Around a 10-12 min read
For this year’s Autumn series we will be taking a deep dive into the Direct to Consumer (DTC, or sometimes D2C) sales channel, one of the fastest growing sales channels in the UK and estimated to now deliver 2.4% of all UK retail sales.
What we’ll cover in this article
Although most brands now have some sort of DTC offering, commitment to the channel varies widely and it is seen by many brands as a niche, low priority channel. It can therefore sometimes be used only to skim a low level of sales from existing website traffic, rather than benefitting from strategic investment and the full focus of the Leadership team.
There are, of course, valid concerns about growing a channel that could be seen as competitive or dilutive to more traditional retailer channels. Real success in DTC requires a fully integrated strategy and buy-in across the organisation (we will deal with these and other issues in the next article), but there are also many reasons for making DTC a key part of your brand strategy, not least the proven opportunity to drive significant, incremental and margin enhancing sales.
In this series we explore these themes and, in this first article, provide an overview of the DTC channel in the UK, as well as case studies from some leading brands which will we hope will give food for thought about just how big your DTC offering could be, and how the channel fits into the rest of your commercial strategy.
The next article will focus on the Key Elements of a successful DTC proposition, together with What issues to consider when building an integrated Commercial strategy that includes DTC.
Finally we will be releasing the results of our 2024 Consumer Research into the DTC channel, which will provide a completely up to date and unique perspective on the channel and its Shoppers, so if this is of interest please get in contact via this link and you will receive the headline report as soon as it is released.
ARE YOU DOING ENOUGH TO GROW YOUR BRAND IN THE DTC CHANNEL?
Size of the Opportunity (UK)
By definition much of this channel remains ‘below the radar’ as sales are not captured by traditional EPOS reporting (eg Nielsen, GFK), but the channel has scaled substantially over recent years.
In 2019 (before Covid) Barclays estimated the channel accounted for 8.0% of all Online sales, which works through as 1.5% of all retail sales. Even with a modest assumption that DTC has increased share of total online by 1 basis point to 9.0%, sales would have almost doubled to £10.9BN by 2023 = 2.4% of all retail sales, and continuing at this rate the DTC channel could reach ~£12.7BN within 2 years – growth of a further 17%.
Whilst regular data sources do not include the channel, the data above demonstrates significant growth opportunities in an otherwise quite challenging economic environment. And as we can see below, a variety of brands are already substantially outperforming in this channel - so instead of asking ‘are we doing enough in DTC’ perhaps the question may be better framed as ‘how big do we want DTC to be?’
Benefits of growing DTC
As well as the opportunity to drive incremental sales at higher than average margin, DTC offers a range of strategic benefits, many of which can be applied to optimise the business and unlock future growth, and which make a compelling argument for increased focus on DTC as part of a wider brand strategy.
These can include:
Clearly higher priced items & brands lend themselves to this channel, with DTC playing a particularly key role in the following categories : Consumer Electronics, Fashion, Apparel & Luxury Goods. However, the Food category has an online penetration of 31% so also presents significant opportunities, and not only via the Subscriptions route.
Brand case studies : Nike, Sonos, Nestle & more
So how big can DTC be? In essence the answer depends in great part upon your vision. 20 years ago no one probably would have believed that 50% of Nike’s revenue could come from DTC, but at this point the question is more when, rather than if, this is going to happen.
For brands which are not yet #1 or #2 in their category DTC can also be a great way to build scale, punch above their weight and curate a powerful connection with their customer base which can provide the foundation for greater growth in the future.
Before we dive into our branded examples it is worth noting that there is no ‘one size fits all’ strategy that can be applied to this channel, and each brand needs to use insights on their Customer to develop the right strategy for them (more on this later in the series too), but hopefully the examples which follow will give some inspiration on what may be possible and start some conversations about what your brand can do…
Nike is rightly known as one of the most successful pioneers in the DTC space, growing sales from $2.5 billion in 2010 to $16.4 billion in 2021. This equates to an increase from 15% total brand revenue in 2010 to 39% in 2021, and the target is to reach 50% this year.
Growth of the DTC channel has been a central part of Nike’s strategy for years, underpinned by heavy investment and is summarised well by its ‘Consumer Direct Offense’ strategy, launched in 2017. This ‘Triple Double’ strategy was developed to drive growth by supercharging three core areas of the business:-
The consumer today expects a premium experience, with innovative product and services delivered faster and more personally. Fueled by a transformation of our business, we are attacking growth opportunities through innovation, speed and digital to accelerate long-term, sustainable and profitable growth.
As DTC sales have grown and investment has increased, the brand has stopped selling via many traditional partners including Macy’s, Urban Outfitters and even Amazon, despite Nike products regularly appearing on the top 200 most searched keywords on the platform.
Nike has also invested heavily in data analytics to build capability and accelerate its growth, including acquisition of 3 companies Celect (predictive analytics), Zodiac (demand sensing), and Datalogue (machine learning). These acquisitions enable Nike to better personalise recommendations, create new products and services, such as the Nike Training Club, and ultimately drive increased Customer lifetime value.
I truly believe that NIKE is just scratching the surface of what's possible. With our breadth and depth, no one has the advantage in this space that NIKE has to directly connect with consumers.
In FMCG, Nestle is targeting a doubling of its e-commerce sales from 13% in 2020 [~$11.8BN] to 25% by 2025, again unlocked by technological & marketing investments, and driven by markets including Europe, the United States & China. The company also notes that, so far, ecommerce investments have not been dilutive to the business.
Building on success of Nespresso coffee pods and Purina PetCare, Nestle has stated its investment will drive a tripling of valuable first-party data points – data collected directly from consumers, to around 600 million. This data will be used to identify areas where business can be optimised by reducing out of stocks or where sales can be boosted, as well as feeding into other existing CRM & product development programmes.
Key Takeouts: So What?
In short DTC has the potential to deliver significant competitive advantage for your brand, become a key part of your brand strategy and help to build a platform for sustained future growth.
If you found this article interesting then keep an eye out for part 2 of this series which will focus on exploring 2 areas of the DTC channel in more detail:
The final part of our Autumn series will be the release of our 2024 State of the Nation research, which includes detailed analysis of different UK DTC Shopper segments as well as an analysis of their Shopping Journeys and benchmarking of key DTC categories & brands.
If you’d like to find out more and be first to receive our headline report when it is published please get in contact with us here.
900 words, a 5-6 minute read
Thriving as a business means growing your brand … and doing this faster & better than the competition requires Insight.
Not just data or facts, Insight explains the ‘Why?’ behind the trends we see.
By understanding the ‘Why?’, brands can better know the Consumer, and as a result create better products, or develop more targeted activation plans. However, to do this Insight first needs to be demanded & embraced by the organisation.
Panasonic knew this. As a very successful electronics company, Panasonic prides itself on high quality products and therefore culturally has a very strong technical focus. However, as a global player, the company recognised that to grow even faster it is critical to understand how categories & customers differ in each market in which it plays, and to place these insights at the centre of what they do.
Developing the Panasonic Insight Driven Value Training Programme
In 2021 Panasonic asked Optima Retail to build on the work we were already doing together to help them build a more consumer & data led culture in the business, and further develop team capabilities to execute a new growth strategy.
The ambition for the programme was to drive a cultural shift, where future innovation and go to market plans would be led by Insights (not assumptions), driving new value for the Panasonic brand.
What resulted was an 11 module “Insight Driven Value” training programme, released online in English and Japanese over a period of 12 months. Each of the 11 modules was focused on a different topic, from building a base understanding of what an Insight is and where it comes from, to introducing the different stages of the Customer journey and then exploring more advanced topics like Insight led Product/Packaging and how to develop a Category growth story.
Key principles were explained in bite-sized chunks, and each module was brought to life with case studies, quizzes and hands-on exercises so participants could learn by doing, as well as a community forum where questions could be asked and best practice shared.
Our focus was to shift the culture in 3 key ways:-
1. Bringing the outside in
2. Data Driven
3. Keeping it simple
Optima Retail work with a range of brands to help them better understand their customers and the market opportunity for their brand. We then work with them to develop growth strategies which deliver these opportunities often including building brand & category stories which are presented to their retail customers. To find out more about how we may be able to help you, please get in touch via our contact page.
Photo credits : Pexels.com / (1) This is Engineering, (2) Pixabay, (3) Fauxels
A simple guide to the different types of consumer, category & shopper data that can be used to grow your brand...
When we start a new project one of our first questions is always 'What data do we have?' - because without real insights we are often left with assumptions and opinions which can be overly optimistic or just plain wrong.
Retail data may need investment, but it also needs a clear strategy to ensure you get the right insights at the right time to maximise your ROI and avoid making more expensive mistakes further down the line.
To help you get started we've pulled together a simple guide to 5 of the key types of retail data available - what it is and when it can be used, as well as some examples of where to go to find out more.
And if you need any advice then please just reach out as we'd love to talk!
Demand for Groceries is through the roof
After years of predictable and quite slowly evolving shopping patterns, current demand means we rapidly need to develop a new understanding of how to best serve shoppers over the coming months, with huge potential implications for Suppliers.
Whether its panic buying or pantry stocking demand is through the roof. UK consumers continue to stockpile goods, decimating the supply chain and fuelling a vicious circle of increased concern and increased demand.
And poor availability means the vulnerable are losing out...
Supermarkets are now looking to cull range
Whilst in the short term this means shorter trading hours, redeployment of cafe & counters staff , and limits to the number of any one item Shoppers can buy, the focus is moving to range and space.
Implications for Suppliers
1. Range Rationalisation
New demand patterns mean every SKU will be questioned. Volume may be concentrated into a smaller number of SKUs, creating a longer tail which could be culled by Retailers to protect on-shelf availability. However, real choice & unique Shopper needs must be protected and smaller brands will be under even more pressure to use consumer, shopper & category insights to really prove the true value they bring to the category.
2. Reduced Promotions
Promotions cause spikes in demand Supply Chain could well currently do without, especially those which only run on shelf with no increased capacity. Added to this, the total amount of secondary feature space may also be reduced causing a double whammy as retailers redeploy some plinth ends to increase shelf capacity for core SKUs, and also look to re-engineer the promotional programme to better reflect current Shopper needs. For example they may feature less packed lunch items and more in home meal solutions, and with reduced opportunity to promote, some brands may want to re-consider their overall pricing strategy.
Major changes always create new opportunities. Some concepts in the NPD pipeline may need to be shelved as no longer appropriate, but new ideas should be explored to take advantage of new shopping & consumption patterns. Which products will increase and which will decline? Clearly some on the go products may suffer mid-term declines, but fresh foods, ready meals & treats may all increase as Shoppers spend more time at home and less in restaurants & food service outlets.
4. Online & Convenience
Increased demand was enough to force Ocado to close their website temporarily this week, and the other Grocers will be feeling the same pressure. Whilst capacity for online deliveries is limited, retailers will do what they can to ramp this up over coming months, driving up channel growth. Increased demand is also sending more shoppers into convenience Stores, and may be sustained as Shoppers working from home do more top up shopping at neighbourhood stores which may be within walking distance. Brands need an effective strategy for both channels to ensure they have the right presence and visibility with the right products to maximise conversion at point of purchase.
Lean in - Buyers are fighting fires day by day at the moment, without time to consider anything strategic or longer term. They will make tough decisions in the interests of their shoppers and their business, potentially also without discussion with Suppliers. Be proactive, and be understanding. Think 1, 2, 3 months down the line to help them. What does your future demand curve look like? What can you share about new shopping patterns and consumer needs in your category which will help retailers adjust their offer?
The market is evolving quickly, and we are operating in a very different world to just 4 weeks ago. Timely insights & rapid learning about how the coronavirus outbreak has changed consumer & shopper needs in your category, and what this means for future category and brand strategies are crucial to driving growth over the next few months. Suppliers who can help Supermarkets develop this new understanding will be the ones to win.
Thank you for reading this article. If you need any help understanding how recent changes in shopper behaviour are impacting your brand, and what you need to do about it to thrive and grow then please get in touch for a free initial chat.
Optima Retail is an agile, independent insights & category management consultancy working with scaling and established businesses to accelerate category and brand growth.
Exclusive listings are near the top of most Buyers' shopping lists when they are looking for new products as they help to differentiate their range, offer the chance to drive lasting growth in their market share, as well as some degree of profit protection. But does it work both ways? Are there similar benefits for new brands in return for shutting down other sales avenues, or is it a one way street?
In this article we answer that question by looking at it from both sides and the benefit of 20 years experience in the trade...
So you’ve spent months perfecting you pitch, explaining how all the latest trends and consumer insights point to your product becoming the next big thing, and your Buyer is still sitting there with a poker face, showing no intent of actually listing your brand? Then here’s 4 tips to seal the deal…
Compelling insight-driven stories about real consumers are the best way to inspire your Buyer and persuade them that your brand will grow their total category. This article explains how...
Growing the Category
As UK supermarkets continue to simplify their ranges & reduce sku count, its becoming ever harder to get the listing you need. As a small or scaling business, getting the meeting you need can be a skill in itself, but once you are there, what is it that will set you apart from all the other products the Buyer sees?
Put yourself in the Buyer’s shoes and you will soon see that they are pretty agnostic about brands, and what any individual SKU will sell – its all about the category. Will your brand drive INCREMENTAL sales, rather than stealing from the competition, and what proof do you have when you pitch?
Any Buyer listing a new brand is taking a leap of faith, and the thing that is going to set you apart from the many other hopefuls is not your brand, its not some whizz-bang technology and its not a load of charts and data. Its your story.
Stories are more persuasive
Stories are consistently found to be more persuasive than more data-led approaches (e.g. Martin & Power 1982*) because they engage the listener in a different way.
Stories can be up to 7 times** more memorable than facts alone because they act as mnemonic devices for facts. Mnemonics work by organizing abstract material into a meaningful structure – just think back to primary school and the rhymes you were taught to remember points on a compass or the colours of the rainbow for proof of this.
Engaging Our Emotions
When listening to straight information, the audience evaluates each individual message, actively analyzing each point they are hearing. When our emotions are engaged, however, and we feel personally connected in some way to an authentic narrative, we often absorb it entirely, without pausing to challenge or deconstruct what we’re hearing.
Swept away by a compelling story, we are more likely to embrace the ideals and messages it is promoting. Even though there may be no facts or data, we can still be deeply moved – and when we do have the facts, the story becomes even stronger. In the end it comes down to the audience being able to relate to what you are saying:
“Data are just summaries of thousands of stories – tell a few of those stories to help make the data meaningful.”
Chip & Dan Heath, from the book Made to Stick
What makes a good story
All stories need a start, a middle, and an end. By setting the scene, showing you understand market conditions and consumer trends you are making your product relevant to the retailer and showing it addresses a shared opportunity. Only then should you go into solution mode.
Start with the most interesting bit of the story. For a retailer this is normally the size of prize, as every Buyer wants to know ‘whats in it for me?’ so make sure you make this as clear and credible as you can.
As well as this, though, think about using additional hooks which grab the attention eg something contrarian (challenging the majority view) or counterintuitive – (going against our own gut instincts). This is where the real insight you are sharing starts to become the competitive advantage the Buyer is really looking for.
5 themes which consistently drive the most engagement in the audience are …
Make it a real story - If your story does not take people on a journey where there is a some sort of transformation or awakening between the beginning and the end, it’s not a story.
Say something new - If your story does not reveal something new or unexpected about the brand, it’s going to be boring.
Keep it simple - “If you can’t explain it simply, you don’t understand it well enough.” Albert Einstein, Physicist
End on a high – finish on your best point. The last thing in your story is what people will remember most!
Finally, deliver it with passion
Make them believe in you and remember you are not just selling the product. You are selling you, your vision, and a commitment to grow their category.
Remember you get what you give. If you present with passion, belief & humour then you will inspire passion and action in your listener. It’s that simple.
About Optima Retail
We work with scaling businesses and have a proven track record of driving commercial performance by speaking the Retailer's language - identifying new or unmet consumer & shopper needs and providing solutions which drive brand AND category performance. For a free informal chat about how we may be able to grow your business please contact us here.
* Martin J. & Power M.E. (1982). “Organizational stories: More vivid and persuasive than quantitative data.”
** Bower, G. H. and M. C. Clark (1969). “Narrative stories as mediators for serial learning.”