They blossomed during the pandemic, when confined consumers flocked to brands they could interact with online, but as vaccines roll out and people tentatively emerge from seemingly enternal home confinement, can celebrated direct-to-consumer (D2C/ DTC) brands sustain their growth?
By all accounts, D2C as a business proposition has gone mainstream. It isn’t just large companies such as Nike, Adidas (which expects D2C to account for half its revenue by 2025), P&G and Unilever who’ve jumped at the chance of directly reaching their consumers. In addition, a raft of ventures ranging from Allbirds and Dollar Shave Club in the west, who set the trend, to Love Bonito, Pomelo Fashion and Oxwhite in Asia, have all brought D2C into mainstream marketing conversations.
While D2C brands profited from targeting homebound consumers during the pandemic, their longevity may also be aided by changing privacy regulations, especially the demise of the third-party cookie. Ritika Gupta, regional ecommerce director at Reprise, says that as the world moves towards a cookieless future, brands of all sizes will proritise the need to aggregate first-party consumer data. “(This) leads them to rely heavily on their own customer data platform (CDP),” she adds.
Brands taking control of their destiny
“A strong D2C strategy puts brands back in control of their own destiny,” agrees Lee Walsh, senior vice president and head of media for APAC at Essence. “The pandemic highlighted the danger of relying fully on brick-and-mortar stores. In ecommerce marketplaces, many brands are facing competition from own-label or generic brand competitors, as well as the increasing marketing costs required to appear at the top of listings.”
Guillaume Legond, client director and commerce lead in the media group at Dentsu in Singapore, reckons that D2C’s durability has been catalysed by the rise of Instagram shopping and other social platforms, with clients in segments such as home appliances especially being able to pivot quite smoothly to this model.
Experts point to the growth of brands such as Nestle’s Nespresso as a sign of the strength of the D2C market. “It was one of the first brands to take full control of the customer journey—from locking people into coffee pods with their user-friendly machines to subscription-based ordering platforms,” Walsh of Essence contends. In Nestle’s latest quarter, where it posted its best financial performance in 10 years, Nespresso saw its sales rise 17%, with the Americas, EMENA (Europe, Middle East and North Africa) and AOA (Asia, Oceania and sub-Saharan Africa) all posting double-digit growth.
It isn’t only large brands such as Nestle that are benefiting from this shift. In Malaysia, Oxwhite, a lifestyle luxury brand, eliminated the cost of middlemen—which typically includes agents, distributors, sub-distributors, retailers, sub-retailers and wholesalers—and instead reached out directly to consumers via its own site and third-party platforms such as Shopee and Lazada. The brand has seen its business grow by 120% over the past year.
Despite the optimism, brands hurtling into D2C need to be mindful of the significant costs associated with converting potentials to paying customers, according to Rachel Tan, head of business for Oxwhite.
“Customer acquisition costs can be unpredictably high for a D2C brand, as customer-acquisition strategy is primarily reliant on paid marketing across Facebook and Google ecosystems—Facebook, Instagram, Google Search and YouTube,” she says. “With the escalating click costs imposed by these platforms, over-reliance on these marketing machines may not be sustainable.”
Take Facebook for instance, the average cost per click (CPC) was $0.31 in 2018. When more businesses hopped into the Facebook advertising bus in 2019, the CPC rose to $0.45. It was a different case in 2020 when businesses cut their adspend, bringing the average CPC price down to $0.39. Going by the average landing page conversion rate of 2.35%, Tan estimates it will take about 43 clicks before a sale is made online. That would have cost about $16.7 per acquired customer, assuming that the CPC was $0.39. Throw in discounts and sweeteners to influence buying decisions and customer acquisition cost (CAC) could easily rise to $19.42 per customer.
As brands jump at the chance to reach out directly to consumers, a common mistake they make is “to just focus on bottom-of-the-funnel performance tactics by running marketing campaigns targeting people who are already close to converting and purchasing their products,” contends Walsh of Essence.
While brands can potentially buy their own keywords and remarket them to prospects and offer strong return on investment, these shoppers may convert anyway—without any paid marketing. “These activities may work in the short term, but they rarely make a sustainable business model,” he contends.
Instead, to build out a sustainable D2C business model that can outlast the pandemic, marketers need to build businesses that are “highly relevant, agile and more authentic than larger brands", says Dentsu's Legond. "The rise of Instagram shopping and other social platforms has also contributed to very engaged, local and relevant brands. We've seen varying efforts and successes to move towards D2C. Some large brands do better focusing on driving brand consideration and making sure that their products are available on as many platforms as possible, but others thrive when they focus on consumer offerings and experiences.”
That said, when brands feel that they are left behind, a possible move is to acquire startups that can bring in the expertise and new brand positioning—Like Unilever did with Dollar Shave Club and Graze. Nike, which says D2C accounts for a third of its revenue, acquired analytics venture Celect. Not all deals work out swimmingly. For example, P&G termiated its plan to acquire razor startup Billie after the deal fell foul of US market regulator the FTC (Federal Trade Commision).
According to Gupta of Reprise, large CPG brands have traditionally had the steepest learning curve, smallest data sets, and the most complex structures.
Luckily for such brands, D2C is not a dominant channel as of yet. “While consumers continue to use online channels at a much higher rate than previously, purchases are still predominantly in-store or via marketplaces,” Gupta says.
This has given brands the breathing space to plan their digital moves, expanding their D2C heft organically and through acquisitions. “Some incumbent brands are also pivoting to M&A’s for specific local markets,” Gupta points out. “Shiseido acquired Drunk Elephant [and] Unilever acquired Tatcha, wherein these acquisitions are primarily done to step into the world of D2C brands.”
Even as these companies jostle for a share of the fast-growing D2C market, they are betting on a permanent shift in consumers’ habits to ensure the durability of their own marketing pivots, rather than a pandemic-driven short-term push in this direction.