Retail

Digital Shift Gives Rise To DTC Brands

online shopping

Outside of the pandemic — if there is such a thing as outside of the pandemic — two stories have been the most compelling in retailing so far this year. The first is the digital shift. The second is the rise of direct-to-consumer (DTC) brands. Last year, DTC online sales reached an impressive $14.28 billion, with that figure expected to grow more than 24 percent in 2020.

Both stories will hold their significance well into Q4 and into 2021. As Labor Day is the gateway to the all-important fourth quarter, it’s a good time to look at where the DTC category will end up when the dust has finally cleared on 2020:

How COVID-19 Boosted DTC

The pandemic served to accelerate the digital shift, some say by 10 years. It also accelerated the rise of DTC brands, but not for the same reasons. eCommerce spiked because consumers demanded it and drove it. DTC brands drove into the pandemic and adapted to it to catch the digital shift. One was driven by demand; the other was driven by necessity.

There are two kinds of DTC brands that have arisen. The first had to go direct-to-consumer as products because they didn't have a shot at traditional retail exposure. The second group went direct to the consumer because its manufacturers didn't like the retail exposure they were getting.

The Rise Of DTC-Only Brands

The first group is arguably more exciting. These are the brands that have either created new product categories, new business models or pivots on their previous business models. These are companies like Adore Me (lingerie), Green Goo (personal care), Shift (used cars) and Misfits Market (produce).

They and others have succeeded because they entered the market independent of traditional retail, and because their business model fit the needs of the pandemic. Adore Me, for example, was a thriving eCommerce brand before the pandemic. But it stayed alive during the pandemic by adding home delivery and home-shopping appointments to its business model.

“DTC has always been more about the direct connection between a brand and its customer, rather than simply selling things online,” Adore Me Vice President of Content Ranjan Roy told PYMNTS. “Having the data to serve them, the know-how to reach them across platforms and the products that they are looking for all come from that connection. The temporary shutdown of physical retail clearly accelerated eCommerce penetration, but the ability to connect to your customers both on and offline means DTC brands are incredibly well-positioned to deepen these relationships even as physical retail [hopefully] gets back to normal.”

Traditional Brands Have Also Joined The Party

The second group of DTC offerings are the brands who could have gone the traditional route but found a more promising future without it. In this group are the consumer packaged goods (CPG) companies and other big brands that have continued a trend that started pre-pandemic. For example, Cadillac Live, which gives potential customers a chance to take a virtual tour of a Caddie without visiting the showroom, was launched last fall. The brand added features to the offering during the pandemic.

Other brands struck out on their own during the pandemic. Pepsi recently debuted two DTC websites, PantryShop.com and Snacks.com, where consumers can order popular food and beverage brands. In May, Kraft Heinz launched its first-ever DTC business line, “Heinz To Home,” with warehouse club-sized packages of staples like beans and spaghetti for home deliveries, all based on consumer tastes and trends. Impossible Foods, known for plant-based meat substitutes, also launched a new DTC site in June, while Macallan Scotch went DTC this summer.

The concept of a packaged goods brand ducking the supermarket accounts that made them would have been unthinkable just a few years ago. But getting a brand to market, even for Pepsi, is sometimes prohibitively expensive. For example, Constellation Brands reportedly spent north of $40 million to introduce its four flavors of hard seltzers in February. Testing, or even making a full-court press online, is a low-risk, high-reward strategy.

“The test for DTC always is, can you provide a value proposition that really resonates with the consumer, right? Because that's when you get the repeats. That’s when you get the sustainable proposition,” said Gibu Thomas, Pepsi’s head of eCommerce. “We'll continue to invest in it and will continue to iterate and pivot until we find the propositions that consumers find delightful and sticky.”

But there’s another reason big brands have found a home in DTC: data. It’s one of the reasons Nike has been moving toward less reliance on physical stores and more dependence on eCommerce. With eCommerce there’s no middleman to harvest and analyze the data.

“The relationship between customers and brands is only going to get stronger and deeper,” Rupert Cross, chief digital officer at 5874 Commerce, told PYMNTS. “Brands are increasingly collecting more information on their end consumers. We just saw Nike cut out the middleman and adapt the DTC strategy in the past two weeks. By understanding the data on consumer behavior, ecommerce strategies can become more personalized.”

Who Will Win?

Both classes of DTC brands will grow, but how many will prosper? That depends on the other story that dominated the pandemic — the digital shift.

DTC brands can add an element of unpredictability to the digital shopping experience. And the more the CPGs of the world move online, the more they will lend their marketing might to drive consumer awareness. It will be an interesting dynamic for a long time to come.

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