Over the past ten years, the increasing popularity of e-commerce has made it easier for brand manufacturers to sell their products directly to consumers. This direct connection has given rise to a plethora of CPG startups, such as Brandless and The Honest Company, that are disrupting the market and fundamentally changing how consumers purchase products.
To remain competitive, many Big CPG companies that have traditionally only sold their products through retailers are beginning to experiment with their own direct-to-consumer (D2C) models. Last year, for example, Campbell Soup tested a D2C online soup delivery service, and Gillette launched Gillette On Demand, which allows customers to buy razor blades directly from the company via subscription or one-time purchase. And let’s not forget Unilever’s $1-billion purchase of D2C razor brand Dollar Shave Club in 2016.
Direct-to-consumer models have a number of key benefits for CPG brands, including access to more meaningful customer insights and the ability to quickly test new products. We’ll explore the most important benefits below.
Understanding Your Customers
CPG companies have a hard time developing a deep understanding of their customers. This is a reasonable challenge, as they rarely interact with the people who purchase their products. A CPG company’s first customer is a retailer, like Walmart, who ultimately maintains the direct relationship with consumers.
Brands do an admirable job conducting focus groups and other market research. However, studying your customers isn’t always the best way to understand them; you also need to have real-world interactions on a regular basis. The insights you gain by directly connecting with customers throughout the entire sales process are priceless and impossible to recreate with focus groups.
Direct access to the customer is imperative now more than ever given the expanse of choice that the internet offers. While brick-and-mortar stores have limited shelf space and must strategically choose the products they sell, digital shelf space is nearly unlimited. Customers are becoming more complicated because of this endless choice.
For example, American consumers have an increasing desire to eat healthy food. According to GlobalData, 87% of consumers in the United States pay attention to the ingredients in their food, and 75% are concerned about eating too much processed food. 46% are actively trying to decrease their calorie consumption.
At the same time, however, those same healthy consumers also want to indulge. They have fried chicken in their Bloody Marys, oversized burgers and incredible milkshakes. Bacon is far from healthy, but it has been one of the most significant food trends of the past five years.
How is a brand expected to understand such a confusing customer if they aren’t always interacting with them? Direct-to-consumer sales is a shortcut to reach these accurate insights.
"The insights you gain by directly connecting with customers throughout the entire sales process are priceless and impossible to recreate with focus groups."
Developing New Products
Groundbreaking innovation in the CPG industry is rare. Most “new products” are just new flavors, new packaging or new variants of existing products.
The main reason for this is that innovation is extremely risky for these organizations. New product launches take 18 to 36 months from inception to the point that consumers can purchase them in stores. That’s an incredible amount of time and effort.
Furthermore, 18 of the top 20 and 85% of the top 100 global CPG firms are publicly traded, according to GlobalData. It is difficult for these publicly-traded organizations to take a chance on a groundbreaking new product that won’t pay off for three years, especially when investors look at numbers under a microscope on a quarterly basis.
D2C helps these firms mitigate that risk by giving them an opportunity to launch new products on a smaller scale. It gives brands the ability to develop specific products for a particular customer, and consumers can “vote” for the products they like by way of making a purchase. This allows Big CPG brands to listen to what their customers love or hate about their new products. They can go back to the drawing board to adjust the product, formulation and marketing over time.
"D2C helps these firms mitigate that risk by giving them an opportunity to launch new products on a smaller scale."
Maintaining Complete Control of Your Brand
Procter & Gamble was the world’s largest advertiser in 2017, spending an estimated $10.5 billion to tell consumers who they are and what they represent. CPG giants Nestle, Unilever and L’Oreal were #3, #4 and #5.
Procter & Gamble may have spent a small fortune on advertising to inform customers about their products, but once these products are shipped to the store, it is up to the retailer to convey the brand’s story. Manufacturers have to rely on the memory of consumers to recall everything about the brand that they saw in TV commercials and other marketing campaigns.
When a product is sold in a grocery store, packaging is the only variable that the manufacturer has complete control over. Brands can work with retailers to increase awareness in the store with display signage, end caps, and advertisements in circulars. However, the manufacturer has to pay or negotiate with the retailer for that additional branding potential.
With D2C, a manufacturer has complete control over its brand image from the moment it first engages with a consumer until the customer has the brand’s product in their house. Competitors are also removed from the equation. Tortilla chips sold in a grocery store, for example, have to compete with an entire aisle of savory snacks. D2C allows the customer to see the product perfectly.
"With D2C, a manufacturer has complete control over its brand image from the moment it first engages with a consumer until the customer has the brand’s product in their house."
Getting Started With D2C
Existing CPG companies have been operating just fine selling their goods through retailers instead of directly to consumers. These CPG firms shouldn’t destroy their current business models. They should instead view D2C as a new sales channel and a new way to get their products to consumers. They should assess their involvement just as they would assess other channels, such as convenience stores, drug stores, warehouse clubs and dollar stores.
Consumers are changing, and so are their expectations for the products they purchase. CPG companies need to catch up with their customers’ expectations while also meeting their shareholders’ demands. These goals do not have to conflict with each other. Direct-to-consumer sales is a perfect way to straddle both of these lines.
There is a direct-to-consumer solution for every CPG company. It’s imperative that Big CPG finds a solution that works for them and adjusts to this new normal. If they don’t, there is a long line of exciting startups ready to take their place.
Anthony Riva has a 9-year background providing analysis and intelligence on all aspects of consumer behavior, retail industry insights, and CPG trends.
He currently is an analyst at GlobalData, where he develops research that enables clients to make actionable business decisions.
Anthony is an active member of The Hudson Union, a cultural institution. In his free time, he enjoys exploring New York City’s restaurant scene and wandering the aisles of grocery stores across the world.