The Direct to Consumer model explored

Disruption has been a feature of online retail. It disrupted old retail models, and some firms could not cope, just look at HMV and Comet, to name but two.

As eCommerce matures, and focus passes to refining the supply chain, it could be tempting to assume the biggest disruption is over. But what if the next stage in eCommerce sees the consumer bypass retail and go straight to manufacturers of consumer packaged goods?

It is this emerging trend that is explored in the How manufacturers are meeting the challenges of changing customer expectations report from LCP Consulting and Cranfield School of Management.

According to the report, almost half (48%) of manufacturers of consumer packaged goods are building Direct-to-Consumer (DTC) channels, with almost all (87%) seeing DTC relevant to their products and consumers. The report surveyed over 100 manufacturing executives from major global players including two of the world’s largest automotive manufacturers. A third were from major manufacturers in the Food & Beverage sector.

Will Shepherd, partner from LCP Consulting said: “Those manufacturers who have already integrated a front and back end DTC model have the ability to deliver a seamless omni-channel experience for their customers. For them, an omni-channel approach is core to delivering significant long-term growth and value. Ultimately, it is those manufacturers who respond to additional customer demands and adopt new models that will reap the rewards.”

Those at the ‘coalface’ of online retail logistics and fulfilment paint a similar picture. Daena Hayhurst is sales and commercial manager at Exact Abacus, who provide an end-to-end eCommerce offering for SMEs from web and channel management to IT to warehousing and fulfilment. The company works with a number of manufacturers using a DTC model and Daena sees a number of factors driving the trend.

He says: “Five to ten years ago it was a massive taboo, you were either a retailer reselling to consumers or a manufacturer selling to businesses only. But, if lower quality backroom eBay sellers give a poor experience to the end user, it is the manufacturer and brands who suffer. As a result, we’ve seen manufacturers move into the channels [such as Amazon and eBay] directly.

“Also, online retail is now a much more competitive environment meaning there's less margin to work with, generally speaking. So it’s harder to sustain a number of layers in the reselling model. 

“One of the least enjoyable parts of what we have recently seen is companies come in with a reseller based model, and see it fail because they misunderstand the margins needed to make the model work.”

There are so many different marketplaces out there for customers to choose from – immediately retailers are up against potentially dozens of different sellers of the same product. And when you're in that position it really is the company with the longest line of cashflow to sustain minimal margins for the longest periods, who wins, or the winner will be those with highest inherent margins, which is the manufacturers. 

Daena continues: “The problem for manufacturers is, that they are not geared up for selling in volume to consumers, which is where our software and service comes into its own.”

Advantages for manufacturers of going direct include control of brand; speed to market; direct access to customers’ data; and providing consumers with choice from the complete product range.

One manufacturer of consumer goods that has led the way in DTC is Adidas. Olga Bressers, director omni-channel models development at Adidas spoke at January’s Delivery Conference in London, outlining how it was interacting with consumers more directly, though still in partnership with retailers.

Olga says: “We created a Confirmed app, so consumers are notified ahead of a product launch and can reserve items for quick pick up.”

Adidas partners with German online retailer Zalando. This connects the warehouses of the two companies through software system Anatwine and offers consumers access to a wider Adidas product range and gives them the ability to purchase items even if they are out of stock on Zalando.

Adidas has also built a retail outlet in Midtown Manhattan. The aim is create an experience centre as well as a shop, with locker rooms instead of dressing rooms, customisation stations so shoppers can create their own designs etc.

Olga adds: “The future for us is about scalability. It is easy to create a solution for one city but to scale it to different locations while meeting consumer expectations, takes agility and is one reason why we are working with eCommerce delivery management firm MetaPack.”

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But moving from a consumer packaged goods (CPG) model to a DTC model is not a straightforward process, says LCP’s report.

“The many considerations include establishing a brand presence, building an eCommerce platform, potentially opening stores, distribution, fulfilment and the ever important last-mile fulfilment.”

Fulfilling a DTC order is a completely different proposition for the supply chain to fulfilling a bulk retail or wholesale order. The key capabilities hinge on order consolidation, picking singles, and precise last mile execution.

“Typically those adopting DTC start by trying to deliver this capability from the same legacy supply chain assets used for retail and wholesale. This is a mistake. Legacy assets and processes handle this segment poorly,” reads the LCP report.

It amounts to a tricky dilemma for manufacturers. Technology has opened up the opportunity and if some manufacturers hold back while others press forward and reap rewards, they could find themselves quickly fading to irrelevance. 

The move could lead to friction with other members of the value chain.

Richard Walters, principal consultant at LCP Consulting, comments: "Some manufacturers see the lack of support by their retail customer as a barrier to entry, and while certainly this is often the case, DTC deployment has the ability to be a win-win situation. This is especially the case where the customer is the final consumer and the manufacturer is able to add value to the overall brand by their DTC marketing activity.

“Where there is some resistance is in the B2B channel where wholesale / distributors hold the customer relationships. Often in these types of markets, the development of a DTC – direct to customer (as opposed to consumer) channel – is not seen as a good thing.”

However, aligning so closely with the consumer is a tall order, after all the consumer is both fickle and demanding. The comfort zone for many CPG manufacturers may still be to buffer themselves via the retailer. 

LCP’s bottom line is “you need to be committed, you’re either in or you’re not”.

The web has had a profound impact on shopping, allowing retailers to interact with consumers in new ways, but it also allows consumers to bypass the retail chain and go directly to the manufacturer. Whether they will want to duo so in great numbers remains to be seen, but if manufacturers create an efficient model that consumers find value in, it will build its own momentum.