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.