Brand Marketing, Growth 19 June 2023
Implementing effective DTC strategy in the CPG industry today
What is the value of a Direct-to-Consumer (DTC) approach for a CPG business today? In this piece, we break down the update to our thinking on implementing an effective DTC strategy based on the findings of recent years.
What is the value of a Direct-to-Consumer (DTC) approach for a CPG business today? In 2018, our DTC Growth Series report focused on advocating for this approach to brand owners. In this report, we emphasized DTC’s potential for superior margins, given its integration of value-adding activities that traditionally boosted the Consumer-Packaged Goods (CPG) industry. We observed at the time that the long-term revenue growth of the largest retailers was significantly outperforming the organic growth of major manufacturers given their greater attention to intangible elements.
We also highlighted how DTC enables manufacturers to redefine and expand their category definition, offering consumers higher-level solutions vs. answering more simple needs. We concluded that this power of disintermediation accelerates and safeguards long-term value creation.
Since then, DTC has evolved significantly, attracting various Native DTC Business Models (Digitally Native Vertical Brands) and established brands within its approach. However, despite DTC’s tenure, its influence on overall CPG sales remains limited and stagnant, with an estimated contribution of just 1% of total sales and 14% of e-commerce only sales(1). The scarcity of large-scale success stories is a testament to this. We can see that in the USA DTC business landscape, most companies have a Gross Merchandise Value (GMV, or total value of goods sold over a certain time period) between 1M and 5M USD with 95% of them being below 1M USD(2).
While Nespresso and Hello Fresh have successfully scaled their operations, finding other substantial and successful DTC businesses in the CPG space remains challenging. A variety of factors affecting DTC must be considered to unlock its potential fully.
What are the potential growth opportunities from effective DTC marketing strategies?
Whether a company is already operating DTC or considering its adoption, a comprehensive review and evaluation of the approach are necessary. DTC is versatile, capable of fostering a multifaceted relationship between the consumer and the brand, beyond merely serving as a sales channel. Therefore, understanding DTC and deeply analyzing its potential implementation is critical for every CPG business. The key to this is placing the consumer at the heart of all deliberations to accurately assess the real potential of the approach.
Defining the company’s expected outcome and a substantial, relevant consumer benefits form the cornerstone of any DTC strategy. The synergy between these elements is integral to establishing a sustainable and successful business model.
The expected outcome for companies can be either linked to a sales and margin focus, namely, getting meaningful incremental sales and boosting margin versus other channels, or to other non-sales driven objectives like increasing marketing effectiveness, boosting equity and consumer closeness and/or collecting first party consumer data. In this second case, sales are always part of the mix but not the primary objective of the DTC approach.
In general DTC must be seen as part of an omnichannel approach, defining its role and opportunities versus other channels. However, it also requires specific focus and management. Every main channel (mainstream, eCommerce and DTC) must be specialized and differentiated, leveraging its specific opportunities. For example, looking at sales vs. non sales objectives, DTC structurally offers the biggest leverage in this second area over other channels.
Consumer benefits can be linked to expanded convenience, performance, or experience. This is always in comparison with other channels.
When looking at consumer benefits, the demographics of your target audience are part of the evaluation that must be made, as specific age groups tend to be more sensitive to the messaging of certain benefits or simply more reachable through a DTC approach versus other sales channels. For example, 88% of Gen Z vs. an average of 41% of total adults claim to have purchased a product through a DTC channel(3).
The DTC business model should prioritize these outcomes and benefits, ensuring they are intertwined to maximize the chances of success and long-term sustainability.
How to develop a differentiated value proposition and support it with the most effective DTC model?
A main requirement for success is to develop an effective value proposition that smoothly delivers the consumer benefit, while being empowered by an effective business model. The value proposition needs to be properly differentiated from the cluttered competition in order to have a chance to cut through and capture consumer attention. Especially in the case of an existing brand expansion into DTC, it also must be differentiated from the other channels. This to provide a specific benefit to the consumer and to avoid any cannibalization that could also impact the relationship with retailers.
Differentiation vs. other channels can be around tangible elements like formats and tastes or simply accessing a broader assortment, or around intangible ones like experience and services. Offering personalized experiences can always play a transversal role. A business model should be developed to support the expected outcome while having the consumer benefit at the center of marketing efforts.
Models can be organized in different ways including digital store, subscription, curation/personalization, membership/access, touchpoint commerce and knowledge hub. Each has a specific set up and dynamics. Also branding becomes a very important element in the choice between a native DTC brand versus expanding an existing brand into DTC. The choice here has different advantages and disadvantages and must be properly evaluated.
What are the operational requirements of effective DTC implementation?
Effective DTC implementation hinges on meticulous execution. Three key steps are required:
- Defining the value extraction approach: This is linked to effectively managing consumer acquisition and retention.
- Identifying the best operational format: Namely, identifying the level of investment vs. external support for the implementation and running of the channel.
- Engineering the value chain: Identifying the key potential value generators and the value destroyers along the value chain. A set of enablers can be considered as well as the identification of key barriers to manage when delivering along the consumer journey.
Capabilities represent another important success factor, as DTC requires dedicated and multi-skilled governance.
Seize the DTC opportunity: Takeaways for brand owners
Much has changed in the consumer landscape post pandemic, and direct-to-consumer marketing and strategy must adjust accordingly. This is what has driven us to update our previous Growth Series report and provide some clear indications on how the opportunity could be cracked. In essence, the potential for consumer acquisition through DTC is ripe for the taking. However, harnessing it requires aligning the expected outcomes and potential consumer benefits with a sustainable business model that enables a new product or customer experience to sit comfortably within the existing brand identity. This forms the basis for a robust value proposition, backed up operationally to drive conversions. A blend of strategic framework and detailed operational capabilities is essential for long-term value creation, differentiating your DTC offering from traditional retail offers.
