Companies considering moving from wholesale and physical retail to
selling their products direct-to-consumer (DTC) need new
capabilities. In this QAD Precision Report we look at the benefits
and challenges of 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.
The digital revolution has meant manufacturers of consumer brands are
no longer competing just with their traditional rivals. Digital-only
start-ups — based anywhere in the world — can 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.
A Lesson From Nike
Any manufacturer considering a DTC model should pay attention to
sportswear and athleisure giant Nike. 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 in recent years. This March,
the company reported its fiscal
2021 financial results for its third quarter ended February 28,
2021. The company experienced a number of serious setbacks due to lack
of containers, US port congestion, and government-mandated store closures.
Despite these difficulties, Nike’s Q3 revenue was up 3 percent
compared to the previous year. This was partially due to 15 percent
growth of NIKE Direct, and digital sales, which increased 60 percent.
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 was 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
management 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 analyze 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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Further Reading
3
MINUTE EXPLAINER: ALL ABOUT FOREIGN-TRADE ZONES (FTZS)
FIVE
BENEFITS OF MULTI CARRIER SHIPPING SOFTWARE
THE
BENEFITS OF INTEGRATING TRADE COMPLIANCE AND SHIPPING
