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
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.
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.
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
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
LANDED COST CALCULATION
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,
E-COMMERCE IMPACTS B2B SHIPPING
REASONS HIGH TECH AND MANUFACTURING FIRMS NEED DENIED PARTY SCREENING
MULTI CARRIER SHIPPING SOFTWARE BENEFITS GLOBAL MANUFACTURERS