Going online? Here are the key decisions your business has to take

Executive summary

• Ecommerce was expected to grow by +19% globally before COVID, and the pandemics led to demand spikes of up to 12x for selected online retailers
   
• CPG brands enter direct-to-consumer (D2C) space not only as a major sales channel but also as an additional way to engage with their consumers and as an engine for experimentation and innovation
   
• CPG brands face a number of strategic and tactical choices when entering D2C
   
• Strategic decision #1: how to engage with consumers? Brands could replicate their existing portfolio in D2C, engage consumers with an additional value proposition, create an entirely new brand or range of products available only through D2C
   
• Strategic decision #2: how to execute D2C? CPG players can build a platform from scratch, partner with an existing e-tailer, buy an existing D2C player
   
• CPG brands also face a number of tactical decisions regarding assortment (all or exclusive), digital product (web site or an app), delivery model (time, fees, free delivery), data & CRM (how to capitalize on additional data?), promo & benefits (how to give consumers part of the retail margin back?)
   
• Entering the D2C segment poses some challenges, mainly related to appropriately managing the channel conflict, defining unique value proposition for consumers, and building in-house capabilities in eсommerce.

 

Global eсommerce boom

Previously CPG brands were building flagship stores to connect directly with consumers, but with the rapid growth of ecommerce an opportunity emerged to build direct-to-consumer (D2C) channels online.

Before the COVID-19 outbreak ecommerce was expected to grow by ~19% globally, and the pandemic has resulted in some retailers seeing their online sales spike as much as 6-12x compared to last year. It is no doubt that the rapid boom in ecommerce during the outbreak will result in many consumers changing their shopping behavior forever, and having a strong D2C proposition will inevitably become even more important for CPG brands.

 

Why enter direct-to-consumer?

D2C could become a sizeable sales channel depending on the brand’s strategy, but even if it doesn’t, it offers a range of benefits to CPG players. First, it is a unique opportunity to connect with consumers in a meaningful and exciting way. Second, it is a valuable source of insights and data, as well as a channel where brands could experiment and innovate.

 

How to build direct-to-consumer?

We analyzed a number of brands that built their D2C capabilities and developed a framework to guide CPG players through the most important strategic decisions when implementing D2C.

Decision #1: How to engage consumers? We found three distinct models in how CPG players engage with their consumers:

• Replicate the offering available in other sales channels in D2C
• Engage consumers in a new way through D2C platform
• Create an entirely new brand or range of products available only through D2C

Decision #2: How to execute D2C? We found three ways how CPG players entered the space:

• Build a platform from scratch
• Partner with an existing e-tailer
• Buy an existing D2C player

The decision framework is summarized below and some cases illustrate the logic:

Nestle (Replicate – Build) – Nestle replicated in their Nespresso online store the assortment available elsewhere, and they built the platform themselves.

Mars / M&Ms (Engage – Build) – capitalizing on gifting market M&Ms offers a unique opportunity to design your own M&Ms and buy them through their online store. This is an example of a unique value proposition available only through D2C. 

Pepsico (Create – Build) – Pepsi launched Drinkfinity available only online. 

Tyson Foods (Replicate – Partner) – avoiding the hassle of building own ecommerce platform and associated support services (logistics, customer care, etc.) Tyson partnered with Amazon and developed a branded landing page for their Tastemakers meal kits.  

Unilever (Engage – Buy) – Unilever acquired an innovative player Dollar Shave Club to develop its D2C competences. 

The ultimate positioning in the matrix will depend on the strategy chosen: replicating existing assortment is the easiest approach, but it provides less motivation for consumers to move their spending into D2C channel, while not many brands are able to create an entirely new brand online. Different execution models also serve best different purposes: building a platform will take the longest, but will ensure the brand has entire control over the channel, while a partnership means giving up on a part of control; acquisition is the most expensive option.  

 

What other choices have to be made?

After the strategic choices of how to engage consumers and how to build D2C are made we see a set of important tactical choices to be made:

• What is the assortment available through D2C? Will it be full assortment like in Nespresso case or a specific range? 
• What is our digital product? Will we have an app or a web site? For example L’Oreal developed an innovative app within its web page allowing consumers to try on different hair colours before they can buy Color&Go coloration that is available only through D2C.
• How we plan to deliver our products? What will be the delivery times, minimum order, delivery fees? Who will be our delivery partner? For example Lumene launched its cosmetics through a food delivery app Wolt in Finland. 
• How are we planning to capitalize on our data & CRM? For example Dollar Shave Club uses the data it gather from consumers to send them the products they need when they need them. 
• What will be our promo & benefit policy? Avoiding retailers and other middlemen leads to extra margin that could be given away to consumers. For example Gillete gives as much as 40% worth of benefits or a free shaving kit for consumers ordering through their D2C platform. 

 

What are the major challenges in implementing D2C?

We see three major obstacles to implementing D2C that CPG brands should overcome:

1. Channel conflict – CPG brands have to make sure they can manage the conflict that arises when they try to eliminate retailers. It could be done by providing unique assortment available only through D2C or a unique value proposition like in the M&Ms case.
2. Lack of unique value proposition – CPG brands have to ensure their consumers see value in buying products through their D2C channel instead of at a local retailer.
3. Lack of capabilities – D2C requires a unique set of ecommerce capabilities that CPG brands typically lack. Their digital teams are competent in managing digital campaigns, but not an online store.

 

Bottom-line

D2C offers a unique opportunity to develop an additional sales channel that unlike traditional retail is fully controlled by CPG brands. This allows for the more meaningful and unique interaction with consumers and the freedom to experiment. CPG brands should think carefully about how to build their D2C channel and ensure they are clear about the choices they make.

If you are interested in learning more about our retail & consumer goods practice, reach out to our experts and let’s have a chat!

 

Author:

Ņikita Pušņakovs

Associate Partner

[email protected]