The direct-to-consumer (D2C) model made waves both before, and during, the pandemic as branded goods manufacturers explored this channel as a new revenue driver. Gartner research shows clear enthusiasm for D2C selling, in the near, as well as medium, term (see Figure 1). However, as per Insider Intelligence, although it might seem that D2C revenue in the United States is increasing, a closer look reveals that the rate of increase YoY is on the decline (see Figure 2). So, the burning question remains “Is the future still a rosy one for branded goods manufacturers selling D2C?”
Let’s start by looking at digitally native brands, because they might just be the canaries in the coalmine for a pullback in branded goods manufacturers going D2C. Well-known, digitally native D2C brands such as Warby Parker, Dollar Shave Club, Casper, Allbirds, etc. built their businesses by cutting out retailers and selling directly to shoppers at lower prices. However, as more consumers reduce discretionary spending, digitally native D2C brands are facing significant economic headwinds, while we see far fewer reports of the latest branded goods manufacturers starting up their own D2C operation.
Here we break down three key issues D2C branded goods manufacturers are facing in today’s market and outline steps that must be taken to navigate this D2C minefield:
Rise of Digital Marketplaces
Digital marketplaces now account for 67% of global ecommerce sales, leaving just 33% of transactions taking place on D2C brand websites. Also, the revenue generated from the top 100 digital marketplaces globally grew by 18% in 2021. With two-thirds of dollars being spent on digital marketplaces and projections of double-digit growth, branded goods manufacturers will be fighting a losing battle if they don’t take immediate action and attempt to retain consumers.
To mitigate this threat, branded goods manufacturers need to make intelligent choices regarding their D2C business. Brands need to understand that D2C is less about driving revenue, and more about building consumer relationships, leveraging data and insights, doing test-and-learns about new product innovations, evaluating how consumers act with different combinations of products in a digital format, etc. That being said, brands should evaluate commercial opportunities to counter the rise of digital marketplaces by focussing on customizable products, offering exclusive assortments on D2C websites, personalized service offerings and elevating brand credentials.
Finding the Balance of Wholesale Vs D2C
Traditional branded goods manufacturers like Nike, Adidas and Under Armour are capitalizing on the growth via the D2C model. Nike projects its D2C arm will be responsible for 60% of its total revenue by 2025. Nike had earlier transitioned to D2C and closed many of its wholesale relationships with retailers like Macy’s, Urban Outfitters, and Zappos. On the other hand, D2C branded goods manufacturers like Casper have been partnering with major retailers like Costco, Target, Sam’s Club and Nordstrom. Several questions get raised on the profitability of D2C sales over wholesale retail. Typically, it is observed that wholesale provides higher margins despite branded goods manufacturers getting more revenue from D2C.
To find this balance, D2C branded goods manufacturers need to adopt a customer segmentation strategy. This strategy would include SKU rationalization across different channels. Typically, not every SKUs is profitable in every channel. This way branded goods manufacturers would be able to offer exclusive products and personalized offerings through their D2C channel, while maintaining their wholesale presence.
Increased Competition and Changing Consumer Habits
A significant challenge that D2C branded goods manufacturers are facing now is the increase in competition in the digital space. Over the last few years, many branded goods manufacturers established or expanded their D2C operations out of necessity while digital giants like Amazon have grown significantly. All of this means more branded goods manufacturers are competing to sell similar products.
The way to overcome increased competition is to stand differentiated by improving product avilability and enhancing consumer experience. This can be achieved by incorporating into your offerings the pulse of the consumer which currently appears to be swinging from a primary focus on speedy and fast fulfillment to convenience, flexibiltiy, reliability and quality of service. Branded goods manufacturers need to rethink their forecasting strategies, inventory positioning, replenishment and last-mile fulfillment strategy.
Finally, while D2C growth may be slowing from its pandemic highs, it does not mean that D2C is going away. However, neither is the complexity and challenges of establishing and scaling a D2C business. It requires navigating the trecherous waters of managing consumer expectations related to product availability, order fulfillment, last-mile deliveries, product returns, etc.
Adapting to the changing market conditions, evolving consumer requirements and understanding your unique value proposition that drives consumers to shop with you D2C rather than the myriad other options available will be critical. So as the lines blur between traditional retail, D2C and digital marketplaces — while the market conditions are getting tough — those brands that get their foundations right will succeed and drive sustainable growth via the D2C channel. Hence, business decisions taken today — the ones that won’t kill you — will make you stronger when you come out of these tough times.
Debrup Jana
Senior Director Analyst
Gartner Supply Chain
Debrup.Jana@gartner.com
Listen and subscribe to the Gartner Supply Chain Podcast on Gartner.com, Apple Podcasts, Spotify and Google Podcasts
The Gartner Blog Network provides an opportunity for Gartner analysts to test ideas and move research forward. Because the content posted by Gartner analysts on this site does not undergo our standard editorial review, all comments or opinions expressed hereunder are those of the individual contributors and do not represent the views of Gartner, Inc. or its management.