Direct-to-Consumer: A Viable Option

The COVID-19 pandemic didn’t revolutionize retail or CPG marketing so much as it accelerated shifts toward digital shopping that had been building for years. One of the clearest examples of the impact can be seen in direct-to-consumer (DTC) sales, which has piqued the interest of major brands for years, leading them to test the waters primarily through acquisitions of digital natives or tests with personalized products, experimental brands, unique pack sizes or subscription services. But as pandemic restrictions led to a massive surge in shopping from home, some CPGs decided it was time to really take the plunge into the DTC space.Omar Haque, vice president of e-commerce for Bimbo Bakeries’ Acelerada unit, says that DTC had been on the company’s radar for the past three years, but it had been “backburnered” due to budgetary constraints. When COVID-19 hit, the company took note of insights finding that screen time had increased and consumers concerned about their safety were browsing more brand and DTC websites than before as they searched for delivery options. PepsiCo/Frito-Lay had launched the DTC websites PantryShop.com and Snacks.com in May 2020 based on those same insights, and Bimbo didn’t want to be left behind.“We wanted to create that direct connection with the consumer,” Haque says. “Retailers today know more about consumers than us. We wanted to get more data and insights. We wanted to know what products people were searching for. We are the leaders in our categories. We wanted to be thought leaders.”Bimbo launched SweetSnacking.com right before Thanksgiving to capitalize on holiday gifting sales. New York-based digital engagement agency NX3 designed the website, which is powered by Shopify plugins. Haque says relying on partners and taking a plug-and-play approach let the company get the website up in three months. Now he’s working on increasing traffic through spending on paid search. While Haque acknowledges that he doesn’t expect DTC to ever be a huge revenue play for Bimbo, he says the goal is to use the website for product innovation. “Instead of going to a retail channel where it’s more commercialized [and requires] bigger batches, this is a great testing ground.”Bold Strategies president Allan Peretz led DTC for Procter & Gamble eight years ago. Back then, many big CPGs were worried that launching DTC stores would disrupt their relationships with major retailer partners, so the potential benefits didn’t outweigh the risk. Small companies that didn’t have to worry about their partnerships with Walmart or Target turned to DTC, and some like Harry’s Inc. wound up becoming retail darlings.“Today, you’ve got retailer buyers out there scouting for up-and-coming DTC brands,” Peretz says. “They’re doing that because they want to understand trends and they want to potentially bring those brands in-store. I think everyone’s acknowledged that there’s a lot of exciting stuff going on online given the competitive nature and the low barriers to entry. For that reason, competing online in different and unique ways becomes more acceptable – even in those big relationships.”While big CPGs might feel more freedom now to experiment with DTC, Peretz notes that they often are at a disadvantage compared to digital natives because they’re siloed by channel and often have long lead times for marketing and innovation. “The small companies that are coming up in DTC, they take a much more integrated view of things,” he says. “They’re also more data-based in terms of understanding what’s happening in the e-commerce channel than a lot of the big companies. They’re always out there trying things, trying new concepts. They do it very quickly and fail fast.”Oral care company Hello Products launched its DTC business in 2017 and was purchased by Colgate-Palmolive in January 2020. Hello director of e-commerce Andrew Feldman says he expects to see more big CPGs buying companies to gain their DTC expertise.“Companies like Hello have proven that we can be more nimble and often form deeper and more resonant connections with people, and that just allows us to gain insights faster and go to market quicker than typical CPGs have been able to do historically,” he says. “I think companies like that look to brands like Hello to teach them how to pivot and innovate on a rapid scale.”The brand has an online community called Hello Friends that provides product ideas. And while Hello products are also available in a wide range of retailers including Dollar General and Whole Foods, the DTC site offers exclusive SKUs and provides a testing ground for innovation. “What we’ve been able to do sometimes is launch first on DTC and then use those learnings and insights to more effectively launch at retail,” Feldman says. “We’re able to demonstrate to our retailer partners that the high level of interest and engagement will be there because we have the real data from DTC.”Keith Anderson, Profitero senior vice president, strategy & partnerships, suggests that depth of consumer engagement is one reason that big CPGs are looking to buy DTC brands. “Part of what you’re buying ... is innovation that emerged from somebody who was paying better attention to certain consumers,” he says.The number of DTC businesses has surged in the past decade because of the increase in digital shopping platforms like Shopify and targeted advertising that makes it easier to reach shoppers, Anderson says. According to him, the new growth model for DTC brands is: “Launch one to maybe three products in a category ripe for disruption, really focus on the quality of those products, set up a beautiful DTC site, and then use Instagram, Pinterest, increasingly TikTok, and some of the other emerging visual social media platforms to reach the audience that you want to reach, and they can buy these individual items almost as seamlessly as Amazon’s one-click model.”According to the Path to Purchase Institute’s Trends 2021 report, which examined strategic/tactical changes caused by the pandemic, 17% of CPGs temporarily increased DTC sales due to COVID-19 and another 24% permanently increased their activity. One of the main drivers was concern over supply chain disruption, but Peretz says he expects the growth to continue because DTC sites have gotten so much easier to launch.“You’ve got solutions that really make it a one-step, two-step process for brands like Shopify and Shopify Plus,” he says. “I see even big companies using those packaged solutions to experiment with DTC because it’s quick and easy and it doesn’t turn into a major IT project for months and years like it did in the past. ... For that reason I think more brands are going to say, ‘Why not?’”Although 95% of major CPGs have yet to try DTC, that’s changing as brands grow more concerned about how their products are being sold online by retailers, particularly Amazon,” according to Mike Mullen, co-founder of DTC solution company Analog Commerce. “You go to the brand site and you click over to Amazon, and Amazon shows you competitive stuff and private label stuff,” he says. “A small percentage of brands are frustrated. They’re worried that, at some point, they could be completely replaced. That’s why they’re trying to dip their toes in the water right now and figure it out because they see a long-term risk there.”DTC sales are typically more expensive than selling through traditional retail because of shipping costs, Mullen says, but established brands can still win in the space by differentiating their product and the experience. That’s especially relevant as retailers focused on SKU rationalization have pushed CPGs to reduce the number of flavors and formats they sell in stores. “You can use your limited retail distribution as a way to introduce the brand to people and have them also see that there’s more that you can do,” he says. “I think the future of DTC for traditional CPG becomes a long tail play.”That strategy has also been embraced by DTC companies that have begun selling their products through brick-and-mortar retail. “A lot of [DTC brands] see retail as a way to drive sampling and trial,” Peretz says. “It’s no longer only a volume driver for them. It’s a way to scale up their business. Someone’s going to go to the big box retailer and buy their product for the first time, but they hope that the second purchase comes through their DTC site where they actually have more control and more profitability.”Major retailers are still eager to get DTC brands into stores to bolster their selection of exclusive and on-trend products. Peretz says he expects that to continue because DTC brands are finding stronger ways to innovate than major CPGs, who are more prone to small changes like new scents or packaging.“A lot of the DTC brands have tapped into things that consumers care about like sustainability and social responsibility,” he says. “The retailers see that and they bring these brands in because that gives them a cool factor. Consumers want that and the big brands aren’t always offering it.”

Direct-to-Consumer: A Viable Option

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