From Amazon to Apple, technology has disrupted traditional commerce companies, where technology solutions have enhanced the experience of the product or services for consumers. However, certain industries, such as consumer packaged goods (CPG), have remained relatively stable. In the past, innovation in CPG has been focused on products’ functionalities (e.g., a fast-action dish soap, or advanced whitening toothpaste). Despite CPG’s brand legacy and R&D capabilities, younger consumers are increasingly drawn to emerging micro-brands, small-scale brands tailored to niche markets (The Economist, 2018). In the rise of consumer-technology solutions, how do CPG companies stay relevant in delivering consumer-centric solutions? The answer lies with direct-to-consumer (DTC) brands.
What is a direct-to-consumer distribution?
Direct-to-consumer is the practice of selling to consumers directly, without the need of a third-party retailer or middleman. Adopting a DTC model has numerous benefits, including reducing costs associated with working with a middleman and furthering a company’s brand equity, where companies can further develop their brand relationship with customers on an e-commerce website or brick-and-mortar store.
Direct sales also allow for a better understanding of customer data (Chonsksi, Caldbeck, and Jordan, 2019). When selling to a third-party store, consumer brands know how much volume they are selling to a store, but they do not know how well a certain product is selling in terms of individual sales. Thus, DTC sales enable greater understanding of sales data and valuable insight for marketing purposes.
An example of a successful DTC company is Warby Parker, the online retailer of prescription glasses and sunglasses. Founded in 2010, the company emerged as an online-only model, where customers received different styles of glasses in the mail to try at home, and purchase the style that best fits them (O’Connell, 2012). Priced at $95 per frame, the glasses were substantially more affordable than glasses in stores. Furthermore, the company established a donation program, where for each pair of glasses purchased, a pair is donated in partnership with the nonprofit, VisionSpring. Thus, consumers associate Warby Parker with affordable styles and social consciousness, messages of the brand that may not be conveyed through a third-party retailer. Warby Parker has also grown its presence to stores across the United States, extending the brand experience.
How traditional CPG companies can innovate
While many retailers are adopting a DTC model, it is difficult to see this model applied with CPG brands because they are stapled goods. Household products have become part of ones’ routine, so there is little room for large-scaled innovation as such changes may not be accepted by consumers. At the same time, new “startup consumer brands” are emerging with an emphasis on an online-store or subscription model (Duguay, 2018).
The shift to e-commerce reflects changing consumer behaviors, where consumers are increasingly attached to their computers and mobile devices. With the rise of grocery delivery services, it is evident that consumers find grocery shopping a hassle. As a result, these emerging consumer brands complement the shift in consumer purchasing habits.
CPG companies can learn from this model by expanding their marketing channels and service delivery methods. While CPG brands have a presence on television and digital media, many consumers discover products and deals through their local supermarket. As a result, the supermarket plays an integral role in consumers’ perceptions of the brand. A DTC model would give CPG companies greater control of customers’ interaction with the brand. One way to accomplish this is through pop-up stores. For example, St. Ives, the skincare brand under Unilever, launched a pop-up store in New York City, where customers can purchase products and mix customized scents. Similarly, Kellogg’s, the iconic American cereal brand that has stocked grocery stores for a century, has opened a café in New York, where patrons can have a bowl of cereal with toppings. Both examples prove that traditional brands with a long legacy can continue to innovate by directly reaching the customers.
CPG brands are also partnering with emerging brands to expand their portfolio capabilities. In 2016, Unilever purchased Dollar Shave Club for $1 billion (Cao & Mittleman, 2016). Although Unilever has an existing portfolio of shaving products, the company was interested in Dollar Shave Club’s subscription model and its capability of developing a strong following quickly. Similarly, Colgate acquired a minority stake in Hubble, an online subscription company for contact lenses, in 2018 (Copeland & Terlep, 2018). With Hubble, Colgate is exploring innovative ways to deliver its legacy products (think a subscription model for toothpaste). With Amazon and Walmart expanding their footprint and capabilities, traditional CPG companies are looking for innovative solutions to remain relevant.
Implications for other industries
Aside from CPG companies, it would be interesting to see whether a DTC model applies to other traditional industries such as household appliances and electronics. Unlike CPG brands, there is not a high turnover for the product. You will not go through a washing machine as you would go through laundry detergent. Household appliances and electronics innovate with new functionalities are advancements in their existing technology (think a faster food processor). The challenge is that the average customers are not enticed to purchase the newest model of an appliance item because they are satisfied with a product that serves its fundamental purpose. As a result, household products are not agile to customer needs.
However, a DTC model can still be applied in this industry. Purchasing appliances is still an experience, and many consumers want to see the product before purchasing it. Similar to Warby Parker, household appliance brands can have dedicated retail stores to showcase their line of the product instead of going through a third-party retailer (e.g., department stores). Another benefit of having dedicated stores is that customers can ask specialists questions about the product. Household appliances can also consider an e-commerce model, where users can test a product at home before committing to purchase the product. The limitation of this proposal is the cost of shipping and greater risks associated with larger products.
DTC distribution has proven to be successful, especially for emerging brands that have gained a loyal following. By selling products directly to the consumer, brands can control the messaging of the product. When it comes to CPG brands, there is are a lot of avenues for further growth including launching pop-up stores or partnering with emerging brands. Ultimately, a better understanding of the customer will position CPG companies for greater growth.
Cao, J. (2016, July 21). Why Unilever Really Bought Dollar Shave Club. Retrieved March 8, 2019, from https://www.bloombergquint.com/business/why-unilever-really-bought-dollar-shave-club#gs.0ippbt
Chokshi, S., Caldbeck, R., & Jordan, J. (2019, February 25). A16z Podcast: Who’s Down with CPG, DTC? (And Micro-Brands Too?). Retrieved March 8, 2019, from https://a16z.com/2019/02/15/cpg-dtc-microbrands-grocery-online-offline-commerce/
Copeland, R., & Terlep, S. (2018, July 02). A Toothpaste Club? Colgate to Invest in Online Startup. Retrieved March 8, 2019, from https://www.wsj.com/articles/a-toothpaste-club-colgate-to-invest-in-online-startup-1530537593
Duguay, A. (2018, March 15). If The Consumer Is Strong, Why Are CPG Brands Struggling? Retrieved March 8, 2019, from https://www.forbes.com/sites/forbesfinancecouncil/2018/03/15/if-the-consumer-is-strong-why-are-cpg-brands-struggling/#3bfb3fcb4728
O’Connell, V. (2012, July 19). Warby Parker Co-Founder Says Initial Vision Was All About Price. Retrieved March 8, 2019, from https://www.wsj.com/articles/SB10000872396390444097904577535111565440718
The growth of microbrands threatens consumer-goods giants. (2018, November 08). Retrieved March 8, 2019, from https://www.economist.com/business/2018/11/08/the-growth-of-microbrands-threatens-consumer-goods-giants