Let’s start with a broad question – what does “Direct to Consumer” (DTC) mean?
A DTC brand is one that has a significant direct relationship with the consumer – primarily the ability to transact without a third party. A direct transactional relationship can occur on the internet, as illustrated by “digital-native” startups and e-commerce aggregator brands like Booking.com. But my primary area of concern is with legacy brands in packaged goods or hospitality. How do they forge DTC relationships as their industries become commoditized?
Can you elaborate on the problems that these brands and industries are facing?
Let’s start with hospitality – it is an area that has become increasingly intermediated because online aggregators created transparency of information, and consumers realized the commoditized nature of the industry and prioritized price above all else.
Large packaged goods brands, on the other hand, inevitably sell one-size-fits-all products that justify their costs and acquisitions. Since smaller brands are able to provide more personalized recommendations, similar prices, and create authentic relationships, packaged goods can’t get by with just shipping to your door.
Does the problem then lie in channel distribution?
Yes and no. Retailers like Nike have always had a successful omnichannel distribution strategy by providing customized options online and specific stock keeping units (SKUs) in stores. Packaged goods, on the other hand, have a harder task because they don’t have a personalized option, and physical store sales still hover around 80 percent. The issue is that it used to be 100 percent, and now they need to simultaneously slow the in-store decline and create online share.
Let’s talk about “digital-native” DTC success stories like Warby Parker or Away Luggage. What are their biggest reasons for success?
It’s a combination. They are able to very quickly gauge and implement consumer tastes, which helps in providing relevant products and also their own inventory planning. Second, they build a base of passionate, vocal advocates and have garnered earned media even before release. Third, their manufacturing models allows them to provide more features without the price premium that a brand name commands.
They are also building longevity from the offset with lifetime guarantees and product replacements – thereby not needing to win every sale, every time. And of course, there’s the first-party-data collection, which creates transparency and trust with the customer and can be used for hyper-targeted marketing.
But DTC brands are rarely achieving the scalability of legacy brands.
New DTC brand scalability is interesting because they are not trying to be in everyone’s lives in a small way. Instead, they want to be front and center of their niche target market. Take Shinola for example; they’ve gone from watches to bicycles to wallets and hotels, and their specific consumer’s expectations are satisfied in different ways. Would it surprise anyone to see Shinola cars?
These customers also allow tremendous brand permission. If Purple mattress uses their technology to go from mattresses to shoe insoles, you can be sure that Purple consumers would take that over your “mass-market” Dr. Scholl’s insole.
Are there Legacy brands that are successfully transitioning and showing the benefits of a direct relationship?
Hilton’s investment in their own app for loyalty users comes to mind. They’ve offered free Wi-Fi, double points, early check-in and more – all features that are not possible if you book through an aggregator like Booking.com. They even let you select your room, as you would a seat on a flight, and partnered with Google Maps to look out the window of the room. They’re taking charge of giving consumers transparency and choice.
Leave us with a final thought, Jim.
Legacy brands need to be quicker in identifying the threat of “small” DTC brands. The threat and competition of these disruptors should be aggregated. Each of these companies grows exponentially. A half share-point today is five brands with two share-points each tomorrow – and in most industries that’s billions of dollars.
These brands are changing expectations of “normal” service and encouraging people to talk about good and bad experiences alike. Since word-of-mouth is king, this has a cascading effect and can quickly move a lot of demand from legacies to disruptors.
Interview by Rushil Mohan, Medill IMC Class Of 2018