Forbes, over a third of consumers report that they bought directly from a brand manufacturer’s web site last year. And the number of manufacturers selling directly to consumers is expected to grow by 71% this year to more than 40% of all manufacturers.
This trend doesn’t apply exclusively to customer-facing products. B2B manufacturers, service providers and startups are all reaping the benefits of a digital era which enables industries to optimize their supply chains and get much closer to their customers.

Below are some notable examples of how entire industries are either already being re-shaped or gearing toward a Direct-to-Consumer approach.

Global Megabrands

This summer, Nike announced their Consumer Direct Offense – a faster pipeline to personally serve customers at scale. For the brand, which has traditionally relied upon other retailers to sell their products, it’s a significant strategic move focused on distribution through their website and in their own stores with an emphasis on 12 key cities across 10 key countries. The effort is expected to represent over 80 percent of Nike’s projected growth through 2020.

Nike is not alone. Other megabrands such as L’Oreal, which in the past has been almost fully dependent on retailers to stock and sell their products, announced that their ecommerce sales rose by 33% year on year in 2016 and now account for 17.6% of their sales. Even though many of their digital sales go through other portals, they could also be looking to grow their Direct-to-Customer approach with the mighty force of Kim Kardashian who is able to directly launch and sell out an entire cosmetic line in under 3 hours.

Disruptive Startups

Startup companies are disruptive by nature. However, over the past decade we’ve seen companies disrupting established industries by bringing a Direct-to-Consumer approach to their products. After all, it takes years to slowly build a retail network – whether it’s owned or not. The direct approach is risky but if the brand promise is fulfilled through the purchasing experience, young companies have the capacity to change the landscape.

WarbyParker, OneDollarShaveClub, Casper – all these $1B+ brands, and many more, have paved the way in recent years. They’ve had the ambition to reinvent the rules and to take on highly crowded and competitive markets by fully owning the relationship with customers. What these brands know for sure is that “their customer is their asset”.

The competitive edge that these startups have relied on revolves around remaining in control of 4 things: customer data, customer relationship, profit margins, and the overall customer experience – from discovery to delivery.

DSD Delivery

Although not exactly a ‘Direct-to-Consumer’ example, Direct-to-Store Delivery (DSD) is also on the rise. In essence what this means is that manufacturers deliver the products directly from their warehouses to the store – without relying upon their traditional warehouses and distribution networks.

A DSD model establishes a “closed loop” network from the consumer good manufacturer’s warehouse to various retail outlets, making multiple stops before returning to the point of origin. This enables companies to be faster and more responsive to their customers’ needs and to stock demands coming from their retail partners – something which translates to a better customer experience, healthier margins and tighter ownership over a simpler supply chain.

This model is on the rise and although it might not be suitable to all manufacturers, it’s worth considering as an alternative in order to get closer to customers and retail partners without relying on intermediaries whenever possible.

Personalization, simplicity and choice

Cutting out the ‘middlemen’ is as much a measure to improve efficiency as it is a strategic move which enables companies to get closer to customers. This enables them to build a direct communication channel, gather invaluable feedback and collect customer data which is otherwise left in the hands of partners who can leverage this knowledge to their advantage.

This shift doesn’t happen overnight and by no means does it undermine the necessity of using retailers, distributors and other partners to reach all potential customers. However, it does provide new opportunities, more customer data and the ability for companies to gain unprecedented visibility and control over their relationship with customers.

Advances in ecommerce and delivery logistics technologies are giving companies the opportunity to explore new distribution channels, gain a better understanding of their customers and ultimately create better brand experiences that are seamlessly personalized.

Lior Sion