DTC: three little letters that gave hope to food and drink brands during the darkest days of the pandemic. From startups and farm brands to FMCG giants, scores of companies set up direct-to-consumer operations in a bid to Covid-proof their businesses. With good reason: as traditional sales channels closed overnight, online selling became a much-needed alternative route to market. But as we approach the one-year anniversary of the first lockdown, many brands will be taking a long, hard look at the viability of their DTC operations.
It’s not that going direct no longer makes sense. DTC allows brands to cut out the middleman and own the relationship with the customer – a big strategic advantage, pandemic or no pandemic. And with online shopping and social commerce booming thanks to Covid, there’s arguably never been a better time for brands to go direct.
Pasta Evangelists shows the scale of the opportunity. The fresh pasta specialist saw sales rise by more than 300% in 2020, with more than one million portions delivered. That’s up from just 200 portions when it launched in 2016. No wonder the company has just been snapped up by Barilla in a deal reportedly worth £40m.
What’s more, technology has lowered the barriers to entry: from Shopify to Instagram Shopping, brands now have an array of ecommerce options that don’t require complicated tech setups or investment in specialist staff.
But while barriers to entry may be low, the barriers to success are rising all the time. Despite smarter tech, the logistical demands of fulfilment, delivery and returns can quickly overwhelm smaller brands.
The real elephant in the room, however, is customer acquisition costs. How do brands raise awareness and drive traffic to their web shops without spending so much money on advertising that any sales they make are essentially unprofitable?
DTC brands were already struggling with this before Covid and it’s a challenge that’s not going away – despite the cost of some digital advertising coming down during the pandemic.
A razor-sharp focus on customer lifetime value (CLV) is therefore essential. It can be five times as expensive to acquire a new customer as it is to retain an existing one, according to McKinsey, so brands need to make sure customers keep coming back.
Subscriptions are a popular strategy for driving repeat purchases, while product bundles and bulk-buys help drive up basket size and ensure margins aren’t eaten away by delivery and fulfilment costs.
Brands that can reach customers through their own media channels, be it social media or email newsletters, also have a clear advantage. However, with experts warning we may be reaching saturation point for DTC brands on Instagram, a willingness to experiment with new platforms will become increasingly important.
Partnerships with other DTCs offer further opportunities. Marketplaces such as Mighty Small allow brands to pool resources and take the risk out of going it alone; in categories such as beauty, DTC brands are forming cross-category alliances to jointly boost awareness, increase engagement and drive sales.
None of these tactics is a silver bullet, of course. In the end, the brands that will make DTC a success long term are those that get the ‘boring’ stuff right: taking the time to understand and engage customers, getting a grip on their sales funnel, clearly defining what role DTC should play for their business and setting realistic revenue targets.
Or having the courage to walk away. The buzz around DTC makes it all too easy to conclude that everybody should be selling direct, but there’s danger in blindly following the crowd. A poorly costed, fuzzy DTC strategy can quickly become a millstone around brands’ necks at a time when they can least afford it.
While some brands will undoubtedly thrive through DTC, others will find their smartest option now is to see direct selling as a useful lockdown experiment – and move on.