The D2C Shakeout: What Retailers Need to Know

The D2C Shakeout: What Retailers Need to Know

The D2C Shakeout: What Retailers Need to Know

The direct-to-consumer (D2C) retail model is in trouble. D2C retailers differ from traditional retailers by removing middlemen in favor of producing their own products and selling them directly to end consumers.

D2C businesses are facing a perfect storm of challenges that have dropped gross margins, on average, by 19% in the past year—a percentage that’s much higher for some of the most well-known D2C brands including Warby Parker and Wayfair.

Businesses just entering the D2C space, or those who are struggling to grow their company, may be wondering if it’s worth it.  The short answer is yes. While there are some significant challenges facing D2C businesses, there are also strategies that can help brands overcome these obstacles and thrive.

Below, we explore some of the intricacies of D2C retail including why there’s been such a huge surge in interest in D2C companies over the past few years. We also look at common D2C business strategies and why some of these strategies may not make sense in today’s challenging retail environment.

Finally, we conclude with a light at the end of the D2C tunnel by outlining some specific steps that D2C brands can take to stay afloat and even grow during this time of change.

D2C brands and consumers: a love affair

The internet set the stage for D2C brands, enabling them to reach consumers cheaply and quickly through nontraditional channels. Social media influencers, Facebook ads, and email paved the way for D2C companies like Warby Parker to grow in a way that wasn’t dependent on expensive TV ads or shelf space with stores like Walmart and Target.

Over the past several years, interest in D2C brands has surged thanks to Millennial and Gen Z shoppers who prefer buying directly from brands and supporting companies they believe are making the world a better place. Nearly 60% of online consumers say they’ll go out of their way to purchase directly from a brand, according to a 2021 study commissioned by Google.

Advances in sourcing and shipping technologies have also contributed to making D2C retail a viable option for brands and consumers alike. Where once D2C brands handled the picking, packing, and shipping in-house, technology is making it possible for D2C companies to flexibly manage all aspects of order management.

Flexible order management systems (OMS) are designed to help retailers scale their fulfillment infrastructure with features like inventory management, distributed order routing, customer care, and omnichannel fulfillment. This has helped to lower the barriers to entry for many D2C brands and made it much easier for them to scale quickly.

That’s the good news, now for the challenges.

Why are D2C Brands Struggling?

There are several things shifting in the current retail environment, creating big headaches for D2C brands. Here are some challenges impacting this new consumer-focused business model.

  • Rising customer acquisition costs: Ten years ago, buying ads on Google and Facebook didn’t require a huge marketing budget. Facebook ads were a particular favorite because they enabled D2C businesses with tight budgets to reach large audiences. But that’s changing. In 2022, the average cost per thousand (CPM) impressions on Facebook is $14.40, up from $11.54 in 2021. It’s also becoming much more difficult to target and optimize Facebook ads thanks to the depreciation of third-party cookies, the increased ability for users to opt out of data-tracking, and other privacy-focused changes on the platform.
  • The D2C space is getting crowded: There are more D2C brands than ever before, which means that it’s getting harder for companies to differentiate themselves and stand out. There were over 800 D2C brands in 2021 and the market is expected to reach $100 billion by 2025. Many traditional retail brands are capitalizing on the D2C phenomenon, with brands like Levi’s, Gillette, and even Frito-Lay jumping aboard the D2C train. This has had a direct impact on pure play D2C brands, who often have smaller marketing budgets and poor brand recognition.
  • Shipping costs are rising: The pandemic drove many of us online to shop, resulting in a surge of eCommerce orders and a corresponding increase in shipping costs. Domestic shipping costs in the U.S. increased by 23% in 2021 over the previous year. Every cost involved with moving and storing goods has increased—from warehousing to transportation to final-mile delivery of goods. These higher costs not only impact shipping rates, but are forcing retailers to increase the price of their products.
  • Supply chain headaches: Supply chain woes like the Suez Canal blockage are also creating massive headaches for both traditional and D2C retailers. The Suez canal incident, which caused a backlog of hundreds of ships in March of 2021, exacerbated an already strained supply chain infrastructure. We’re still feeling the strain today as enormous demand for the containers that carry goods persists. Businesses are spending about $15,000 per container in 2022 versus around $4000-$5000 before the pandemic.
  • Smaller-than-expected markets: In some cases, D2C brands have found that the markets they’re targeting are much smaller than they anticipated. There are many factors contributing to this, including an overestimation of the size of the addressable market, competition from other brands, and a lack of consumer awareness. Whatever the reason, it can be difficult for D2C brands to adjust their strategy on the fly and pivot to a new market.
  • Dampening investor interest: The rise in interest rates has made it more expensive for brands to borrow money and has caused some investors to pull back on funding D2C companies. Investors are scrutinizing D2C business models more, with some questioning whether the high valuations of these companies are sustainable.

Does D2C make sense for all retailers?

D2C can be a great option for brands that want to build a direct relationship with their customers. It also gives you complete control over the customer experience and can be a good option for companies that want to launch new products quickly and efficiently without having to go through the traditional retail channels.

However, D2C is not right for all brands. Brands that are looking for immediate scale and reach may be better off partnering with a retailer or using a marketplace like Amazon. In addition, brands that sell products that require lots of hands-on interaction or explanation (like makeup or electronics) may benefit by partnering with retailers in addition to implementing a D2C strategy.

Remember, D2C is not a magic bullet. Brands that don’t have a well-defined target market or a clear value proposition are likely to struggle regardless of whether they sell direct-to-consumer or through retail partners.

The D2C approach to retail is centered on building strong customer relationships. Brands that focus on delivering what their customers want are more likely to be successful than those who don’t.

What can D2C brands do to weather the storm?

D2C brands need to be strategic in how they allocate their resources while also focusing on developing brand loyalty. Here’s a checklist of things to consider when cultivating a strong D2C business in the current challenging environment:

  • Define your target market: Clearly define who you’re trying to reach which includes fully defining the problem that your products solve. What needs does your brand address? Creating a clear brand identity and purpose can help you stand out. It’s also important not to spread yourself too thin by focusing on a single niche—maybe two—before expanding to new markets or product categories.
  • Create a great customer experience: From the moment someone hears about your brand to the moment they receive their order, every customer touchpoint should be exceptional (and connected). Everyone in your organization should be consistent when it comes to messaging, customer service, and company goals.
  • Cultivate customer loyalty: Focus on creating lifelong customers by building strong relationships with your customers. Memberships and VIP programs can help foster brand loyalty and motivate repeat purchases, but also try to find ways to show your customers that you care about them.
  • Spend your marketing dollars wisely: Be strategic about how you use marketing to reach customers. If Facebook ads aren’t getting the results you want, experiment with different ways to reach your target market. This includes everything from SEO and content marketing to paid advertising. Strategic partnerships with complimentary brands, influencers, and retailers are all good ways to build brand recognition and attract new customers.
  • Allocate resources wisely: D2C can be expensive, so you need to be efficient about how you allocate your resources (time, money, people). Technology can help you keep your business lean and do more with less.
  • Test and learn constantly: D2C is a new and ever-changing landscape. Be prepared to test different approaches and learn from your mistakes.
  • Remember, businesses take time to build. Building a successful company—whether D2C or otherwise—is something you’ll need to cultivate over time. Patience is key, particularly when you’re a new company establishing brand recognition and loyalty. Slow and steady wins the race.

What’s next for D2C?

Building a successful D2C business is not easy. As more legacy brands embrace D2C strategies and new companies continue to enter the D2C space, competition will increase.

Brands who focus on cultivating strong relationships with customers and delivering an exceptional experience will be in a better position to survive and thrive. Consumer shopping preferences and behaviors are changing constantly and it’s important to follow market trends, but also speak with your customers about what they need.

A great example of this is the growing popularity of eCommerce subscriptions, with 25% of consumers using D2C subscriptions exclusively according to a recent survey by PYMNTS and Sticky.io.

The D2C experience will continue to evolve as new technologies make it possible to personalize online shopping journeys to individual customers and add new capabilities that align with customer preferences. D2C brands that can pivot quickly, embrace change, and experiment with new approaches  will be in the best position to succeed.

And while costs may be increasing, the D2C model remains more efficient than the traditional retail model with lower margins and overhead costs. Technology is making it possible for incredibly lean startups to thrive in the D2C space, offsetting many of the costs associated with legacy retail brands. And speaking of technology…

A unified commerce platform for every D2C brand

As the D2C landscape continues to evolve, it’s more important than ever for brands to have a unified commerce platform that can help them meet the needs of their customers. Kibo Unified Commerce Platform is designed to help brands reach their customers across all channels, with a focus on delivering an exceptional customer experience.

Kibo’s platform is flexible and modular. You can add features like segmentation and targeting, unified cart and checkout, coupons/discounts, and more. We also support a wide range of integrations, so you can connect your existing systems.

Our order management system includes everything D2C companies need to adapt to an ever-changing retail landscape from seamless inventory management to a flexible order routing system. Kibo’s team can help you throughout the entire planning and implementation process and provide ongoing support. To learn more about how Kibo can help your D2C brand succeed, request a demo today.

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