A D2C shift is on the horizon.
If you’re looking to buy razors, eyeglasses, dog treats, mattresses or even custom suits, there is a direct-to-consumer (D2C) company that can help you out with that.
The past few years have seen an explosion of D2C brands—and investors and venture capitalists are taking notice.
Globally, D2C startups have raised over $9 billion in known venture capital since the beginning of 2019, according to data found on Crunchbase.
Canadian D2C brands like MissFresh and Indochino are just a few of the latest companies that have shown that the path to venture capital investment is profitable.
Though still a new category for portfolios, D2C e-commerce investments are on the rise, and they are shaking up the tech investment landscape in a big way.
What is Direct-To-Consumer (aka D2C)?
Before the internet, retail was a distributor’s world.
As a manufacturer, you had to show your product was worth the distributor’s time, energy, and investment. If you did, you could get your product on the shelves of stores like Costco, Walmart, or The Bay.
If you couldn’t show your product was worth it, your product would never get in the hands of consumers.
Distributors set tight standards. They controlled supply. They set prices. Only products that could be guaranteed to sell in large quantities made it into the retailer’s stock.
Retailers could sell directly-to-consumer (remember the Sears catalogue?), but still left manufacturers out of the consumer conversation.
The introduction of the internet changed the retail landscape for good, opening doors for manufacturers and welcomed them into the era of direct-to-consumer e-commerce. With D2C e-commerce, manufacturers can skip the middleman and get their products to consumers directly.
Suddenly, you control the supply. You set the prices. You have the power to influence demand more than any other business model out there.
D2C removes distributors, resellers, and other companies that have traditionally been the go-between a brand’s product and the final customer. This shift brings manufacturers closer to their target demographic, and consumers closer to their product.
The power of a D2C model is undeniable for manufacturers, but does it work for investors?
What’s Driving the Shift to D2C E-Commerce Investments?
It’s truly a consumer’s market, and their changing needs are driving the change in the tech investment landscape.
Consumer shopping preferences have slowly been changing, but the reality of the COVID-19 pandemic has shaken any confidence in the in-store shopping models.
Today’s consumers want to buy directly from brands.
According to Astound Commerce Insight’s Global Brand Shopper Survey, “more than half (55 percent) of shoppers prefer to shop directly with brand manufacturers over retailers.”
But why?
Consumers value fair pricing
The D2C e-commerce model allows companies to curate a controlled brand experience from beginning to end. In keeping overhead expenses low, control supply and to set their prices—with lower markups— they can pass the savings onto customers.
Manufacturers can offer member discounts, repeat-buy incentives, and set pricing according to known customer behaviours. They can control the marketing and get instant feedback on promotions, and adjust accordingly.
This aspect of the D2C model is resonating with Canadian consumers.
Astound Commerce’s 2020 Global Consumer Survey Report found that consumer merchant-type preferences are trending towards e-commerce and D2C.
72% of Canadian consumers chose Amazon and D2C when they were looking for the lowest prices, compared to only 26% who chose either large or department stores.
Price will always be one of the top concerns for consumers.
The D2C business model works by cutting out the middleman, giving manufacturers freedom in their pricing strategies to attract more customers in a larger geographic landscape.
Consumers want to connect
As each generation enters their prime shopping years, consumer behaviour transforms in new and unexpected ways.
The newest generation to enter the power-buying stage? Millennials.
As this age group comes into their prime shopping years, retailers have to adapt to keep up with changing preferences.
The Astound Commerce study indicates that millennials want brand experiences that are:
- engaging
- sophisticated
- social
- streamlined
Of this list, more than half of respondents connect on at least a weekly basis with brand manufacturers on social media, and 45% turn to brand websites directly for a strong sense of the product and brand.
Millennial shopping behaviour is full of engagement, with an average of 2 to 3 different touchpoints before they commit to their purchase.
With this shift in consumer behaviour, the lines between maker, sellers, and consumers are rapidly blurring. The newest power-buyers are NOT shopping as their grandparents did.
Companies who hold onto their old ways will soon be nothing more than old news.
The disruptive D2C business model satisfies consumer’s needs to engage and connect directly with brands.
Consumers want reliable service
If we learned anything in 2020, it’s that we were not ready for a crisis.
2020 left consumers in a state of panic—from toilet paper to flour shortages, shoppers went into a state of anxiety that led to fisticuffs in grocery store aisles across the country.
This forced companies to think outside of their typical workflow and adapt to crises in real-time.
Established D2C companies already had an advantage. They were locked and loaded and ready to meet many consumer demands. In return, many companies saw huge gains at the height of the first wave of the pandemic.
Marketplace platforms like Amazon and Shopify and fulfillment services like Amazon FBA made selling easier and shipping faster. With one- and two-day shipping options, D2C brands could get products into the hands of consumers quickly.
While D2C companies were able to provide reliable service for their customers, big brands were left scrambling to keep up with distribution demands.
Major retailers like Real Canadian Superstore, Costco, and Save On Foods had wait times of up to three weeks in some areas in the country. Shipping estimates were measured in weeks, leaving customers frustrated and anxious.
The D2C business model allows companies to quickly adapt to changing environments and continue to provide reliable service.
Consumers want to get excited
Traditionally, it takes anywhere between 18 to 36 months to bring a product to market.
Consumers have short attention spans, and that attention is quickly diverted if left idle for too long.
With D2C, brands can quickly test new products with a specific demographic, get feedback, and modify the product to meet consumer needs before fully launching it on the market.
This process holds the attention of innovators and excites early adopters. It creates buzz-worthy content for bloggers and satisfies the new era of shopper’s thirst for connection.
D2C e-commerce offers another exciting advantage: personalization.
The Business Development Bank of Canada (BDC) found that nearly 75% of consumers claimed to want personalized products and services and that “consumers are moving away from the traditional consumption of standardized, mass-produced products.”
The D2C e-commerce platform allows manufacturers to create personalized shopping experiences for customers, including customized dog treats to fresh produce, and everything in between.
D2C companies like Bowzer Box, Luxe Box, or Mama Earth Organics sell monthly subscription boxes to excited customers, creating a recurring monthly revenue stream in the process.
D2C’s ability to grow, adapt, personalize product offerings and excite consumers has catapulted some D2C valuations into the billions.
D2C E-Commerce Is Tech You Want To Invest In
D2C disruptors are gaining in market share across the board.
In the last 5 years alone, North American D2C e-commerce disruptors have had an estimated average compound annual growth rate (CAGR) of 200%.
Traditional consumer packaged goods (CPG) market leaders? Less than 1%.
Startup D2C companies powered by creative growth hackers are finding new and inventive ways to satisfy consumer thirst for tech-forward, connected, continuous service at prices that reach a larger audience than ever before.
Throw retail into a crisis environment, brands big and small have no other option but to adopt direct-to-consumer practices if they want to survive.
Amazon’s Q2 North American revenue surged 43%, doubling its net income to $5.24 billion in the quarter. Amazon’s marketplaces grew even faster with a record number of D2C transactions created by third-party sellers.
This unprecedented growth resulted in Amazon committing to increasing its square footage of warehouses within its fulfillment network by 50%, compared to just 15% last year.
As Hugh Fletcher, Global Head of Innovation at Wunderman Thompson Commerce shares in a recent interview with Raconteur, “We believe there will be a ‘lockdown loyalty effect.’ Consumers will remember the brands and retailers that got them through the darkest lockdown days.”
