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Going direct to consumer (D2C) makes good business sense, but it calls for a different level of supply chain preparedness.
The outbound logistics and returns management scale are nothing like what manufacturers have experienced. The best way to go direct to consumer is to sell through established e-commerce channels first and then launch your D2C brand in limited urban cities; adapt your supply chain and scale when you have retrofitted your supply chain for “consumer scale” fulfillment.
Why is there an interest in going D2C?
In one word — disruption. Just in the fashion category, there are over 15,000 active brands and at least 2,000 of them are purely digital. The remaining have an e-commerce/marketplace/own-store footprint. Traditional manufacturers that sell only through retailers do not resonate with their shoppers as much as the digital-first brands do. The latter's positioning as conscious, cause-driven, modern and environmentally friendly innovators finds instant acceptance among shoppers.
The CPG world is even worse. They spend less on R&D (2 percent to 5 percent of revenue, as per 2017 filings). While we don’t have comparable numbers of privately-held D2C brands, the acquisition activities point to the fact that modern D2C brands innovate faster than traditional incumbents and are getting bought for a premium. For example, between Unilever and P&G, there are at least 15 acquisitions in 2017-18 that are all companies with less than $100m in revenue but have unique technology or shopper insights/relationships that the traditional brands could not figure out by themselves.
The CPG industry is buying its way to innovation, by paying $310bn — not small change. Nobody wants to be disrupted. And that’s why there is interest in going D2C. But going D2C is not for the faint-hearted.
The crux of the supply chain challenge for manufacturers going D2C is that they are now in the “small parcel”shipping business. At the DC level, SKU picking and packing have to be re-thought for such volume of orders.
This could mean challenges at various levels: staffing for shifts (in tandem with the daily order flow and seasonality), separate areas within the DC for D2C fulfillment or even separate DCs for D2C.
While same-day delivery is a very urban phenomenon, two-day delivery is a real need. And shoppers don’t want to pay for shipping.
Ever heard of the scars from dimensional weights-based pricing from small-parcel shippers? Welcome to the world of bizarre pricing of last-mile shipping. Unless you quickly gain expertise in parcel rate negotiation, the D2C margins you were salivating on, could prove to be a mirage.
Returns and chargebacks
It's one thing to clear the aisle at the end of every season and it’s complex by an “order of magnitude” to do it every day nationally, from the residential doorsteps. As much as 30 percent of the products bought could be returned and then there are chargebacks, which would especially be high for products that make promises that are different from the incumbents’.
How should fashion products and CPG manufacturers approach the D2C trend? Work with e-commerce companies and build supply chain infrastructure and know-how of small parcel fulfillment. Adopt the channel at a pace that is sustainable for you. Once you are ready for the D2C approach (beyond piggybacking on multi-line e-commerce companies), choose a few cities to launch your brand in. D2C leaders get 90 percent of their orders from two to three cities, allowing them to figure out region-specific warehousing, fulfillment and even taxation challenges before they scale nationally.
Ashwin Ramasamy is co-founder and head of e-commerce and D2C research for PipeCandy.
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