In business, direct is best
As ecommerce and disruptive technologies influence buying behaviours, companies across industries are entering a new phase in business to consumer relationships. In particular, retailers and consumer packaged goods (CPG) companies face complex customer demands, and what is generally described as the threat of new online marketplaces.
D/SRUPTION spoke to Alan Treadgold, retail strategy expert at PA Consulting and a primary architect of the company’s D2C report, to find out how D2C can catalyse positive change in consumer relationships.
PA Consulting surveyed senior leaders from 150 consumer goods companies and 150 retailers across the US, Europe, and the Asia-Pacific region for their perspectives on online marketplaces and direct to consumer (D2C) initiatives. While attitudes towards D2C are overwhelmingly optimistic, it comes with various challenges.
Be digital, be direct
It’s a challenging time for brands – that much is clear. And, as Treadgold explains, this is true regardless of industry or location.
“It doesn’t really matter what geography you’re in – Europe, North America or the far east. And it doesn’t really matter what sector you’re in, although some are struggling more than others,” he says. “If you have a direct relationship with your end customer, patient, or citizen, then you’re able to much more effectively engage with them. It can also be a more profitable way of organising your business.”
Through an assessment of 300 CPG and retail companies, PA Consulting’s report highlights the general enthusiasm to develop direct channels to consumers in an attempt to overcome complex, challenging markets. It identifies the contrasting views of retailers and CPG brands when it comes to large digital platforms, and explores attitudes across different geographies.
Despite some differences, the principle of D2C exists across supply chains. Direct channels enable better customer experiences, faster product access, and personalisation. Given that 80 per cent of consumers say they are more likely to buy from a brand that personalises products and services, it’s no wonder that companies are keen to implement direct strategies.
Reaping the rewards
According to PA Consulting’s research, 84 per cent of consumer goods companies have seen increased D2C sales in the past 18 to 36 months. 98 per cent expect this trend to continue. Treadgold explains that this positive view stems from the many benefits that can come from a successful D2C strategy – including a closer relationship with end users.
“With a direct channel, you have a means of talking directly to the customer, gaining more insight and more visibility over how they are buying your product and what promotions are most effective. You can build up a much richer picture that you don’t get when you use a retail intermediary,” he says. “One of the challenges that CPG companies have in taking their product to market through retail intermediaries like Tesco and Walmart is that they don’t have a direct line of sight with the end customer. They’re always one step removed.”
Information taken directly from consumers has serious value for any business, as it can lead to better judgements about driving engagement and open up opportunities to cross sell products. Take out the middlemen, and businesses also have more control over how their brand and products are represented.
“In CPG, businesses like Dollar Shave Club, MyMuesli, and Eve and Simba are all getting a lot of traction with shoppers. What they and lots of other businesses are showing is that there are few – if any – categories of consumer spending which don’t have a D2C opportunity,” says Treadgold.
D2C is viewed as particularly beneficial for retailers and CPG companies, as they aim to make high volume, high frequency sales. As such, any minute change in company to customer relationships can have a huge effect on margins. However, D2C has also proved advantageous in other industries like automotive.
“About three years ago, Hyundai opened a store in Bluewater Shopping Centre south of London – so not a dealer network at all. They put just two physical cars in the store, not 20, 30 or 50 like a large dealership would. That store is one of the best performing Hyundai outlets in terms of the number of sales that it does each year. In a digital world, customers don’t need to see every single vehicle in your range in the same location. They can choose all of the options online. Hyundai aren’t the only automotive brand that has explored going to market through retail stores rather than through a dealer network. Tesla is very disruptive and it goes to market in just the same way, in relatively small stores and in shopping centres.”
The difficulties of direct to consumer
While there are considerations to be made in terms of budget and ability to scale, attitudes are generally positive when it comes to direct channels. It’s a slightly different story where online marketplaces are concerned. A significant amount of retailers (20 per cent) perceive that online marketplaces like Alibaba and Amazon will have a negative impact on their business. In the US, where Amazon rules the roost, the report found that 45 per cent of respondents were concerned about ecommerce platforms. In the Asia-Pacific region, just three per cent share the same view.
“We tend to think of Alibaba as a Chinese version of Amazon, and it really isn’t at all. Alibaba has been a tremendous force in helping brands to develop a very strong footprint in China. It’s also helped Chinese brands with a regional footprint to develop at much bigger scale. Having worked quite a lot in that part of the world I can certainly understand why there is a lot of positive sentiment,” says Treadgold.
Alibaba and Amazon are certainly seen as competitors, and have forced retailers and CPGs to work harder to reach customers. Although they have made it harder for other companies, their vast networks have also provided a platform for growth.
“With Amazon, although the headlines tend to be that most retailers see Amazon as their principal competitor, we are living in a world where your principal competitor is very often also an important collaborator for you. I think Amazon, for a lot of retailers and CPGs, exists in that world. They provide an opportunity for you to get so much reach and so much scale.”
So, how do companies retain their competitive advantage? For Treadgold, the first step is to put the customer at the centre of the business. Secondly, they need to find meaningful points of difference with their online competitors. This could mean building incredibly innovative, convenient or personalised products. A third point, he says, is to reconsider the role of retail stores and make changes where necessary.
“There was a time when retailers were very resistant to the notion of being on Amazon or any digital channel because they thought it would only undermine their physical stores. What’s become very clear is that you simply cannot have that view anymore; you have to put the customer at the centre of the organisation. The retailer has to be where the customer wants them to be.”
The relationship between B2C and D2C
Will all companies be affected by the D2C business model? Treadgold considers it to be a possibility, but one that relies on reinvention.
“What we’re learning is that it’s a story of reinvention. Retailers have to reinvent if they want to stay relevant to suppliers and brand owners on the one hand, and to end users on the other. Whether we’ll see a massive migration of everything going direct depends on the ability of participants in value chains to reinvent themselves in order to remain relevant.”
PA Consulting’s survey offers five key recommendations for businesses pursuing a D2C strategy: start with the consumer, be data literate, be agile and open to new models, understand the meaning of innovation, and be realistic. In Treadgold’s view, the first of these is the most important.
“Everything else cascades out of having the customer at the centre of your organisation. It’s difficult to imagine being able to do any of the other four things unless you are in that mindset and organisational structure.”
Another major consideration that spans all five recommendations is flexibility – in other words, being able to recognise and respond to changes, fast. In hugely competitive digital markets, the ability to be flexible is a key differentiator between businesses.
“Flexibility is now just as important as scale, to understand very quickly who your customers are and what their expectations are. You need flexibility in your business and in your supply chain to be able respond very immediately to those changes.”
Access the full report here.
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