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DTC brand sales soar in a time of social distancing
Through a special arrangement, presented here for discussion is a summary of a current article from the bi-monthly e-zine, CPGmatters.
By edict or by choice, Americans sheltering in place have sent e-commerce orders for CPG goods through the roof since the beginning of March. Direct-to-consumer (DTC) brands have been huge beneficiaries of the shift, which promises only to grow in the long term as millions get comfortable with the idea of buying groceries and other staples online.
DTC is “the new currency,” Ken Harris, managing director of Cadent, a CPG consulting firm, said. “It’s democratic, universal, a way to launch and get in front of consumers fast — and a way to fail fast and ramp up quickly again. Startups that figure this out and are able to do it will succeed far faster than those that can’t.”
DTC startups had already been seeing outsized growth. More than $17 billion in sales have shifted away from traditional, larger CPG brands (with sales of $1 billion or more) to smaller brands since 2013, according to IRI.
The growth of DTC brands should continue to accelerate as the pandemic catapults online grocery spending. Online’s share of grocery sales will approach and could even exceed 10 percent this year, four years sooner than previously forecasted, according to a new study by Fabric, an Israel-based startup that builds “micro-fulfillment” centers.
“When the COVID-19 thing went down, you saw that even an ice cream brand can go DTC as a starting point,” said Rob Gonzalez, co-founder of the Digital Shelf Institute. “It gives you an audience and a way to build traction. That wasn’t available for new brands before.”
A Boring Life, a new brand of artisan honeys and CBD-infused snacking products, hemp tinctures and dog gummies, pivoted in March to solely launch on a DTC basis after determining efforts to expand distribution in stores for now would be costly and ineffective.
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“The old model is gone,” co-owner Jennifer Johnson told CPGmatters. “There is no Expo West. We can’t visit stores; we can’t do demonstrations. The traditional means for growing an artisan food brand have now been thrown out the window.”
Discussion Questions
DISCUSSION QUESTIONS: Will growth for DTC start-ups in the CPG space likely accelerate due to the pandemic? Do you think the way new brands will be brought to the grocery channel will change significantly post-COVID-19?
Poll
BrainTrust
Lisa Goller
B2B Content Strategist
Ryan Grogman
Managing Partner, Retail Consulting Partners (RCP)
With forums like Amazon, Shopify and Tencent, DTC’s time was already here — the virus just accelerated its awareness and growth.
You still have to MOVE the merchandise, and IMMEDIACY and the 360 experience of “bricks” will continue to trump online (DTC). However, online does allow immediate connection of the mind of the shopper to the mind of the seller. AND connection to the infinite “long-tail,” all the merchandise in the world! So “awareness and growth” are exactly right in describing what is going on. However, maybe bricks retailers will learn to focus more on the shoppers, than just on their suppliers? (And the 40,000 items in 40,000 square feet of their floor space.)
Just like the pandemic gave a boost to grocery online ordering, it has opened the door for more CPG companies to go direct to consumer (DTC). DTC is becoming a realistic option for consumers, especially for products that are purchased on a weekly or monthly basis. With predictable replenishment patterns, consumers could easily set up accounts with CPG brands and place a recurring order for these products and eliminate adding the products to their weekly grocery list. The pandemic is changing consumers’ behaviors and habits and it will be good for the companies that make a good impression on customers. Every customer interaction counts.
DTC was always there but now awareness has been heightened by the lockdowns. It definitely will be a new option not previously considered by the normal shopper. I just hope they will be ready.
Yes the pandemic will accelerate DTC growth, especially if savvy CPG brands form strategic partnerships. Gaining access to established logistics networks will help DTC startups reach consumers’ homes faster.
Moving forward, more grocery brands will embrace digital product discovery to survive. Buyers can search for innovative products (keto, vegan, plant-based) and compare items with ease. Online retail platforms are already popular for connecting global retailers and suppliers to boost speed to market for in-demand products.
The answer is yes. CPG brands will continue to accelerate. Those in the natural/organic space must make the move online to survive and, hopefully, thrive. So will non-traditional brands and categories such as in-home exercise equipment, auto parts and accessories and many other categories that are now forced to try and compete with Amazon. I don’t think we realize yet how profound this change will be.
DTC and e-commerce growth is without question going to see a significant uptick during the pandemic and beyond. The barrier of entry for DTC brands remains just as low as it was before with the added advantage that consumers are now actively looking for them in more and more product categories while enduring stay-at-home orders in their states. The big question is how much of this upward momentum will be sustained once we are on the other side of the pandemic. As it’s starting to look like even easing restrictions will be a long-term solution and not a short one measured in a couple of months there may be more runway to this than previously expected. However, DTCs were already hitting a growth ceiling without developing the right brick-and-mortar partnerships so it remains to be seen if this can be overcome in the next year. I expect we will see a smaller number of DTC brands leading the pack with an ever-growing distance between second-tier players just as we see in brick-and-mortar sales.
“I expect we will see a smaller number of DTC brands leading the pack with an ever-growing distance between second-tier players…”
Agreed! As the COVID-19 crisis eases, there will be a nasty fight for market share in most segments of DTC. The battlefield will be digital marketing. The big players will bid up the rates for targeting and retargeting to levels we’ve not seen before. They know if they win now, they will be sitting pretty for a long time. Smaller players will have a tough time attracting eyeballs and driving conversions. The only realistic play they have is to commit to very sophisticated methods of audience segmentation, etc.
It won’t be easy. And it won’t be pretty.
The pandemic is absolutely accelerating DTC growth in the CPG space. To me, the bigger question is whether that growth is long-term. As food supply chains are near their breaking points, and shoppers are avoiding stores, more people are turning to online grocery. Yet, in many cases, delivery times are unavailable, or products are sold out. So consumers are searching for alternatives. If DTC brands want to sustain current growth, they need to form strategic partnerships with retailers, offer subscription programs, and work with fulfillment partners to ensure fast delivery.
Great points. No doubt ecommerce has accelerated and will be a greater share going forward. DTC has also accelerated. But the longevity of DTC’s recent acceleration is the question. DTC brands need to solve the fulfillment and logistics aspects of being a DTC brand. It needs to be profitably sustainable in the long run. Getting clicks isn’t the hard part, especially right now. Delivering at a sustainable cost is the real challenge. But it’s also the real opportunity — build sustainable competitive advantage based on your product and your supply chain, not how good you are at Facebook ads.
DTC is not a new phenomenon. However the next phase of growth will come from established CPG brands that have traditionally been sold via brick-and-mortar expanding their DTC brand offerings. This will come in the form of “made for” DTC brands (new names, packaging, etc.), as well as the acquisition of startup DTC brands who have developed consumer traction.
The pandemic is teaching consumers to buy in different ways. DTC retailers have a window of opportunity to get consumers in the habit of buying through them.
The growth of online will accelerate more in these three months than was forecasted for the next three years or more.
COVID 19 is without a doubt an “accelerator” for new business models as we all grapple with sheltering in place. DTC started out as a “launch pad” for new products looking to efficiently compete with CPG (and other) business behemoths. Now DTC has accelerated to true “disruptor status” on a grand scale. Consumers won’t forget the positive experiences they had in home delivery of goods they had never consider before the pandemic. They won’t forget the negative experiences either. Suddenly we Zoom, we order ice cream online, we cook, we research, we talk to our kids, we do puzzles, we get healthy and we look for new ways to solve challenges. DTC is without a doubt a new solution and a new business opportunity for a much wider audience than it ever had before.
I think it is folly to predict trends in CPG right now. We aren’t going out like we used to. We aren’t able to buy the brands we’re used to. Niches can get overconfident when there are many other factors making them a success.
For at least the time being there is little option and great opportunity for DTC brands in CPG. However given the surge in grocery and the potential for renewals of the pandemic, these opportunities are not mutually exclusive with indirect distribution. More to the point, there are a lot of new entrants in “grocery” from full-service restaurants to fast casual, including both chains and independents.
I agree with Bob that it’s impossible to know which trends will persist, expand or decline, brands need to be more creative in how they go to market and grocery chains need to do the same with their sourcing. Darwin wasn’t a retailer or a marketer but his principles do fully apply.
I agree with the rest of the discussion responders so far in that the previous growth trends for DTC start-ups will absolutely accelerate due to the pandemic. Massive shifts towards online CPG shopping coupled with many traditional distribution outlets for these products being bogged down with product unavailability or delayed shipping has led many consumers to wade into DTC start-up waters that they would have previously been reluctant to attempt. The two key questions are: will consumers stick with these new DTC brands post-pandemic and will new DTC start-ups in general be able to sustain this type of growth. The answer to both in my opinion is yes, but not at the rates being experienced now. Larger online outlets and more traditional grocery channel distributors will have a greater chance of maintaining their growth than the startups. However, with the continued rise in social commerce as a successful promotion and communication vehicle, barriers to entry for new DTC startups will continue to be extremely low post-pandemic and be seen by many as a more attractive, low-investment option for product launches.
Yes, we will be streamlining DTC and online brand sales as social distancing becomes an accepted part of the new “normal” and omnichannel marketing follows.
Agree with all that the change in the CPG landscape is permanent, and it will extend well beyond the Covid-19 pandemic. One overlooked driver that I’m seeing: DTC brands have a real prowess at using social channels for customer acquisition. This skill is particularly advantageous right now; media budgets are down generally, but especially with the largest CPG brands. DTC brands are taking advantage of the lower CPA/CPC to engage directly and successfully with new customers. When legacy CPG brands wake back up from the current hibernation period, they will be surprised by the rapid acceleration that DTC brands have logged.
Accelerate? Absolutely. And not only direct, but through marketplaces like AMZN or WMT as well. The days of the innocuous middle man posing as a brand are over. And if you sell commodities, time to think private label (see also: Target’s strategy), or cheaper than a dollar store.
DTC is definitely having a moment in the sun, as consumers scramble to find new sources for favorite merchandise that might be sold out at their regular merchants, and as locked down style seekers search for new brands to keep things interesting. DTC players would be wise to provide exceptional customer service now so they can keep their gains when the brick-and-mortar world starts to reopen.
Online connection is the way forward for the high-end (super niche artisan food brands) and bottoms-end (replenishment, bulky items, dry goods) the DTC spectrum. In-store, pop-ups and co-selling ventures will be value-added awareness activities.
If you are a CPG company, you must DTC or you will continue to lose market share. I have been advising clients for years to get serious with DTC, including banding with other CPG companies for an enterprise with economic volumes.
Unless one wants to pay Amazon, it is time to move forward.
After the initial investment DTC provides a greater profit than selling retailers and wholesalers. Format canbilization has reduced item distribution and thus lost sales. Private label continues to gain market share.
DTC is a real alternative for CPG growth. Like TV-only products going into retail, DTC will likely be the new product driver. This does not mean new product launches must change, but adding a channel — your own — sure will help.
As the “shop small” and “support local” movements have gained momentum, particularly during the crisis, it follows that DTC brands would benefit. Consumer trust is shifting from big CPG names to independent DTC platforms as certain segments feel a responsibility, a social pressure almost, to give their money to small and independents. They feel good about themselves afterward, and they aren’t likely to give that up once the crisis is over.
However, DTC is not an easy space for all industries, particularly those vending non-essential items. Select DTC brands in the fashion space are scrambling to adapt, making face masks and other PPE to stay afloat. In some ways, going DTC does give brands far more freedom. Not going through the traditional avenues means a greater ability to innovate, adapt, and even disrupt. And once brands taste this, it could be hard to give up post-pandemic.
The challenges for those newly flourishing in DTC will be fulfillment logistics and ability to scale with demand. Many DTC manufacturers are already back-ordered on certain items and are struggling to keep up with their supplies because of the unprecedented demand.
DTC has always been present. COVID-19 is indeed an accelerator for DTC, but this ramping up is mostly focused on “essential” products. The must-haves versus the nice-to-haves will determine which brands are brought to DTC channels.
That being said, the next phase of this health crisis will be an economic crisis. Consumer spending will respond to this as people spend less to save more. This will impact DTC growth in the same way it will impact total retail growth. I expect grocery DTC trends will be ramped up for existing brands, but it’s hard to predict the success of new brands being brought to this channel in a post-COVID-19 era of frugal consumer spending.