Almost all consumer products are bought through an intermediary. We buy products from retailers who bought them from the original manufacturer. Right now, I’m sitting over a breakfast cereal which was manufactured by Kellogg’s but bought at the supermarket.
Over the last year, I have spoken to hundreds of retailers and brands seeking to understand the growth in online marketplaces. One of the implications, that few have yet fully appreciated, is that “direct-to-consumer” sales by manufacturers are about to take off.
Let’s look at the difference between the traditional retail and direct-to-consumer models:
Two Retail Models
The traditional model allows the manufacturer to focus on product development and production, and the retailer to focus on distribution and the relationship with the end-consumer.
The direct-to-consumer model, in contrast, sees the manufacturer take responsibility for the entire process, from product development through to distribution and managing the end-customer relationship.
In my view, two changes will combine to create strong growth in direct-to-consumer sales. Let’s look at each in turn.
1. It’s getting simpler for manufacturers to fulfil individual products
Some “direct-to-consumer” models have always existed, but only when it made economic sense. For example, manufacturers have often been the retailers of big and bulky products (such as cars, furniture and beds) because significant cost savings exist from removing physical distribution steps.
Historically, for most products, selling direct-to-consumer made no economic sense. There was no way Kellogg’s could profitably distribute its products directly to customers’ homes. This is changing with the emergence of 3rd party fulfilment platforms, such as Fulfilment by Amazon (due to launch in Australia this year) and Asian platform Lazada (the recipient of a $2 billion investment by Alibaba) which bundle products into one combined delivery. These platforms can potentially offer consumers the online equivalent of buying all their products in one visit to the supermarket.
2. It’s getting simpler for manufacturers to maintain a 1:1 connection with consumers
For direct-to-consumer to grow, it’s not enough for a brand to have access to cheap and convenient fulfilment. The end-consumer must also be willing to maintain a 1:1 relationship with the brand.
For most consumers, a car or a bed is something they buy infrequently. Because the purchase decision has such a significant impact on our lives, we are willing to invest in a 1:1 relationship with the seller. Most products are not important enough to justify a 1:1 relationship with the seller. I don’t need a relationship with my tomato sauce manufacturer, for example – I’m happy to just go to my local supermarket.
What’s changing is the growth of digital platforms which make it simpler for businesses to communicate directly with individual consumers. An exciting player in this field is Eagle Eye, which supports both retailers and brands to develop real-time digital connections with their consumers, for example by enabling brands to track individual consumer redemptions of promotions on social media (I'm supporting Eagle Eye with their Australian launch).
The combined impact of these two trends is highlighted in the matrix below. The intermediary model in the bottom-left of the matrix currently dominates retail. As fulfilment of individual products and 1:1 communication becomes a realistic option for brand manufacturers, I believe we’ll see sales shift into the top-right quadrant.
The drivers of direct-to-consumer sales
So what does this mean for you? It depends where you are in the value chain.
For manufacturers, the challenge is to acquire the completely new skills needed to transition from B2B to B2C. We’re already seeing examples of brands moving in this direction: Procter and Gamble has launched a subscription service in the US for its Tide Pods laundry detergent.
For retailers, the challenge is looking ahead to where the market is heading and responding to stay ahead. Retailers start in a great position since they have strong relationships with their customers. However, many need to look radically at their fulfilment capability and how they leverage digital channels to communicate 1:1 with individual consumers.