The Rise of Direct to Consumer Brands: Revolution or Evolution?
Amid the intensifying pressures of price competition and the rise of Amazon as a global force, another disruptive trend is becoming too big to ignore: the rise of direct to consumer (DTC) brands.
Unilever’s high-profile, $1B acquisition of Dollar Shave Club renewed interest in the DTC model, but dozens of other well-capitalized brands have already emerged in diverse categories in Europe and North America. Retailers and manufacturers should take notice.
From meal kit and snack food players like Hello Fresh and Graze to health and personal care brands like the Honest Co., new brands are emerging and growing exponentially through non-traditional routes to market, some leveraging early success to later gain share of shelf at traditional retailers.
There are commonalities between these emerging players. All were born after the dawn of smartphones and social media. They are vertically integrated and available primarily (or exclusively) directly from the manufacturer. Many emphasize specific benefits like eco-friendliness or “free from” attributes, and several carry celebrity endorsements from the likes of Jamie Oliver and Jessica Alba.
Direct selling models aren’t new, so why the explosion now?
Technology has lowered barriers to entry for new market entrants, both in the demand chain and the supply chain. Faster and at lower cost than ever before, new entrants can develop, brand, market, and distribute on-trend products that resonate with under-served and high-potential customer segments.
And DTC models have other key benefits. Brands maintain control over presentation and pricing. They gain rich insight into who is buying what, and deep, direct consumer connections. Some DTC models feature subscription auto-replenishment, which drives immense and predictable lifetime customer value. And, of course, there is the appeal of margin expansion through the disintermediation of middlemen.
But the model can be challenging. Most DTC players offer a narrow portfolio of products, brands, and categories—significantly limiting their reach and relevance, especially in contrast to retailers. And operating with excellence as a vertically integrated brand manufacturer and retailer is notoriously difficult.
Still, the onslaught of new brands will continue, as will a predictable cycle of M&A and consolidation. Agile new entrants will launch, grow, gain share—and sell out to big brands. Venture capitalists and entrepreneurs will bear the risk of innovation, and strategic acquirers will pay a premium for talent, technology, customer data, and accelerated growth and share gains. In turn, top-tier FMCGs offer emerging brands economies of scale and sophisticated channel development platforms to drive growth beyond the natural limits of DTC models. Some brands will retain their authenticity and relevance, while others’ equity will be diluted.
Incumbent brands, too, will experiment with DTC, albeit with different playbooks. With more to lose amid the spectre of channel conflict, large brands will be wary of under-cutting retailers’ prices on like items. In addition to selling direct, these brands will guide shoppers to their retail partners’ sites and share shopper insight back with channel partners. And they will emphasize innovation that traditional retailers can’t or won’t support, as in the example of Kellogg’s Bear Naked Custom Granola offering.
Retailers, whose investments in own labels have for decades put suppliers on guard, may find themselves with the tables turned. While many focus on intensifying competition from direct competitors, indirect competition from DTC players is quietly restructuring the industry’s value chain. Instead of serving as consumers’ tastemakers and gatekeepers, some retailers may instead be driven to convince both consumers and brands of their relevance.
The landscape won’t be transformed overnight, but retailers and brands must reconsider their positioning, strategies, and capabilities. Consumers won’t wait, and neither will the competition.