3 Reasons Why Legacy Brands Should Adopt the D2C Model

Posted on February 2nd, 2021
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3 Reasons Why Legacy Brands Should Adopt the D2C Model

Coinciding with the rise of numerous D2C brands, many CPG brands are shifting to the direct-to-consumer model. The advent of digitization has provided an avenue for many industries to rethink and revamp their operations to provide the best experience to their teams and the customers alike.

The D2C model offers numerous advantages and cutting out the middlemen is one of them as it allows brands to enjoy a significantly higher profit margin. The clear equation between brands and their customers enables them to focus on the consumer data and draw meaningful insights to deliver the best outcome.

Taking inspiration from the D2C eCommerce model, retail giant Amazon has also been encouraging manufacturers to follow suit. Amazon organized a three-day event in Seattle in 2017, inviting manufacturing companies and startup brands and encouraging them to shift to the D2C model, while making use of Amazon's fulfillment center.

According to Curt Doherty, CEO of CNC Machine Network, one of the main driving forces the eCommerce industry has witnessed with manufacturing clients is the heavy influence of social media marketing. This new and exciting way of distribution has allowed manufacturers to communicate and build relationships with the customers directly.

Legacy brands Vs. Startup brands

Most D2C success stories have come up from CPG startups. With more operational freedom, startups have been able to adopt an entrepreneurial culture that is more agile as compared to CPG brands, since they can navigate from designs and ideation to implementation and delivery much faster.

On the other hand, legacy brands hold a monopoly over a certain sector of the audience and have established a strong relationship with retailers. These brands are not pressured to innovate as they are minting larger profits and have a pre-set way of operating their businesses, leaving less room for innovation. That's one reason why startups have an upper hand over CPG brands.

One notable example that supports the advantages of the D2C model is the men's razor market. Proctor and Gambles's Gillette, one of the most preferred razor brands, has been the leading player in this sector for a very long time. The market soon started experiencing disruption when D2C brands like Dollar Shave Club and Harry's shaving began selling their razors through a monthly subscription model at a fraction of Gillette's razor price.

After receiving wide acceptance by the consumers, Harry's Shaving continues to sell directly to the consumers with the tagline "Great shave, no middleman", on the other hand, Dollar Shave Club ended up being acquired by Unilever in 2016 for USD 1 billion. The disruption caused by these two D2C brands encouraged Gillette to launch the Gillette Shave Club that follows a similar subscription model.

The Benefits of the D2C Model

Besides the obvious benefits of earning larger profit margins and eliminating the middlemen, there are some other notable benefits of selling directly to the consumers.

1. Allows brands to gain a better understanding of the customer

Earlier, manufacturers rarely interacted with their customers. Surely, CPG brands may try to understand their target audience via extensive market research, focus groups, and surveys. But today, using these methods is not necessarily the best way to gain customer insights.

It is essential for brands to have direct contact with their customers through every stage of their journey, including post-sales communication and feedback. Such interactions are difficult to replicate in focus groups and surveys.

For instance, with the increasing cases of obesity in the United States, more customers are choosing to eat healthily. According to reports by Global Data, 87% of consumers in the US check the ingredients in the food items before purchasing them and 75% are concerned about eating too much processed and unhealthy foods. On the contrary, the same customers who want to eat healthily also want to indulge in junk food as a cheat meal. Here, the D2C approach enables CPG brands to gain such insights in a better way which actually reflects the customers' behavior.

2. Enables a faster product launch

Most legacy brands shy away from innovation because of the extreme risks involved. On average, it takes between 18-23 months for a new product to get launched in the market—from the point of production to the point where the product reaches the shop floor, which is difficult to manage for CPG brands.

Additionally, more of these CPG brands are publicly traded companies, meaning they have to consult the stakeholders first and convince them to take a chance on a possibly revolutionary product that may not be successful in 3 years. The traditional retail model makes manufacturers very risk-averse and a decision to stock a new product without analyzing the sales history seems a little risky.

With the D2C model, manufacturers have the freedom of mitigating these risks by launching a new product on a smaller scale or on a trial basis. Manufacturers can develop a new product and test it within a small demographic and gain detailed feedback. This process will help larger CPG brands to understand what is being loved by their customers and what adjustments they need to make in their existing products.

3. Ensures better control over products and brand reputation

In a traditional retail model, manufacturers could only have control over the packaging and outbound advertising activities like billboards and TV commercials. Once the product is launched, CPG brands can no longer control the sales aspect.

The extravagant advertising practices done by larger manufacturers are also evident. Procter and Gamble is again a big example as the company spent around USD 10.5 billion on advertising alone in 2016. No matter how much these brands try to influence the audience through commercial advertising, if they struggle to sell the product, the risk of loss will be inevitable.

With a D2C model, brands have the freedom to become their own boss by controlling every aspect of the business, from manufacturing to retailing, to advertising and customer relationships. In today's hyper-competitive world where customers are constantly looking for all-around high-quality products and enhanced experiences, it is vital to have complete control over the business from start to the end. This complete control sounds appealing to many manufacturers and gives them more freedom than having to lay their trust in a number of third-party retailers and distributors. Hence, moving to the D2C model seems like a viable and sensible option.

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February 2nd, 2021