Sales of Direct-to-Consumer Brands Soar during the Pandemic
By Dale Buss
If prospects for growth of direct-to-consumer (DTC) brands were glittering before the coronavirus pandemic, they’re absolutely stellar now. By edict or by choice, Americans sheltering in place have sent e-commerce orders for CPG goods through the roof since the beginning of March, and DTC brands have been huge beneficiaries of the shift – which promises only to grow in the long term as millions more consumers get comfortable with the idea of buying groceries and other staples online.
At the same time, however, legacy CPG giants such as BIC, Hershey, Johnson & Johnson and General Mills have been learning more about how to compete with proliferating DTC startups such as Each & Every, and their abrupt ramp-up to meet e-commerce demand during the Covid-19 crisis will provide even more lessons.
For instance, some CPG giants are using a more calibrated approach to DTC by introducing individual products and extensions of existing brands online, in part using e-commerce as a vast consumer-focus group and “fast-fail” platform. For example, McCormick, the spices giant, recently launched its Old Bay hot sauce only on McCormick.com.
“Typically, you wouldn’t go to McCormick.com to buy spices,” Rob Gonzalez, co-founder of the Digital Shelf Institute, told CPGmatters. “But it was completely sold out within 30 minutes of launch.”
DTC is “the new currency,” Ken Harris, managing director of Cadent, a CPG consulting firm, said. “It’s democratic, universal, a way to launch and get in front of consumers fast – and a way to fail fast and ramp up quickly again. Startups that figure this out and are able to do it will succeed far faster than those that can’t.”
The online share of grocery sales will approach and could even exceed 10 percent this year, four years sooner than previously forecasted, according to a new study by Fabric, an Israel-based startup that is building “micro-fulfillment” centers to service retailers in cities. More than 50 percent of consumers have purchased groceries online over the past few weeks because of Covid-19, Fabric found, and one in five of consumers have recently ordered groceries online for the very first time.
“The latter number is particularly remarkable, indicating that Covid-19 is a force majeure that’s propelling a new cohort of consumers toward online grocery shopping much faster than would have happened otherwise,” Fabric said. “We expect this to have a formidable and long-lasting impact on online sales penetration.”
And it’s DTC startups that have been lining up, before and in the midst of Covid-19, to take biggest advantage. These newly created brands “are hyper-focused on a highly differentiated, core product to serve their target audience’s unique needs,” said a recent report by the Digital Shelf Institute, based in Boston, which describes itself as “a community of manufacturing executives strategizing to win on the digital shelf.”
“Extra small companies,” a category with less than $100 million in sales that comprises most DTC startups, have been growing most quickly of any CPG segment, with sales rising by 4.9 percent in 2018 versus 0.6 percent for large companies, according to CPG sales tracker SymphonyIRI. Since 2013, more than $17 billion in sales have shifted away from traditional, larger CPG brands – with sales of $1 billion or more – and to smaller brands, which have tended to be nimbler online.
“For challenger brands, DTC is a legitimizing entry point,” Harris said. “It’s either to the exclusion of or in addition to traditional retail outlets. But if you’re going to pick one these days, you go online first. You can get the economics right online and being able to make money when you’re selling online is absolutely essential to a startup protocol.”
Meanwhile, a majority of the venture-capital CPG investments made from 2015 to 2019 went to brands with a direct-to-consumer component, according to the Digital Shelf Institute.
“When the Covid-19 thing went down, you saw that even an ice-cream brand can go DTC as a starting point,” Gonzalez said. “It gives you an audience and a way to build traction. That wasn’t available for new brands before.”
Each & Every, for instance, is a line of deodorants and fragrances launched DTC in 2017 by two women who saw a lack of high-quality, natural-deodorant options. Most recently, Each & Every has experimented with a trade-in program in which it gives consumers free products in exchange for a competitor’s.
Even startup brands that preferred launching in the traditional way, through a network of bricks-and-mortar retailers, have been changing their tack in the wake of the coronavirus. A Boring Life, for instance, is a new brand of artisan honeys and CBD-infused snacking products, hemp tinctures and dog gummies that had to pause in its U.S. rollout in March even after penetrating major specialty stores such as Market of Choice in the Pacific Northwest.
Brokers told owners Serafina Palandech and Jennifer Johnson that efforts to expand distribution for now would be costly and ineffective even though, as the Boring, Ore.-based company believed, many American consumers probably could have used the purported calming effect of CBD during the coronavirus shutdown. So they pivoted to continue the launch on a DTC basis instead, selling via the brand’s own web site as well as networking with a number of hyper-regional online purchasing platforms.
“The old model is gone,” Johnson told CPGmatters. “There is no Expo West” annual trade show for new brands in California. “We can’t visit stores; we can’t do demonstrations. The traditional means for growing an artisan food brand have now been thrown out the window.”
But the fact that DTC for the moment is the most feasible way to launch a new brand or product doesn’t mean success in that channel is guaranteed for startups. Brandless, for example, a startup that set out to challenge household names including Crest and Kraft with a one-price-for-all online store, has shut down. Its board said the market for selling goods online directly to consumers is “fiercely competitive and ultimately proved unsustainable for the company’s business model.”
Doug Straton, chief digital officer for Hershey, is one executive of a legacy CPG brand who has noticed the flip side of the wide-open spigot of venture-capital investments in DTC startups. “There is nothing wrong with those companies,” Straton told CPGmatters. “And a lot of them do some very interesting stuff. Clearly, they have an edge in terms of interacting and understanding consumers and in using technology that is native.
“But once their funding dries up,” Straton added, “most of them can’t survive because they don’t have significant scale. So really, the game for most of those folks is how to build it to a meaningful size and then sell it.”
Traditional CPG companies also have been choosing the DTC approach to launch new brands. For example, BIC, a world leader in disposable lighters and shavers, last year unveiled a new DTC brand of razors, Made for You, in an exclusive deal with Amazon. Earlier this year, BIC expanded the line to include shave cream, body lotion and face lotion.
In fact, legacy CPG companies have been rushing online lately, with existing as well as new brands, as they have shed previous concerns about channel conflict with their physical-retailer customers.
“Several years ago, brands were aware of channel conflict and about angering their retailer partners,” Gonzalez said. “Johnson & Johnson and General Mills, for instance, couldn’t go direct-to-consumer. But you don’t see that hesitation anymore. Everyone has accepted that you’re going to sell products multi-channel. And at the same time, you see almost no traditional brand-category captain that goes DTC take meaningful market share from store shelves. Stores are absolutely still dominant.”
One challenge for existing brands is to “get your market structure right so you can sell successfully online,” Harris said. “The trick will be to take a legacy business with a margin structure set up in a certain way and determine the price/pack architecture so that you can make money online. You need to determine the proper-size package and the most efficient way to sell a product through online outlets, and make sure the price point is attractive – but also doesn’t get you in trouble with bricks-and-mortar retailers.”