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The Benefits of DTC Selling for Manufacturers

The current pandemic has highlighted the importance of being able to reach your customers at a time when most stores are closed. In this QAD Precision Report we look at the benefits and challenges of direct-to-consumer (DTC) sales for manufacturers.

The juggernaut that is e-commerce has reshaped almost every industry, shrinking the distance between manufacturers and consumers and allowing brands to build loyalty with customers across a number of channels. 

Even before the Covid-19 pandemic, many manufacturers understood that the digital revolution meant that they were no longer competing just with their traditional rivals, but that digital start-ups — based anywhere in the world — could target, and win, previously loyal customers.

At the advent of e-commerce, low value items made up the bulk of online sales — think books, clothing and sports equipment. Unsurprisingly, as consumers became increasingly familiar with online shopping, they became more comfortable buying a wider number of products online. After all, the convenience of shopping for a vast variety of products from the comfort of your home has distinct advantages, particularly for busy people or those without easy access to shops.

As a result, online sales have grown an average of 20 percent year-on-year every year for the last ten years. What’s more, digital natives have turned to the internet for larger, more expensive purchases, such as household appliances and jewelry — and in the case of Tesla, cars. 

DTC and Covid-19

Governments around the world responded to the Covid-19 pandemic by issuing stay at home guidelines and ordering retail closures. Consequently, many consumers turned to online shopping. Research from Adobe Analytics found that online sales in the US increased 25 percent in March. Companies that operate purely or mostly online have a distinct advantage under these circumstances.

Nonetheless, this does not mean that DTC sales are a silver bullet. Although online sales overall experienced a spike in March, what we were buying changed somewhat. Groceries, over the counter drugs, and hand sanitizer experienced skyrocketing surges, while clothing — normally a popular and busy e-commerce category, fell 13 percent. Having said that, a number of companies with a strong DTC model are better positioned to ride out the crisis than others.

A Lesson From Nike

Sportswear and athleisure giant Nike has performed well during the current crisis. This is because Nike has heavily invested in DTC, and the company has long believed that DTC will become an ever-more important revenue stream. Analysts suggest that the gross margins on Nike's DTC business are 62 percent — significantly higher than the 38 percent for its wholesale business. 

The DTC model has stood the company well. Nike released its fiscal third-quarter earnings on 24 March. Overall, the company’s revenues increased 5 percent, with digital growth of 36 percent. This, along with strong growth across EMEA, Asia Pacific and North America, helped to offset the impact of the pandemic. Furthermore, during the early part of the year, digital sales in Greater China spiked more than 30 percent during a time when the government had closed stores in this region.

Long time Nike competitor, Adidas, recently announced plans to increase its digital footprint during a time when 70 percent of its stores are shuttered. In late April, during a call with investors, the German sportswear giant, noted that e-commerce will become ever more important than ever before, and that it plans to reallocate resources to e-commerce and IT operations.

Shaving Wars 

If their customers are online, manufacturers and their products need to be too. This could be through a dedicated e-commerce site or by leveraging online marketplaces such as Alibaba and Amazon. Depending on what they sell, and where they sell, it can be a challenge to ensure that e-commerce operations are profitable. Nevertheless, as consumers increasingly shop online, companies without a digital presence risk being left behind. Upstart digital competitors can take on leading companies — and make inroads into their market share. 

When Dollar Shave Club set up in April 2011, nobody expected that the scrappy start-up could inflict much damage on a venerable company like Gillette. Established in 1901, Gillette is a world famous brand with a number of highly regarded products. 

In 2011 when Dollar Shave Club started its subscription service, Gillette had a 72 percent share of the US razor market. But what difference five years makes. By 2016, Dollar Shave Club had  captured 51 percent of the market and Unilever bought the company, reportedly for $1 billion. 

The Challenges of DTC Selling

Digital start-ups can inflict damage on even famous brands. In the case of Dollar Shave Club, it’s low cost subscription model along with tongue-in-cheek advertising, helped lure millions of customers away from more established brands. Nonetheless, larger brands have name recognition, which is a significant asset when transitioning to DTC sales. Having said that, there are certainly challenges with DTC selling. 

For some manufacturers, DTC sales are, at least in the foreseeable future, unlikely to be more than a fraction of overall sales. This is particularly true if products are typically used by end consumers but not purchased by them. Think of items such as car batteries. Although DTC aftermarket sales of auto parts has been growing steadily for years, the vast majority of us still prefer to have repairs done by a professional mechanic.

For others, selling DTC means that a manufacturer may be working in competition with retail and wholesale partners, which could risk damaging those relationships. Traditionally, manufacturers have relied on these partners in order to reach customers, but selling DTC may change these relationships from complementary to competitive. However, DTC sales can be complemented with other services such as drop shipping of online orders to retail partners in order to create different, but still complementary, selling models.

Getting it Right: Technology and DTC Selling

Perhaps the most challenging aspect of DTC selling is efficiently and cost effectively fulfilling online sales. Delivering a consignment of 1,000 pairs of sneakers to 100 wholesalers across the European Union, for example, is significantly more straightforward than selling one pair of sneakers to 10,000 individual customers across 27 different countries (28 including the UK).

To do this profitably, manufacturers will need to consider a variety of fulfillment options. This could include partnering with a logistic provider. Alternatively, manufacturers could reconfigure their operations to fulfill orders themselves. For companies that sell globally, a mix of the two might be the best answer. 

A manufacturer that decides to sell DTC and use their own infrastructure to fulfill online orders will need a global transportation execution solution. Ideally, this should be able to handle any mode of transport to support both global and domestic shipping. Furthermore, the solution should include multi carrier shipping capabilities, along with consolidations, to ensure products reach consumers efficiently and cost effectively. 

For high volume shippers, visibility is not enough. A single portal delivery exception management solution will allow you to track any and all shipments, with all carriers, as well as alert you to problem shipments and capture proof of delivery.

Should you ship cross-border, other technological solutions can simplify this process. An export execution solution will ensure that export processes are met, the correct documentation is included, and that paperwork is completed in the correct language. Ideally, the solution should integrate with the manufacturer’s system of record and allow for automated business-specific rules. When shipping internationally, you must adhere to all regulatory requirements. Therefore, a solution that integrates shipping and trade compliance will mitigate the risk of compliance missteps.

The Benefits of DTC Selling

Although there are certainly challenges with DTC selling, there are also a number of compelling reasons to do so. Firstly, done right, e-commerce, offers direct access to customers — and as in the case of Nike has shown, greater gross margins. 

In addition, there is a limit to how much stock can be made available to customers, even in a manufacturer’s own dedicated stores. With DTC selling, manufacturers can offer customers access to their full product range.

Perhaps most compelling of all, DTC selling gives manufacturers a wealth of data about consumer purchasing habits. With DTC selling, manufacturers can easily track, capture and analyse customer data, offering valuable insights into customer behavior. This direct engagement with consumers can give a manufacturer insight into demand before mass production begins. In an increasingly competitive online world, this data could be the difference between companies that thrive and those that do not survive.

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About QAD Precision – Trusted Global Trade and Transportation Execution

QAD Precision, a division of QAD Inc., provides industry-leading global trade compliance, and multi carrier transportation execution solutions from a single, integrated platform. An ISO-certified company, QAD Precision assists companies to streamline their import, export and transportation operations, optimize deliveries, and increase logistics ROI. QAD Precision’s scalable and extensible solution easily integrates with existing ERP and WMS solutions. Industry leaders in every region of the world rely on QAD Precision’s global support centers to leverage thousands of carrier services and manage millions of global trade and shipping transactions every day. For more information about QAD Precision, visit www.qadprecision.com.

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