Manufacturers have traditionally relied on retailers and resellers to reach their customers. With the growth of e-commerce, many are now choosing to sell direct-to-consumer (DTC). In the latest Precision Report we look at DTC for manufacturers, along with the challenges, benefits and solutions to support this sales model.

The growth of e-commerce has changed almost every industry. The distance between manufacturers and end-consumers has shortened. This gives manufacturers greater access to their customers, but it also allows rivals to flourish. For some manufacturers, DTC is about survival. Digital start-ups and international competition can deplete an established brand’s market share. E-commerce may as yet make up a fraction of all B2C sales, but the trend is only going one way. Online sales have grown 20 percent every year for the last ten years. What’s more, digital natives are turning to the internet to make larger, more expensive purchases, and they are increasingly shopping cross-border too.

Some manufacturers were early adopters of DTC — and it has paid off handsomely. Apple and Nike products may be available in bricks-and-mortar shops, but consumers have long been able to purchase directly from these manufacturers. Nike believes that DTC will become an increasingly important revenue stream. Analysts suggest that the gross margins on Nike’s DTC business are 62 percent, compared with 38 percent for its wholesale business.

It is not just manufacturers who work in the retail space that see the benefits of the DTC model — Tesla does too. Customers can visit their local Tesla showroom to test-drive the company’s cars. However, if they decide to buy a vehicle, they must do so through Tesla’s e-commerce site. Customers are responding. Tesla sold 101,312 vehicles in 2017, up more than 33 percent over the 75,000 cars sold in 2016.

Is DTC the Future for Manufacturers?

Factory direct to consumer sales are predicted to grow. Estimates vary, but marketplaces like Amazon and Alibaba are seeing 100–200 percent growth every year in F2C merchants using their online shop fronts. Market analysis from IDC forecasts that half of all manufacturing supply chains will be home delivery-ready by 2020. Companies will achieve this either by building in-house capabilities or outsourcing to third-party logistics suppliers (3PLs).

A report published by the UK’s Centre for Supply Chain Management at Cranfield University and LCP Consulting supports this. It found that almost half (48 percent) of manufacturers are already building DTC channels. Furthermore, 87 percent saw DTC as relevant to their products and consumers. Respondents included more than 100 manufacturing executives from major global players and several of the world’s largest companies.

If their customers are online, that is where manufacturers and their products need to be too — either through a dedicated e-commerce site or on an online marketplace like Amazon. It is true that many manufacturers have found it difficult to make e-commerce profitable, but without access to these consumers, even giants may stumble and fall. Consider the cautionary tale of Dollar Shave Club and Gillette.

 David vs Goliath

When a scrappy start-up takes on an established brand they can inflict serious damage. Gillette is a household name with highly regarded products and a history stretching back to 1901. None of that stopped Dollar Shave Club from luring away millions of customers — and a lot of market share.

Before the 2011 advent of Dollar Shave Club, few people would have thought that millions of people would subscribe to regular deliveries of razor blades. At the time Gillette laid claim to an impressive 72 percent of the US razor market. By 2016, DSC had captured 51 percent of the market. That same year Unilever bought DSC for a cool $1 billion.

Established brands have name recognition which they can leverage as they transition to DTC sales. For the most part, that gives them an edge over start-ups. Gillette responded by launching its own subscription service, but at a price point above DSC.

Another major difference is that Gillette’s subscription service is fulfilled by retailers such as Amazon, Tesco and Superdrug. Manufacturers, such as Gillette, that have traditionally reached customers through bricks-and-mortar retailers have to strike a balance. Selling DTC can put a manufacturer in direct competition with retailers. This is a risky strategy, especially for companies without the expertise necessary to sell and fulfill online sales.

The Challenges of DTC for Manufacturers

DTC is not going to be right for every manufacturer. For some, DTC channels are unlikely to be more than a small percentage of sales. In such a case, the figures simply don’t stack up — at least for the foreseeable future. Furthermore, there are a number of challenges along with capital investment. These include working in competition with retail and wholesale partners — and damaging those important relationships — as well as the capabilities needed to fulfill DTC sales. Let’s briefly look at these.

Competing with Partners

Manufacturers selling DTC may find themselves in competition with retailers and wholesaler partners. Whereas once manufacturers relied on these partners for survival, selling DTC changes these relationships from complementary to competitive.

This has the potential to damage relationships badly. For some manufacturers, the potential payoff from DTC is not worth it. This is especially true if they supply products that are generally bought from bricks-and-mortar stores. Although until Dollar Shave Club upended the razor market, this would have seemed true for Gillette.

Retailers may not want to compete with suppliers, but some are working with  manufacturers to drop-ship online orders to deliver items as quickly as possible. That means that new kinds of profitable relationships are possible.

It is also possible for manufacturers to sell to consumers and not directly compete with retailers if they offer unique or one-off products. The Oreo festive gift tins are a case in point. In December 2016, Mondelez International launched a seasonal website, gifts.oreo.com. Over the holiday period, customers can order gift tins of white fudge covered Oreos. This is a limited-time initiative and offers a unique product. This means that Mondelez can sell direct to consumers — and capture valuable consumer data as they do it. At the same time, it offers a compromise with retail partners because there is no direct competition to sell a manufacturer’s mass-produced goods.

Operational Costs and Logistics

Setting up an e-commerce platform is not particularly difficult. Granted, the more products you make, the more complex it becomes, but selling to customers directly is not the biggest challenge of DTC for manufacturers — it’s the logistics of fulfilling and delivering these orders.

A manufacturer who traditionally has sold their products wholesale will need to reconfigure their supply chains to make DTC profitable. Selling 1,000 t-shirts to one wholesaler is less complicated than selling one t-shirt to 1,000 individual customers.

To do this successfully — and profitably — the supply chain must be reorganized. Depending on what they sell, and where they sell, manufacturers may need their own distribution facilities to fulfill and deliver orders. Alternatively they may need to outsource and leverage the capabilities of a 3PL. These are operational challenges that many manufacturers have not previously needed to consider.  

Even if you use a 3PL for fulfillment, it is still vital for manufacturers to ensure seamless “last mile” delivery. Customers whose orders are not delivered in a timely manner will blame the manufacturer, not the 3PL or carrier, for poor customer service.

DTC is a no-brainer for companies manufacturing high end brands at high price points, particularly if their bricks-and-mortar presence is geographically limited. For companies selling less expensive goods however, fulfilling and delivering online orders could significantly squeeze margins.

The Benefits of DTC for Manufacturers

There are a number of compelling reasons why manufacturers should consider DTC selling. Firstly, e-commerce offers the opportunity to increase sales through direct access to customers — and as Nike has shown, greater gross margins. It also allows manufacturers to have better control over the customer experience. The switch to DTC is also driven by consumer demand. As e-commerce matures, the number and types of goods people are buying online has changed. Not that long ago it seemed inconceivable that consumers would shop online for high-value items such as engagement rings or fridges. But as millennials have aged, they are increasingly turning to e-commerce for these purchases too. Moving to a DTC model is not without risks, but there are significant benefits. Let’s look at these.

Unified Brand Experience

The DTC model means a company has full control of a brand — that’s everything from the product, the packaging and the brand message. Traditionally, retailers were responsible for the purchasing experience. Depending on your product, this may not always have been an enjoyable one for consumers. Consider a phone shop. Consumers may be able to compare specifications and prices, but they can’t purchase your products without human assistance. That’s fine if the store is not busy, but aggravating for customers in a rush. With a DTC strategy you also have full control of the customer experience. Done correctly, this means greater customer loyalty and repeat business.

Data

E-commerce give you a wealth of data about consumer purchasing habits. It is much easier to track, capture and analyse customer data when you sell online. These metrics give manufacturers valuable insights into their customers. Traditionally, manufacturers had to rely on their reseller partners for data. The reseller’s sales figures determined the success or not of a product. While useful, this offered little insight into why one product sold better than a similar one.

Direct engagement with consumers can allow you to forecast likely demand before mass production begins. Genuine People uses real-time feedback from the company’s Instagram account to determine production quantities for their fashion offerings.

Full Inventory

It is unlikely that stores will disappear, despite the much discussed “retail apocalypse.” There will always be customers that want to purchase items to take home immediately. However, brands sold through bricks-and-mortar retailers compete for floor space and prominence. There are almost always limits to how much stock can be made available to consumers, even if manufacturers have their own dedicated stores. Store footprints will need to be right sized to support omni-channel shopping. Store inventory should offer customers a cross-section of available products, while DTC channels will allow them to access your full product range.

Supporting DTC with Technology

In the next few years newer technological solutions are likely to become standard features in e-commerce and DTC sales. Manufacturers in the B2C space will streamline the online shopping process with voice search options, augmented and virtual reality.

This should make online shopping a more immersive and intuitive experience. Whatever the future holds, any company selling DTC will need technological solutions that automate the efficient flow of goods. Here are the most pressing requirements.

Transportation Execution for Any Mode of Shipment

A manufacturer selling DTC will need a global transportation execution solution that can handle any mode of transport, whether parcel, courier, freight, truckload (TL) or less than truckload (LTL). Global shippers also need to leverage multi carrier shipping and consolidated shipping to ensure products reach the end user efficiently and cost effectively. The solution should make shipping less labor intensive by automating all necessary documentation, including shipping labels.

Automated Cross-Border Trade

For efficient, automated cross-border trade, manufacturers need a robust global trade management solution. It should ensure all export processes are met, all documentation is included and is completed in the correct language. The solution should integrate with the manufacturer’s system of record and follow automated business-specific rules. It should also mitigate trade compliance risks by ensuring all shipments adhere to regulatory requirements.

Landed Cost Calculation

With landed cost calculation manufacturers capture the costs associated with all their shipments. This could be the cost, such as duties, associated with a particular line item or freight or harbor maintenance fees for an entire shipment. The landed cost offers visibility into all the costs incurred shipping an item from origin to final delivery point. This helps manufacturers to accurately set prices.

Ensure Trade Compliance

Global shippers need a comprehensive trade compliance solution to ensure every shipment meets export regulations. Trade compliance software allows you to automatically verify trading partners, validate the destination country, determine end-use and remain up do date with denied party lists. Your solution should include alerts and automatic holds if a shipment or trading partner is subject to special regulatory controls.

Manage By Exception

When you send hundreds or thousands of shipments each day, visibility is not enough. The delivery exception management solution you choose should allow you to track any and all shipments from one portal, capture proof of delivery, and alert you to problem shipments so that you can manage by exception and proactively resolve delivery issues.

About Precision Software – Trusted Global Trade and Transportation Execution

Precision Software, a division of QAD Inc., provides industry-leading global trade management, transportation execution and multi carrier shipping solutions from a single, integrated platform. Preeminent industry leaders in every region of the world rely on our global support centers to leverage thousands of carriers and manage millions of shipping transactions every day. The PRECISION solution’s open architecture allows for easy integration with leading Enterprise Resource Planning (ERP), Warehouse Management Systems (WMS) and existing legacy solutions. An ISO-certified company, Precision Software assists companies around the world to minimize shipping costs, optimize first mile and last mile deliveries, avoid compliance delays and mitigate the risks associated with dynamic trading environments. Precision Software’s customers span multiple industries including banking and finance, life sciences, high technology, retail, industrial, automotive, higher education and public sector as well as logistics providers. For more information about Precision Software, visit www.precisionsoftware.com.