Waves of innovation are fundamentally reshaping the dynamics of the sectors we serve. Scaling tech-led challenger brands and transforming corporates are converging on the benefits of Direct to Consumer business models. DTC propositions can meet the individual desires of increasingly autonomous consumers, whilst satisfying investors and shareholders with high margins and reliable subscription revenue streams.
In the pet sector, pioneering entrepreneurship and creative innovation at scale has driven extraordinary D2C growth in a category with total market value set to exceed $200bn by 2025.
Butternut Box and Tails.com utilise algorithms to offer personalised dog food catered to the nutritional needs of individual pets. These are compelling propositions for devoted owners and drive exceptional loyalty and retention statistics, especially when combined with playful digital marketing and leading-edge data analytics.
Nestlé Purina’s recent acquisition of a majority stake in Tails.com is enabling the challenger to continue to grow through leveraging Nestle’s scale, whilst informing strategy and cross-category learnings at the world-leading nutrition, health and wellness company. Indeed, Marco Settembri, Nestlé EVP and CEO for Europe, the Middle East and North Africa believes that “personalisation is the future” of the corporation.
In a similarly innovative and ambitious fashion, Mars is seeking to evolve beyond pet food to become a holistic pet care provider. It has recently acquired veterinary businesses in both Europe and North America to build a consumer ecosystem facilitating the analysis of large datasets to stage medical or nutritional interventions, for instance through suggesting an appointment with a vet or an alternative type of food.
Such complex segmentation of data at scale illustrates the inherent advantages larger incumbents have over nimbler challengers. However, the case of Mars is no cause for complacency as it also illuminates the assumption-driven approach of classical segmentation and the ingenuity of new techniques.
The infant nutrition category is also moving beyond the traditional distribution model. Brands are engaging the consumer through a community and services-led approach suited to the intimate nature of their products, in order to exploit a market value set to reach almost $100bn by 2024.
Infant nutrition brands in China face a critical problem in ensuring consumer trust. Daigous have long purchased sought-after products abroad, chiefly luxury goods and premium infant formula, on behalf of those based in the country. Arla launched the DTC Baby&Me concept in China to develop consumer trust through a direct approach, fostering deep connections with consumers through their parental love and thus driving online demand. Its success spurred an introduction to the UK in 2018.
Similarly, FrieslandCampina protect their brand image through a DTC strategy and assure Chinese parents with a supply chain underpinned by blockchain technology. Their loyalty programme develops close connections with parents and facilitates the sharing of valuable consumer insights with Alibaba.
The growth of DTC offerings and the empowering impact of marketplaces such as Amazon have enabled brands to bypass retailers, undermining the strength of traditional FMCG-retail relationships through channel fragmentation. To scale its next generation of products, Philip Morris International is growing its network of almost 300 experiential retail stores globally, illustrating how brands can even assume the role of the retailer.
However, retailers have historically succeeded by being close to the customer and the sector is responding in vibrant fashion. 2019 has already seen a £750m food delivery deal between M&S and Ocado, whilst Harrods is working in with Farfetch’s Black & White Solutions to build a best in class online luxury platform. In May, Carrefour will launch an online returnable packaging scheme in partnership with TerraCycle’s Loop and is working with Google to improve shopping experiences across stores, online, smartphones and voice.
Indeed, the Internet of Things will continue to change the consumer journey and emerging economies will leapfrog stages of development. Following the $16bn acquisition of Flipkart Walmart is now poised for success in the rapidly growing Indian market.
Caveats regarding the profitability of delivery and personalisation inherent in D2C models are crucial, but such obstacles are set to be eroded by technological advances driving reduced production costs and increasingly efficient last mile delivery.
With regards to the challenges ahead, talent is crucial in any transformation, and the cultural change necessary to evolve a business model can be initiated through acquisitions. Following the successful integration and expansion of Dollar Shave Club and the acquisition of Graze, Nitin Paranjpe, recently promoted to Global Chief Operating Officer of Unilever, expressed his excitement at the potential to “leverage their tech and ecommerce expertise for the wider Unilever portfolio”.
A successful DTC transformation is naturally contingent upon a digital transformation and from our perspective the growth of the influence of Chief Data Officers, Chief Digital Officers, Chief Information Officers and Chief Technology Officers has been extraordinary. Technology has transitioned from an enabling to a business-critical function. Individuals appointed to newly-created positions are step-changing the capabilities of businesses across the consumer landscape globally.
As our clients exploit the velocity and impact of new technological developments, they grapple with the complex implications for talent strategy. As leaders of corporations and scale-ups alike face challenging new frontiers, perhaps the future potential of candidates will become the defining factor in talent selection?
The recent appointment of Michael Voegele as CTO of Philip Morris International is an interested example. He has joined the corporation to build a D2C-enabled smoke-free future and previously helped lead the three strategic pillars of Speed, Key Cities and Open Source at Adidas. We hope that organisations will continue to develop creative hiring strategies as they transform and embrace new business models.
A powerful wind of change is blowing through the consumer facing industries. We would love to hear your thoughts on the future of DTC business models. Please let us know at joseph.ball@thembsgroup.co.uk