Do direct-to-consumer digital brands have advantages over traditional retailers?

Discussion
Photo: RetailWire
Jun 19, 2019
Tom Ryan

While a number have discovered the benefits of opening physical stores, digital direct-to-consumer (DTC) brands continue to operate much differently than traditional brick & mortar retailers and legacy e-commerce brands, and that gives them an advantage pursuing digital initiatives.

That’s at least according to a new study sponsored by Oracle from CommerceNext.

Compared to their traditional counterparts, DTC brands were found to be increasing online marketing budgets at a higher rate, focusing more of their budgets on customer acquisition and more aggressively pursuing AI-driven technology initiatives such as chatbots and personalization. To date, DTCs have also avoided leveraging promotions and discounting, which can be effective, but erode margins.

Like traditional DTC retailers such as J. Crew and Victoria’s Secret, digital DTC brands benefit by sourcing directly from factories. As younger organizations, they tend to be more open to experimentation. Being digital-first drives them to an “obsession with data” versus traditional retailers.

The study found that only 22 percent of digital DTC brands consider achieving a unified view of the customer to be a barrier, compared to 29 percent of incumbent e-commerce brands. Only seven percent of digital DTC brands consider aging legacy technologies a barrier versus 41 percent of traditional retailers. Such DTC brands are also less worried about managing tech integrations.

Digital-first DTC brands have different concerns, however, such as hiring and retaining top talent (30 percent of DTC brands versus 19 percent of traditional retailers).

Digital-first DTC brands’ biggest concern by far was achieving profitability at scale (40 percent versus 11 percent of incumbent retailers). That’s partly because many are backed by venture capital firms and are able to prioritize growth over profitability.

“They have a different set of growth goals and internal stakeholders to please,” said Charlie Cole, chief digital officer, Tumi + Samsonite, of digital DTC brands in the study. “For traditional retailers to combat that, they’ll need executive buy-in to take more risks, try new things, and be more experimental in channel diversification. Above all, traditional brands must be less afraid to fail.”

DISCUSSION QUESTIONS: What advantages may digital DTC brands have over traditional retailers in the ongoing shift to digital retailing? What can traditional retailers and DTC brands do to compete more effectively?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The ability to be much more customer-centric by curating an assortment is far greater than through traditional channels."
"It’s not smooth sailing for all digital DTCs, but they do have the benefit of investors that will prioritize growth over short-term profits."
"We should remember that many of the direct-to-consumer businesses are still relatively small and young."

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19 Comments on "Do direct-to-consumer digital brands have advantages over traditional retailers?"


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Oliver Guy
BrainTrust

DTC presents a huge opportunity to know the customer as well as providing greater value by cutting out the middleman. In addition their ability to collate actual customer data from across all of their customer base is much greater than it would be using a traditional retail channel. Consequently the ability to be much more customer-centric by curating an assortment is far greater than through traditional channels.

Bethany Allee
BrainTrust

Oliver nails the strength: customer data. Having a comprehensive understanding of their customers is a definitive advantage over traditional retailers. Digital buying has evolved customer expectation to being a tailor-made experience. DTC wins there.

Neil Saunders
BrainTrust

It’s interesting that customer acquisition is mentioned as one of the areas where digital DTCs are increasing their budget. As much as this is understandable, it is not necessarily a strength. Wayfair is a case in point here: its customer acquisition costs are out of control. This is helping to drive some impressive top-line growth, but it is decimating the bottom line and raises questions over how sustainable the business is over the longer term.

I would certainly not put all digital DTCs in the same category as Wayfair, but we shouldn’t assume that everything they do is better or more advantageous than the actions of traditional retailers and brands.

Steve Dennis
BrainTrust

That data that is public (and some I have seen that is not) shows that the majority of DNVB’s see rapidly escalating CAC while CLTV is decreasing (Wayfair, as you point out is the posted child for this). Few have demonstrated their ability to generate significant market share without much lower gross margins as well. So it’s clear they are buying market share. That has a limited life span.

Jeff Sward
BrainTrust

Good way to put it. VC guys can make money on the initial flip, public or private, while the business is losing money, but growing. After that, evolution and competition rule the game.

LAURA RAMIREZ
Guest

Further to the point about “out of control” customer acquisition costs, I’m often more concerned about the retention metric. Garnering new customers is a vastly different exercise than retaining them and I still believe, even irrespective of data (just because you have it doesn’t mean you’re utilizing it correctly), traditional retailers have the edge.

Ben Ball
BrainTrust

The obvious advantage is that they are “natively” digital and do not have to unlearn unproductive paradigms and processes.

Brandon Rael
BrainTrust

The entire DTC model has been constructed around providing an outstanding customer experience across all shopping channels. By going directly to the consumer, the brands have an outstanding opportunity to provide the value, quality, and service on such a personalized level. Successful DTC brands such as Warby Parker, Away, Harry’s, Bonobos, and others have built their entire operations around connecting, engaging, and entertaining their customers.

Digital brands’ entire DNA has been built by consumer insights, and by providing curated experiences. The retail evolution has been sparked by the DTC brands opening showrooms at a record rate. The most critical part that some retailers are missing is their inability to drive experiences through storytelling, and tying their products to the customer’s lifestyle beyond the actual product.

LAURA RAMIREZ
Guest

The irony here of course being that legacy/traditional retail USED to do an excellent job of providing customized/personal touch customer care and storytelling over selling of commodities. Everything old is new again. That traditional retail has had such an issue with leveraging their strengths is a shame.

Carol Spieckerman
BrainTrust

Digital DTC brands just plain know more about their customers. It isn’t just having a value around data, it’s the quality of the data itself. DTC retailers can track shoppers’ journeys and change pricing, promotions and digital product merchandising on the fly. The DTC model also provides a clearer, consolidated inventory picture. Of course all of that changes when DTC brands hit brick-and-mortar but the digital-first advantage allows them to hit the ground running after the shingle is hung.

Andrew Blatherwick
BrainTrust

We should remember that many of the direct-to-consumer businesses are still relatively small and young. While it is easy to manage a retail organization in growth when you are new and exciting, it is significantly harder to maintain that growth when investors and financiers are pushing hard. The beauty of online is that the costs of set up are lower and you can become national and even international very quickly, so you have a larger market to go for very early on. Maintaining that growth is significantly more difficult and we have already seen many direct-to-consumer retailers fail to make any money and go out of business.

AI is something that all retailers are interested in and hopefully using, but it is not a universal panacea to solve all issues. It still takes intelligence and retail know-how to interpret and exploit the findings.

Jeff Sward
BrainTrust

Sure, digitally-native DTC brands have advantages over traditional retailers — in all of the web-based components of the business. And traditional retailers have advantages over digitally-native DTC brands in understanding the basics of brick-and-mortar retailing. And I do mean the basics, not necessarily all the right forward-looking evolutionary moves. Malls are going to be rescued in part by digitally-native brands getting into the brick-and-mortar business, not because traditional retailers figure out e-commerce. And retailers like Walmart who have charged aggressively into internet businesses will be in the best position of all to have a 360 degree view of how the whole model operates in the most optimum manner.

Ralph Jacobson
BrainTrust

Effectively eliminating disintermediaries in the supply chain ecosystem is a great way to approach today’s evolving shopper landscape to help reduce costs. I like seeing even more diverse product categories beyond fashion take advantage of this channel.

Rob Gallo
BrainTrust

It’s not smooth sailing for all digital DTCs, but they do have the benefit of investors that will prioritize growth over short-term profits. In addition they don’t have to replace legacy systems that lack the capabilities to deliver a modern day customer experience. Not to make excuses for traditional DTCs, but they can replace everything all at once. It does take time to reinvent the company, culture and customer experience.

Bill Hanifin
BrainTrust

DTC brands are successful in part because they focus on a focused product line (e.g. cosmetics) or a product that meets a specific need (e.g. fitness). Their Achilles heel in many cases can be their manner of funding. When venture and private equity money is the source of life and growth, pressures to meet investor expectations can unravel an otherwise organized growth plan.

Because they are lean and don’t have the baggage of traditional retailers, they have a distinct advantage over the offline competition. That doesn’t mean they won’t venture into the physical world. Customers like to “showroom” and I believe the transformation of the retail landscape will be evidenced in malls full of DTC kiosks or small stores where customers can see, test, and learn – also buy.

It’s been said before, but traditional retailers have to take advantage of their physical connection to the customer and focus on stellar customer service and in-store experience. The potential advantage to be created is obvious, so why aren’t more offline retailers showing progress in these areas?

Kai Clarke
BrainTrust

At some level, DTC digital brands have an advantage over traditional retailers in that they openly embrace the digital retailing model and the data it encompasses. However, traditional retailers have started a major shift to develop a full DTC presence of their own, which complements their on-ground presence, as they realize that we are in both a digital and brick and mortar world.

At some point, we will see a true tipping point of one of these models as the other one becomes the better way for the majority of shoppers to implement their purchases. Whether it be online, on-ground, or a combination of the two, it is the consumer and their dollar votes who will win out in this digital awareness war.

Steve Dennis
BrainTrust
Digitally-native brands have a number of potentially important advantages over legacy brands. First, they start from the place of understanding that the customer is the channel and have never gotten caught up in creating (or needing to undo) the silos that undermine so many retailers efforts to be truly remarkable. Second, because they started online they are fundamentally data-driven. Third, as they open stores they get to pick the locations that are right for today and size their stores to today’s potential demand. They are also not burdened by worrying about “cannabilization” and other cultural barriers that hinder legacy retailers’ innovation. There are a couple of big cautions though. Many built their models based on moon shot economics, funded by risk seeking venture capitalists and most are discovering the scaling beyond $50 million or so is not so easy. We also have very incomplete data to assess their sustainability. Most lose tons of money. Many have only opened a handful of stores. Great sales productivity in the most dense urban markets with a high concentration… Read more »
Shikha Jain
BrainTrust
Some of the pros of the DTC strategy are as follows: Customization: Ability to personalize functionality for the consumer (simple things like filters) which allow for more “hunting” shopping behavior. Convenience: The consumer can shop anywhere and at any time. Cost advantage: Lower fixed costs by moving to eCommerce gives profits back to the brand. Or if price perception is a problem, allows the brand to give some of this benefit back to the consumer. There are still cons to this strategy (that are already being addressed): Acquisition: For footwear and apparel, there is still a desire to try before you buy touch and feel products. It can be hard for a pure DTC to fulfill those requirements. Reviews and word of mouth helps of course but the DTC channel is best suited for repeat purchases. That is why Bonobos, Warby Parker etc. have “showrooms” in malls etc. Basket size expansion: For those that enjoy shopping (I’m talking spend half a day at a mall), a big part of the experience is browsing, touching and… Read more »
David Naumann
BrainTrust
David Naumann
Vice President, Retail Marketing, enVista
1 month 1 day ago

The advantage that digital DTC brands have over traditional retailers is that they are not constrained by out-dated legacy systems that weren’t designed for unified commerce. DTC brands are driven by digital metrics and when they expand to brick and mortar stores, it is easier to integrate new store systems with existing e-commerce sites than integrating e-commerce sites with massive legacy merchandising systems.

Many traditional retailers are focused on implementing a unified commerce platform to solve the omni-channel issues of offering a seamless customer experience. In fact, according to BRP’s 2019 Unified Commerce Survey, 86 percent of retailers indicate they have or plan to implement a unified commerce platform within two years.

wpDiscuz
Braintrust
"The ability to be much more customer-centric by curating an assortment is far greater than through traditional channels."
"It’s not smooth sailing for all digital DTCs, but they do have the benefit of investors that will prioritize growth over short-term profits."
"We should remember that many of the direct-to-consumer businesses are still relatively small and young."

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