Direct-to-Consumer Business Models in Branded FMCG

Read Time: 3 Min

As brands face increasing competition over shrinking store shelf space and consumers become more accustomed to transacting online, direct-to-consumer (DTC) retail models are becoming more prevalent across several consumer product categories. Going for a direct-to-consumer business model presents numerous opportunities for businesses. However, it also brings its own challenges and pitfalls. Not all products necessarily lend themselves to a DTC distribution model.

From ready meals to razor blades, the distribution of branded consumer products is being disrupted by growth in online direct-to-consumer retailing. There are several reasons for the rising popularity of this type of model. In food and drink, the battle for shelf space in supermarkets has intensified. This is due to a combination of product variety and subcategory increases, and an ongoing shift away from large out-of-town supermarkets towards convenience store formats where space is scarce. Add to this the rise of supermarket own-label and discounters putting downward pressure on prices. It is easy to understand why brand owners’ margins are under growing pressure. Against this backdrop, the prospect of cutting out the middle man by selling via direct-to-consumer business models can be appealing. This is due to the control over price and margin that it brings.

Why direct-to-consumer business models give more control

Aside from price and margins, direct-to-consumer can bring greater control on several fronts. Firstly, a DTC retailer controls the customer relationship. This gives them the ability to brand build through managing the end-to-end customer experience and through enhanced customer engagement at multiple touch points across mobile, email, social and online channels. This direct relationship leads to possibly the most important element of control: ownership of customer data. In online DTC, rich behavioural and demographic data can be captured, analysed and used to measure return on marketing investment, drive repeat purchase and to personalise the proposition to improve the customer experience.

A third element of control comes from the independence afforded by DTC. With less reliance on a limited number of large retail distributors, a DTC brand removes the risk of being de-listed by a key customer. However, for a long-established FMCG brand operating a traditional distribution model, pre-existing relationships with supermarkets can make it more difficult to develop a direct presence, as they may resist allocating shelf space to brands seeking to pursue DTC distribution models.

Which products are best suited to an online DTC business model?

When the supply of a product needs to be regularly replenished by consumers, a direct-to-consumer subscription model can work well. Online subscription businesses have sprung up across several categories such as healthy snacks, delivered diets, and even freshly roasted coffee. Regular deliveries remove the hassle of remembering to frequently stock up on certain items. In food and drink, ambient products are better suited to DTC. They don’t require the added complication and expense of a cold chain. Plus have a longer shelf life. For some categories (eg chocolate, wine) the self-gifting element of receiving a delivery is an affordable indulgence that consumers enjoy. There is also a subscription business opportunity to play a curation role in order to provide variety and keep the consumer engaged.

Delivery has traditionally been a key conversion barrier when selling online. It remains so, but it has been lowered significantly by the proliferation of more flexible delivery methods. The ecommerce boom has created a highly competitive UK courier market, with reduced costs and more accurate delivery windows. Furthermore, the soaring popularity of alternative delivery options such as third party click-and-collect, locker-style collection points etc has led to consumers’ increasing ability to be able to get what they want, when they want it.

From an investor perspective, DTC retail subscription models are attractive. They have low customer concentration and enhanced revenue visibility, stemming from a large customer database. These customers have regular patterns of repeat purchase. Against this, these businesses need to manage customer churn and invest heavily in sales and marketing. This will grow their customer bases as they cannot rely on third party distribution. This can be a drag on profits and cash, particularly in the early phase of growth whilst the business is establishing critical mass.

Contact Chris Watt for further information.

About the author

Chris Watt

"I’m one of the Managing Partners at ECI and a member of our Investment Committee. Having developed something of a focus on the travel sector in my early career, over the last few years I have been involved with a broader range of investments spanning EdTech, pet food, financial services and online marketplaces."

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