Consumer to product or product to consumer?
The direct-to-consumer trade in recent years has changed dramatically. Simply in the food and grocery vertical, until before the pandemic the consumer was in the habit of going to the supermarket every week to stock his or her pantry with necessities. This involved traveling from one place to another, entering the shop to find the products, putting them in a shopping trolley, going to the checkout, physically paying, and returning home with the groceries.
Today, this whole process can be done digitally on a mobile phone or tablet without the need to leave the house, stand in long lines and spend valuable time. Companies such as Justo in Mexico, Farmstead in the US, Shopper in Brazil, and BigBasket in India have focused on digitizing the consumer’s weekly grocery shopping experience.
The convenience shopping process has also become more efficient. Usually, the consumer used to travel to the nearest convenience store to buy the required products. However, today there are multiple startups that have digitized the shopping process by delivering even in less than 15 minutes and offering attractive benefits to their users. Some examples are JOKR or Rappi in Latin America, GoPuff in the United States and Flink or Getir in Europe.
These are just a few examples within the grocery industry which is estimated to be worth more than USD$1tn. There is so much potential in this market that companies like JOKR, within a year of its founding, managed to reach unicorn status and expand into multiple geographies very quickly. However, this same trend and paradigm shift has influenced the market dynamics of many other industries within retail.
What is it that has caused direct-to-consumer commerce to increase significantly?
Clearly the pandemic has been a major catalyst for digital transformation and technological adoption of online platforms. This has changed consumer habits, driving them to consume online. In addition, there is now more physical and technological infrastructure that allows for more and better connectivity and direct access to the consumer. Mobile penetration has been enormous, allowing people to consume more data over longer periods of time and have access to more mobile applications. As a result, it is becoming much easier to find relevant brands or local brands that sell directly.
Although e-commerce was born in the 2000’s, it has recently had an accelerated growth. In the beginning, everything was based on websites, it was necessary to have a debit or credit card from a bank and to wait long periods of time for the products to reach the consumer. In addition, communication with the customer was via email and there were no instant messaging applications.
Today people shop not only on websites but also on mobile apps and social networks. It is very common for companies or individuals to have an account on Facebook, Instagram or TikTok to market their products. In addition, consumers trust ecommerce much more than they did years ago, as technological advances have encouraged brands and retailers to provide a more efficient customer journey and a better shopping experience. As a result, e-commerce grew by an average of 21% annually between 2014 (USD$1.3tn) and 2021 (USD$4.9bn) and is expected to grow at a rate of 10% annually over the next 4 years, reaching an annual sales value of USD$7.3tn by 2025.
Everyone wants to ride the DTC wave
Every company today wants to ride the e-commerce wave, seeing it as a new sales channel and looking to be competitive against digitally born brands. Having a digital channel brings many benefits for brands, among which the following stand out: having a direct relationship with the customer, offering a more personalized shopping experience generating greater loyalty, capturing proprietary data to make smarter business decisions, and cutting out intermediaries maximizing financial profitability.
However, the digitization process is an arduous process that involves creating new commercial and operational structures, as well as a significant capital investment to develop a scalable strategy. Therefore, some brands and retailers have found it difficult to modify their business model to adapt it to e-commerce, which entails very different challenges and efforts to those of traditional commerce.
To better understand direct-to-consumer e-commerce, it is important to keep the following elements in mind:
A business without customers is not a business. Even if you have customers in the traditional channel, if you do not manage to bring them to e-commerce, you will not be able to increase your sales volume and make this new channel profitable. Customer acquisition can be done through different mechanisms, perhaps the most effective of which is digital marketing. This consists of capturing customers by launching highly targeted and personalized advertising campaigns through social networks or websites. The most common platforms to do this are Google Ads (YouTube and Google), Facebook Ads (Facebook and Instagram) and TikTok.
Another strategy for user acquisition is called product-led growth. This business methodology means that user acquisition, expansion, conversion, and retention is primarily driven by the product itself. This requires alignment between all teams in the organization, from engineering, through sales and marketing, so that the product becomes the source of sustainable business growth. One company that successfully implemented this strategy was Zoom.
Some companies use physical user acquisition, activate through other channels, and offer incentives for the customer to transact on their digital channel. The cost of user acquisition by this means may be lower than the associated cost of previous strategies because they use the current sales infrastructure to transform the customer to the digital world. For example, today, if you go to buy Nike trainers at a retail outlet, your purchase ticket might contain a QR code that you have to scan to get an exclusive discount for an online purchase. Other similar strategies involve asking for an email or mobile phone to drive online commerce.
Digital channel: Front-end
Just as in any physical shop there is a dedicated space to display products and advertise them, in e-commerce there are ways to promote products and let the customer know the availability, price and details of them, as well as having a shopping cart. Direct-to-consumer e-commerce distribution channels are usually through a digital marketplace or by having your own online shop.
The former consists of a virtual marketplace where you can sell your products together with many other sellers. This happens on platforms such as Amazon, Mercado Libre, Rappi or Alibaba. On the other hand, creating your own online shop gives you direct access to the consumer and more control over the sales process from start to finish. However, customer discovery is much more complicated and costly, especially if you do not have a fully established brand.
Another consideration is that, unlike a marketplace where the process of listing products is as simple as uploading a photo to your social networks, having your own digital channel involves a higher level of technical knowledge and effort. This technological development can be done by yourself or through third parties. If you decide to do it yourself, you will require a knowledgeable and experienced technical team, as well as the investment in time to get the development ready. You also have the option of having the technological development done by third parties, where you can either upload to their application or have the service as a whitelabel.
Each of them has different benefits that can be adapted to your needs and budget. The level of technological infrastructure, connectivity with logistics and payment systems, and customer interface will be different if you are a small or medium-sized business, a fast food or convenience chain, or a brand or retailer with a high volume of sales. Some examples of these channels are WooCommerce, VTEX, Cloud Store, Shopify, GetJusto, Toast, among others.
Probably the best strategy is to have a presence in multiple channels, not only in marketplaces or with your own shop but also thinking about new tools such as direct sales through Whatsapp and other social networks or through social commerce structures such as Facily, Favo or Nilus, which leverage the power of communities to reach more customers.
It is essential that the retailer has control over its product, so inventory management is central to the direct-to-consumer strategy. An online retailer can manage its own inventory, use third-party inventory in the sales process, or have hybrid models.
The benefit of having your own inventory is to be able to control product availability and assortment, as well as the delivery window. To streamline inventory management, you can use data analytics, machine learning and artificial intelligence to predict demand and determine the optimal or if possible, just-in-time level of your inventory.
Sometimes you can sell third-party inventory, i.e., have a product in your catalog that you can purchase from a third party. The benefit of this strategy is to minimize working capital and increase the product portfolio available to the consumer. One of the disadvantages is that there is little control over product availability and hence product logistics.
Some startups are using mixed models, i.e., a percentage of their SKUs are held in their own inventory and another percentage are sold as if they had it but are ultimately purchased from third parties. Applying a hybrid model requires knowledge to determine what your main products are and what you need to manage them and what products you can use from reliable suppliers in your sales model.
Warehouse management is one of the primary activities of direct-to-consumer commerce. One of the first elements to define is the location of your warehouses. If you try to deliver in less than 15 minutes to the customer, you must be very close to the customer as opposed to the next day or more than 24 hours.
Another element is inventory management. Having control of it is very important, as you can optimize the picking and packing processes, taking care of the quality of the product, and always keeping in mind the image of how the consumer is going to receive it.
Nowadays there are startups that offer warehouse services and can even carry out the entire logistics process (storing, picking, packing, and delivering). Companies like Cargamos, Velocity X, Picap, Melonn and Clicoh are just a few examples in Latam. The advantage is that you can focus on managing your business without spending valuable time managing the logistics process, which requires unique expertise and capabilities. You also minimize capital investment in logistics assets.
When managing your own warehouse, consider the degree of automation it can have. For example, there are companies such as 1M Robotics that can automate a nano-warehouse for the delivery of express products directly to the consumer without the need for human intervention. Also, companies like CurbX, which is trying to automate a large warehouse to facilitate the backbone of e-commerce.
The most expensive part of e-commerce is the last mile delivery. The cost of logistics can be prohibitive for the sale of low intrinsic value products. However, it is still a primary activity that any entity must have. It is perhaps the part of the direct-to-consumer sales process that is most valued by the customer and by which the customer often evaluates the entire service.
Logistics involves multiple stages, often divided into long-haul and last mile. The first involves the movement of the product from one city to another and the last mile involves the final delivery to the consumer. Companies may have the capacity to do this themselves, which implies having their own fleet to move the product. It also involves developing or contracting tools for truck filling and route management, such as Simpliroute, Foxtrot, Wizesystems, Loginext and Drivin.
Some companies choose to outsource logistics, which allows them to minimize CAPEX and focus on their primary activities, leaving logistics to those companies that are experts in this area. There are companies whose value proposition is last mile delivery such as 99 Minutes, Liftit, Chazki, LalaMove, Mensajeros Urbanos and Moova.
More flexible methods of delivering to the consumer can be BOPIS (Buy Online, Pick-up in Store) or setting up delivery and pick-up points in convenience stores, or unattended spaces through smart lockers, which are enabled by companies such as Lok, Boxit, Lockerbox or Boxlock.
Perhaps one of the elements that has evolved the most is the payment method. E-commerce 20 years ago required a connection to a traditional bank, which meant that the merchant or the person making the transaction had to be banked. This limited the participation of multiple companies or individuals who wanted to sell online or people who wanted to buy but did not have access to financial services.
Today, the Fintech revolution has given sellers and buyers access to the world of e-commerce. Any business can sell directly to the consumer, they just need to connect with a fintech company such as Stripe, PayPal, MercadoPago or KiwiPayMe. In addition to this, there are integrators such as Toast (focused on restaurant chains) that take care of the entire checkout process included in their range of services as a point-to-point solution.
Another e-commerce enabler that gained prominence this year is Buy Now Pay Later, which combines a credit solution with an online payment enabler. This credit is usually granted at check-out and only the exact amount to be paid for the products is entered, giving the consumer 3 to 6 months (sometimes interest-free) to pay. The retailer or brand is charged a fee (2–5%) on the value of the ticket to increase the customer’s purchase intent. In Latin America, companies such as Addi, Kueski, Nelo and Wibond are developing this model.
Some applications trying to reach the unbanked sector also accept cash on delivery of the product or cash deposit at a physical point of sale, either their own or a third party’s. This has allowed them to increase their consumer base. This has increased the consumer base and even given individuals the opportunity to start their own business.
Relationship with the customer
In e-commerce, consumers care about being valued and having their opinions heard. It is important that companies executing a direct-to-consumer strategy have open channels to engage with their customers and provide a unique shopping experience. Although e-commerce has become more widespread, customer service is becoming more and more personal.
Communication with the customer has been facilitated by applications that integrate and connect CRM’s directly with the conversation with the customer, trying to ensure an optimal level of service. Some startups working in this space are Yalo, Table and Jelou. The goal of engaging directly with the customer is to get feedback about your service and send them personalized promotions to increase their intention to buy in the future.
As part of customer service, customer retention and increasing the average purchase ticket, companies are using mechanisms to reward customers with points or money at the end of each purchase. This allows them to build a loyal community.
Technology has made it possible to capture consumer data, analyze it and make more accurate predictions. Even knowing what customers are looking for and how they navigate your digital channel is a data point from which much value can be extracted. There is also more and more data from the operation, which allows production and commercial processes to be made more efficient.
One of the current challenges for companies generated by omni-channeling is to capture data from all sales channels (own e-commerce, third party e-commerce, marketplaces, WhatsApp, social networks, and physical points of sale) and process them independently to have more accurate information about the behaviors, cost and value generated by each unique consumer.
The value of consumer data goes beyond what can be done with it internally, as it can also be monetized by selling it to other institutions. Sometimes companies that sell direct-to-consumer may have better data than companies such as Nielsen, which represents a competitive advantage.
Additional DTC considerations
- Modularity and use of resources: Companies do not need to perform and develop all activities within the e-commerce value chain themselves. They can probably focus on those activities that really give them a competitive advantage and leave the rest to other companies that can offer them modular solutions, either because it is cheaper or more efficient. Such is the case of startups like Instance and Mi Águila, who take ownership of every part of the e-commerce sales process.
- Promotion management: A critical element in the operation of the business is the management of promotions. If the company controls all channels, it is probably easy to manage. However, if the company is using multiple channels, it may face challenges in managing promotions properly.
- Unit economics: Selling online is not like selling physical. What you are looking for in direct-to-consumer is to maximize the profitability that each customer generates. This is achieved in two ways, the first is by reducing the cost of acquisition of each user that comes to your digital channel (CAC), while the second involves increasing the economic value that each customer generates for the business (CLTV). This depends on having a high customer retention (1 — churn %), increasing the average purchase ticket (AOV) and maximizing the contribution margin of each sale.
- New competitors: The world of e-commerce has been revolutionized, and today there are numerous companies aiming to acquire emerging DTC companies by creating a portfolio of brands that will allow them to have critical mass and scale, streamline operations and have relevant contribution margins. This trend has been increasing in recent years, born out of the US unicorn Thrasio and with many startups emerging globally. Today in LATAM Merama, which has already achieved unicorn status, plays in this category along with Wonder Brands and Rio Grande.
Direct-to-consumer trade has grown exceptionally in recent years and will continue to grow, becoming a major driver of global trade. There are an increasing number of technology-based companies looking to become an enabler within the e-commerce value chain, each with a distinct value proposition. The market is large and growing and there is no one value proposition that is representative for all consumers. On the contrary, each company must tailor its value proposition to a niche market to be successful and competitive. Undoubtedly the best of direct-to-consumer is yet to come.
“Ecommerce isn’t the cherry on the cake, it’s the new cake” — Jean Paul Ago, CEO L’Oreal
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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