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Brands selling direct: What does Unilever’s $1 billion bet tell us?

July 21, 2016 05:29 PM
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P&G, Unilever and Dollar Shave Club have collectively ensured that reading the trade press is far more interesting than the James Patterson beach novels that we’re usually focused on this time of year.  Monday, Unilever announced that it had bought Dollar Shave Club for a billion dollars, and we learned today that Procter & Gamble has been experimenting with a direct-to-consumer laundry pod delivery service, called the Tide Wash Club.  This follows the June 2015 launch of Gillette’s own Shaving Club.

Collectively, this begs the question: Is this a fad, or is this the new normal?  Should all CPG brands be thinking about aggressive direct-to-consumer (DTC) online selling efforts than they have in the past?  

Before we answer the question, let’s take a step back and look at five factors that are influencing the environment that we’re in today.  

1. Retailers hold the cards today: In their respective roles as buyer and seller, retailer and manufacturer relationships are in a constant state of evolution, with most acknowledging that retailers are currently in the power position.  The consolidation of power into a relatively small number of large national grocery and mass discount retail chains has undercut brands’ negotiating leverage.  The rise of high-quality private-label brands, best exemplified by Kirkland’s Costco brand, has undercut the premium positioning that big brands once owned.  In the online world, the dominance of Amazon, with all of its potent levers to influence the brands that shoppers are most likely to see (and resultantly buy) as well as its own foray into private label, has shifted this balance even more in favor of retailers.  

2. Brands' interests don’t always align with retailers’. From the perspective of a retailer, a particular brand or category matters only in the broader context that they play across the retailer’s entire assortment and shopping experience.  Some categories drive store traffic, others drive margin, others create incremental impulse opportunities.  The brand perspective is far different though:  Brands are far more focused on driving sales, ideally high-margin sales, of their brand.  Often these interests intersect, but not always.  

3. E-commerce creates opportunities for upstarts from left field.  Dollar Shave Club’s fast emergence, powered by a funny viral video and low price points illustrated the fact that an insurgent online DTC brand could indeed dominate a category.  In January 2013, Gillette’s online sales were seven times Dollar Shave Club’s.   By June, 2016, Dollar Shave Club’s sales were more than twice the size of Gillette’s online.

4. Electronics precedent for brands’ DTC efforts:  We used to see a similar reluctance on the part of electronics manufacturers to sell directly to consumers, for fear of alienating retail partners.  However, during the 2000’s many electronics manufacturers began to sell directly to consumers online.  Many saw their .com sites grow to become their most important retail distribution channels.  And their relationships with retailers continued on, albeit changed.

5. The rise of Convenience Commerce:  The recent emergence of e-commerce powered technologies that facilitate the easy replenishment of frequently ordered products have provided platforms for brands to sell directly to those that want to be loyal to their brands.  Internet of Things devices (like Amazon’s Dash Buttons) allow consumers to simply press a button to re-order and create the opportunity for appliances to automatically order when they run low on, say, laundry detergent.   And Amazon and companies like Dollar Shave Club have proven that consumers will subscribe to favored brands and products.  

All of these advances do not necessarily require that the seller carry a broad assortment of brands, nor do they require the critical mass of complementary products that only retailers can offer to make the shopping trip worth the consumer’s while.  And Slice research has shown that these tactics do indeed influence consumer loyalty.  For example, Tide accounted for 98 percent of online laundry category sales amongst customers that used Amazon’s Tide Dash button in a study conducted during Spring 2016.

Taking all of these facts and trends together, it shouldn’t be surprising that we are seeing brands take steps toward selling directly to consumers.  So, what does this mean to retailers, manufacturers and other constituencies?

Brands –

While there are significant risks to channel partner relationships, brands that sell frequently and reliably consumed products (pet food, razors, paper towels, etc.) have little choice but to experiment with direct-to-consumer efforts, particularly in the IoT and subscription spaces.  Also, there will be an opportunity, if not a mandate, for companies like Procter and Gamble to partner with companies like Maytag.  If appliances are going to order replenish-able products like laundry detergent and dishwasher soap, the two manufacturers ought to know each other very well to find ways to deliver convenience to consumers that increasingly demand it.  While the signals have been there for all to see over the past few years, Unilever’s billion dollar bet has forced competitors to move more aggressively than they might have been otherwise inclined.

Retailers –

Retailers have a natural advantage over brands in that they offer more brand choice, more category choice, and have more pricing latitude than brands.  However, by allowing consumers to develop the habit of making recurrent purchases of a single brand they are opening the door for brands to pursue DTC opportunities. Retailers will be much more likely to win, and do so profitably, if they habituate consumers (by providing economic incentive) to receive multiple items in each shipment.  Jet.com’s smart cart is a good example of this practice in action.  

Fulfillment providers –

We do not believe that DTC fulfillment will ever be a core expertise of brands, especially CPG brands.  There will be opportunities for third party fulfillment players to step in and play that role, creating a more leverage-able cost base than any manufacturer individually.

Slice Intelligence provides data and analysis of consumers’ online shopping behavior based on their email receipts.

 

 

 

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