Direct-to-Consumer Business Models in Branded FMCG

22/03/2016
Read Time: 3 Min

As brands face increasing competition over shrinking shelf space in stores and consumers are becoming more accustomed to transacting online, direct-to-consumer (DTC) retail models are becoming more prevalent across several consumer product categories. Going DTC presents numerous opportunities for businesses but also comes with its own challenges and pitfalls, and 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 DTC retailing, and 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 become more intense due to a combination of increases in product varieties and subcategories and an on-going shift away from large out-of-town supermarkets towards convenience store formats where space is scarce. Add to this the rise of own-label in supermarkets, discounters putting downward pressure on prices, and it is easy to understand why the margins of brand owners are under growing pressure. Against this backdrop, the prospect of cutting out the middle man by selling DTC, with the control over price and margin that it brings, can be an appealing one.

Aside from price and margins, DTC can bring greater control on several fronts. Firstly, a DTC retailer controls the customer relationship, giving them the ability to build the brand through managing the end-to-end customer experience and through enhanced engagement with customers 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.

So which product categories are best suited to an online DTC model? When the supply of a product needs to be regularly replenished by consumers, a DTC subscription model can work well. Online subscription businesses have sprung up across several categories such as healthy snacks, delivered diets, cooking ingredients 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 since they don’t require the added complication and expense of a cold chain and 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 and there is also an opportunity for subscription business to play a curation role in order to provide variety and keep the consumer engaged.

Delivery has traditionally been a key barrier to conversion when selling online and it remains so, but it has been lowered significantly by the proliferation of more flexible delivery methods. The ecommerce boom has led to the development of a highly competitive courier market in the UK, 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 subscription models have attractions such as low customer concentration and enhanced revenue visibility, stemming from a large database of customers with regular patterns of repeat purchase. Against this, these businesses need to manage customer churn and invest heavily in sales and marketing to 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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